Investing in property makes sense.

Investing in the right property takes knowledge.

Welcome to the Rewarding Property Decisions podcast.

I'm Jared McCabe, director of Wakeland Property Advisory.

Join me for expert insights into the fundamentals, trends and opportunities to help you create long term wealth through smart property decisions.

Hi everyone and welcome to episode 109 of the Rewarding Property Decisions podcast.

Well, there's been quite a bit of activity of light through this spring market so far.

Within the first home buyer market, we're seeing a lot of activity predominantly off the back of the the federal government's incentive around deposits and and only requiring a 5% deposit with them supporting going as guarantor basically to to prevent lenders mortgage insurance.

So it's meaning that first time buyers don't need to have at least 10 if not 20% to get into the market, which is certainly encouraging a lot more activity and encouraging buyers who perhaps wouldn't have had the capacity to get in otherwise to come into the market.

So it's most notable at the moment within the sub $1,000,000 bracket, we're seeing a lot of activity in that space.

And so if you're looking to buy property in that, that sub $1,000,000 market in the inner even middle ring suburbs, it's very difficult to get a house at that price point.

You've probably got to go a lot further out.

So for those that are looking to perhaps maintain an inner city lifestyle, they're looking at alternatives and that's sort of bringing in the the apartment market now for and, and sometimes units, but predominantly the the apartment market.

Now, for those that have listened to podcast and and spoken or spoken with us at all in recent times, we'll know that the apartment market hasn't been overly strong for a fairly extended period of time now.

It's sort of upwards of eight to 10 years.

And if you're looking in the established market, they've probably at least held their value in some instance, had some minor upgrades.

But for those that are have purchased in the off the plan or high rise sector, you've done well.

If they've actually held value, a lot of them have have decreased in value over that period of time.

And a lot of that comes down to underlying land value, which is what I wanted to discuss today, that the underlying land component, people quite often don't understand how that works.

But the, the notional land component that comes with buying an apartment is really important.

Obviously we all understand it when it comes to a house because you can physically see it.

But when it's with an apartment, it's very, it's more of a notional side of things.

So I wanted to have a look at why it's, it's so important and how you physically when it's not physically yours, how you determine how it adds value, where the value is, those sorts of things.

So First off, why is it isn't so important?

Well, land really is the, the key driver from a growth perspective when we're talking about capital growth with property, particularly in the inner city suburbs where it is at such a premium, the, the land components and the, the supply is obviously extremely limited as well.

It's they're not making any more of it.

It's harder to harder and harder to come by as more and more development gets brought up out of the ground.

So obviously that shortage in supply creates excesses of demand and that's where the, the growth comes from and that, and that's what pushes up value.

So that's why the land is is such an important part of selecting the right property and Even so with an apartment.

So how do you calculate the land component of an apartment or unit when physically you don't own that?

Well, it's not a difficult process, but it takes a few steps and you've probably got to go a little bit further than what you otherwise would.

First off, determine the total site area of the of the development that you're looking at.

And then you need to determine what that total site is worth to get your idea.

Now, it's not as simple with with apartments as just dividing by the number of apartments in the block.

You need to look at the unit entitlement which will be on the plan of subdivision because in some developments, particularly some of the larger ones and there'll be, there'll be one and two-bedroom apartments or some of them will just be larger.

And so they'll have different unit entitlements to the development.

So you need to determine basically what your percentage of ownership is within that.

And that's what the unit entitlement will tell you.

It's not a percentage.

It might be there might be 240 unit entitlements and you might own 60 units within that 240.

So you've got a quarter, but there's other ways.

There's there might be others where it's there's 240, you only own 20.

So understand what your unit entitlement is and what the percentage is.

And then obviously just apply that to the total value, which will give you your land component.

And then you can look at it in comparison to or what percentage it makes up of the total value of your property.

Pretty straightforward.

But you just, it's a couple of steps there and it gives you an understanding and then you can start to look at, well, how much of the overall purchase price is made-up of notional land value.

So what type of apartments typically provide the greatest land component?

Well, it's not the high rise sector.

Typically when what you'll find in that you'll be you'll be doing very well in a high rise apartment.

If you're over 10% in terms of your land component, most instances it'll be sub that, which obviously means if you've got that smaller amount of land value, it's going to make it tough to get some some reasonable growth, particularly with the the number of apartments within that space that are available or still to be constructed at the moment.

