Buy properties for land value

People often recommend that you buy properties for land value. What they are suggesting is that you should maximise the land value in any purchase. Regardless of whether you are buying off-the-plan or a 'used' property, you should attempt to break the property value up into:

1. Basic land value
2. Value of improvements

For example I saw a property developer in the Philippines offering house & land packages for P1.5million. They were reluctant to tell me the value of the land, reinterating the point that its a package. Finally he told me that you can buy land in an adjoining lot for P3000/m2. This is a good reference for benchmarking. Given that the package included a 80m2 lot with a 80m2 (floor area) 2 storey house, the implication was:

Having established that vacant land next door is selling for 3000 pesos per sq metre, based on the package price of P1.5mil, we know that the implied value of the house is P15,750/m2. Based on previous independent advice, I know that P12,000 per m2 is a reasonable amount to pay for a basic house, so these lots look overpriced. Of course they are sold this way because most Filipinos lack financial literacy. They think they are getting a good deal because the nominal price of P1.5mil ($US30,000) is low. But they might wonder after they move in - Why is the neighbourhood so noisy? The reason - the neighbouring lots were empty when their house was under construction. Now the neighbours are building their house, its apparent that they are too close to their neighbours. Soon when the whole neighbourhood is filled with kids, dogs, roosters, jeepneys and tricycles, they will realise that they bought into a slum.

Most developers are marketing to suckers who don't know the value of property. Why buy in a fully priced subdivision? Security and facilities are the only reasons, but will you use them? Its crazy that people buy these residential lots and sit on them for decades. Of course if you want to avoid the premiums involved in such packages, you need to consider:

1. Buying a vacant lot and getting an architect/builder to build a house for you

2. Buying a 2nd hand house - privately or foreclosed

3. Establishing a consortium to buy & develop your own subdivision - You need a sought after area because there are many failed subdivisions around

One of these approaches means that you can buy at a reasonable market value. But markets are not static. We should be trying to buy a property for its future capital growth potential. We are looking for a re-rating in the value of the land component - which is why we shop to maximise the land value. In contrast, the house value will depreciate so we want to minimise that capital component. There are several potential capital growth factors we should be looking to find:

1. Trends favourable: Look for areas where the trends support the future demand for your property, particularly where the trend has just changed and is likely to be sustained. e.g. Expansion of the city, development of your area, growing popularity of larger size lots, growing popularity of 2br homes, possibility of a new train station after the area population density increases.

2. Focal point established: Is there some feature in the local area that makes the land more valuable, e.g. A new train line that has reduced traffic, a new shopping mall attracting jobs, an attractive beach

3. Improved accessibility: The impact of a new toll way is considerable because it provides much faster access to the city. An area previously too far away from the city becomes a magnet for weekender accommodation, sparking a lot of property development.

4. Other special attributes: You need to decide what is a positive attribute and what is a negative. The positives are considered to be schools, churches, large lots, big houses, beaches, waterways, access, forests, shopping centres (if you are not too close); whilst the negatives are considered to be industrial areas, prisons, slums, pollution, etc. Of course these attributes are subject to change. e.g. The prison might be closed in time, and the slums might be redeveloped by government or private enterprise.

5. Rezoning: In some countries the distinction between different types of land can be HUGE. The implication is that you can significantly benefit if you are able to hold the land when the zoning is changed. Large projects attract jobs, so they tend to more readily get approved. But there is no reason why you can't profit on their coattails, particularly if you are able to anticipate change. Restrict zoning laws tends to artificially elevate the value of land. If you hold agricultural land on the fringe of a growing city, you will eventually profit from the increase in land value. But the increase in value will not be straight line, so timing is important. Look to buy such fringe land after city property has increased. Get rid of it before, and realise its value before any collapse in the economy.

The implication of these statements is that you should not buy strata title property like apartments, condominiums. I think this is true, though it will depend on personal circumstances. Buying a strata title might be a lifestyle decision. If you tend to buy the property as a owner-occupied premises, it might make sense. You might prefer a small, low-maintenance garden, greater security, or to unlock the land value from your house prior to retirement. These are all valid decisions.