Many believe that it is in the land and that is why they invest in houses. Is that your belief? In today’s show Gavin Hulcombe, who’s a valuer with Herron Todd White, says you might want to re-think that.
 

Transcript:

Kevin:  You’ve probably heard this myth in the past – I know I certainly have – that houses make better investments than apartments because they have more land. I guess every property has some kind of land component, but there is some confusion about where the real value of the property is. I’m going to talk to Gavin Hulcombe now, who’s a valuer with Herron Todd White.
Gavin, thanks for your time.
Gavin:  That’s all right. Good morning, Kevin.
Kevin:  You’ve heard this comment before – houses make better investments than apartments. Is that true?
Gavin:  I think it’s like all things; it’s really difficult to generalize. I think obviously the supply and demand issues are probably the foremost consideration in terms of where the best investments are.
Look, I guess one of the arguments is always that the land appreciates – it goes up in value – and improvements always depreciate in that when they’re brand new, they’re always really modern and look good, in five years, they’re a little bit dated, ten years, they’re dated a bit further, and by the time they’re 30 years old, it’s a 30-year-old apartment.
I guess the argument is often that the land where you have a house and land component goes up while the house depreciates. If you buy a unit, you get less of that appreciation because more of the value of the unit sits in the improvements and therefore they can depreciate.
But I think the key thing is when you look at apartments, typically they will yield much higher than houses. Again, it depends on where they are and what have you, but as a general statement, units will often [1:29 audio skips] which is essentially the rent as a percentage of the value of the property.
Kevin:  It stands to reason though, the more use you can get out of land, the more valuable it’s going to be. As an example, a normal housing block, if overnight that is rezoned and you can then put apartments up, the value has actually gone up, hasn’t it?
Gavin:  Obviously, it links back to the utility of the land. If it can be developed at a much higher density, then that increases the value of that property because of what you can put on the property.
Kevin:  Okay. Now, the statement there about units being less valuable than houses, you’ve made a very good point about depreciable assets there. How does a valuer go about valuing a house as opposed to a vacant block of land?
Gavin:  As in all valuation, it’s essentially you’re putting yourself in the eyes of a potential buyer, and you take into consideration all of the things that they would – the good, the bad, and attributes of the property. Then in assessing the value, you’re then comparing it to other properties and saying, “Well, what would the market, i.e. the buyers, what allowances would they make for either the busier road or the bigger house or smaller house or better decoration or whatever it might be?”
In essence, you’re always comparing a house to a house. If you’re looking at land, you’re comparing land to land and making the similar adjustments to what a perspective purchaser of that property would do.
Kevin:  I suppose any person looking for an investment property, they have to bear all these things in mind about what type of investor they are – whether they’re a unit type investor or a house and land type investor. I guess when it comes to investing in a unit you’re then dealing with body corporates and a whole layer of different types of administration, as well, aren’t you?
Gavin:  You are, but I think even just going back to your point about as an investor, I think probably investors need to be a bit clearer as to whether they are looking for a yield investment – as in higher income-earning capacity throughout the life of the property – or are they looking for a capital growth investment?
Depending on where a unit is and all those sort of things, it can provide a higher yield, but equally if you go back to the old adage of the worst house on the best street, the land might go up but it’s at a much lower yield while you own that property, but ultimately, it may show stronger capital growth over the longer term.
I think when people are looking at investment property, I think it’s a useful consideration to say “Am I looking for a yield or am I looking for long-term capital growth?” Because I think that will influence your decision, as well.
Kevin:  Well said. Gavin Hulcombe from Herron Todd White.
Thank you for your time, Gavin.
Gavin:  That’s fine. Thanks, Kevin.