Together, land apportion and owner occupier appeal (along with location) are arguably the biggest factors to consider when choosing a residential property as an investment.
When you’re deciding which of the three residential property types to invest in – houses, townhouses or apartments – one of the first factors to consider is land.
There’s a strong correlation between the land apportions (the proportion of land surrounding a dwelling) and the anticipated capital growth:
A fundamental principle of owning property is that landed properties tend to outperform non-landed properties over time. Let’s look at a simple comparison between houses and apartments to explore why that is.
Land Apportions: Houses vs Apartments
A house typically has a land value of over 50% of its total price, while an apartment typically has a land value of 40% or much less.
This is because land is a finite resource and asset; it can’t be produced any more than it has. Take an inner-city suburb, for example. All the land within that suburb has been developed. As much as the government and community might wish to provide more land for housing in that area, it’s just not feasible, or even physically possible.
With apartment developments, however, the sky is effectively the limit. Whilst the locations for apartment developments may be limited, the government in effect controls how high they can be built. Consequently, the number of apartments able to be supplied is ultimately infinite.
Since the mid-2000s, the price growth difference between houses and units (known as the House Unit Gap – or HUG) has increased exponentially as apartment developments become denser and higher. In March 2022, the HUG hit an all-time high of 28.2%.
These buildings provide a greater number of apartments per square metre of land, and so have significantly reduced the apportion of land.
This is why for property owners, owning land for wealth creation is a fundamental principle of any investor’s portfolio.
Do Apartments Have Their Place?
Whilst people have had capital appreciation mainly from owning land in Australia, there are always exceptions to this rule. Look at inner Sydney, for example, where planning controls limit the height of apartment developments.
Furthermore, apartments generally have high cash flows and yields – making an excellent choice for more sophisticated investors that have cash flow negative landed investments. Like everything in life – it comes down to balance.
Where thinking like an owner occupier comes into play
While investors look to cash flow to hold their assets, it is important to weigh this up against the ability to sell an investment at the end of the investment period.
Investors often invest in apartments that have excellent cash flows but poor resale opportunities, which limits their capital growth. Why? Because they haven’t taken on an owner occupier’s mindset when purchasing their investment property.
Many people in the property market rely on emotional biases to influence their purchasing decisions. As a result, owner occupiers – who are likely to make more emotional decisions based on their lifestyle and family structure – tend to pay higher prices than investors in the established market.
So, when selecting a property for investment, it’s best practice to ensure that the qualities of the property appeal to an owner occupier, as ultimately that is who you will be targeting when you eventually sell your property.
A matter of balance
There are challenges with investing with an owner occupier’s mindset; the size of the property and number of inclusions need to balance with the rental yield, as these factors increase the property price but not necessarily the rent – therefore affecting the cash flow of the investment.
It’s all a matter of balance as together, land apportion and owner occupier appeal (along with location) are arguably the biggest factors to consider when choosing a residential property as an investment.
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SUMMARY
Together, land apportion and owner occupier appeal (along with location) are arguably the biggest factors to consider when choosing a residential property as an investment. Let me show you why that is and how they affect your capital growth.
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