Henderson.

The Hidden Value in Apartments

 Anyone who has been thinking about property investment for any length of time has likely heard the mantra ‘always buy land.’

The reason land has value is that the land component of any property generally appreciates in value, while the building depreciates.

On the surface, it might appear that we would never want to buy an apartment, because it has a huge built form element, while the land proportion is relatively small. This is certainly the case when we see huge 10 or 20 plus story buildings. Not only are these types of units all the same with no scarcity at all, but the relative land component is also tiny.

However, it is important to understand that not all apartments are equal. In fact, if you invest intelligently in apartments, you can find yourself in an incredibly strong position thanks to the ‘hidden’ value of the land component.

The Value of Land

The way an apartment block works is that you effectively own a portion of the land that an apartment sits on. If you have a 1000 sqm block with five apartments, then you effectively own one fifth or 200 sqm of land. Notwithstanding the fact, that you don’t control all the land or what’s done with the building, it is important to understand that this land has value.

What we can also see here is that the fewer apartments there are, the more land component you control.

That’s why we always recommend smaller apartment buildings and never look at large off the plan style developments. As mentioned, there is the scarcity factor involved, but importantly, you are also getting land.

When you start calculating the value of the apartment based on the land component alone, things can get very interesting for savvy investors.

Recently, there was an apartment for sale in a small block of four units in Newcastle. One of the apartments was selling for $540,000 and the size of the overall block was 800sqm – meaning that you would control 200 sqm.

On the surface, there wasn’t much to write home about, apart from the fact, that the land component was quite large for an apartment.

However, land in the same street was selling for $4,000 – $5,500 per square metre.

Based on the land component of an apartment with 200 sqm, you would have been sitting on a property that was effectively worth, between $800,000 and $1,000,000 based on land value alone.

That means for a purchase price of $540,000, you could have instantly created around $400,000 in additional value.

If you look at an apartment and simply focus on the intervals and what it has to offer, you can easily miss out on a huge part of its true ‘hidden’ value.

If you look beyond what is right in front of you, it’s possible to unlock a wealth of opportunities.