So typically the oldest style boutique blocks are where we want to focus in this space and what we where you'll get the the greatest land component and it's usually the sites that are considered to be under capitalized where you'll get the greatest level of growth going forward.

And an Art Deco apartment is a really good example of that because they were very much undercapitalized.

They were the first of their type to start in Australia to start building that multi Storey dwelling.

So that that having that meant that there wasn't in, in comparison today's standards that there was a few number of apartments on what we would consider to be a relatively large parcel of land.

And as a result, they're now considered to be undercapitalized.

It's not just Art Deco.

The, the Fifties, 60s and 70s era apartments are still very much considered to be minimalistic in terms of utilizing the full site.

Even when they are in some nice residential suburban streets.

They feel the, the feeling is that there can be better quality and, and more usage taken up of those sites with the way we can construct properties and things these days.

So those older style buildings usually are a bit undercapitalized and sites, sorry.

And that that's where you've got the opportunity to, to get some good growth.

So where are these sites typically located?

Well, they're, they're very much the, the boutique type developments within the blue chip suburbs of Melbourne.

And they've generally been in areas where the land or the, the demand to be in those areas has been strong for an extended period of time.

It's not something that's just changed overnight.

And we've just all of a sudden seen that this is a popular area in most instances.

They've probably been well regarded and sought after location since Melbourne was established.

So good examples of this are the the eastern and southeast eastern suburbs.

So Burendar is stunning to those sorts of locations.

They've been long regarded as high, high value and high demand type locations.

And as a result, over over history, there's been a need and a want for there to be more affordable accommodation.

So at different stages of Melbourne's history, there's been apartments constructed to create that, that more affordable accommodation.

And as a result those those sites because as we said before have been undercapitalized in terms of how they've been built on in comparison to today's standards means that there's opportunities there.

And the the the land component now for those as compared to the high rise developments is much stronger.

So when will we get to a point where land actually starts to exceed the overall value of these properties?

Well, we're starting to see it already.

The continued increase of underlying land value and the, and the obviously finite resource or asset that it is, has meant that the, the premiums that developers and builders are now prepared to pay for these sites continues to grow because they're not able to secure them by just purchasing a house, because it's harder and harder to do that.

So they're looking at alternatives and the alternatives are to go and approach a development and see if they can they can secure it that way.

So we've been discussing this as a business for since Richard started Wakeland Property Advisory in 1995.

And it's the interesting thing that is, is that over the last five to 10 years the the talk around it and what we expected to happen is now started to come to fruition.

And it's it's been in the bluest of blue chip locations as you would expect to start with as where the developers have started to look because land is so expensive there and and then the end development will realize some higher prices.

So it's justified in those locations.

And so where it's really occurred to start with has been around the Toorak, Hawthorne, S Yarra, East Melbourne, those types of locations where that's where land is at a premium and that's where these older style apartments can be demolished if they're in the right locations and then new developments can be constructed.

But the interesting thing in more recent times, probably the last probably three to five years, is that it's starting to branch out a little bit further.

So these are still locations that are highly regarded and highly sought after, but they're probably not quite at the same level as the Tooraks and Hawthorns.

So areas like East Hawthorne, Prahran, which is still well regarded, but they're now starting to, the developers are starting to spill into those locations to look to alternatives.

And that will continue to to occur across Melbourne.

It'll, it might take longer in certain areas, but it will certainly continue to, to spread that way.

And that's, that's the expectation that we would have.

Now.

There are obviously restrictions and things that developers are wary of.

So that is something to be mindful of if you're looking to go down this path from an apartment purchasing perspective.

So the larger the development, obviously the harder.

So if you're in a larger multi unit development, you've got to get everyone on site.

So if there's, it's a lot harder to get 12/16/20 people to agree to, to do one thing as opposed to getting four people to do it.

So it's if that's the the target, then being in the right location, but in the smaller blocks it's more likely to happen sooner than it is in the larger.

And then also planning controls are a big thing too, particularly when we talk about say Art Deco apartments because there are heritage protections over a lot of them.

So if there is likely to be heritage or planning protections that might prevent developers having a certain form of interest or even things like large trees on the site because it might make it harder to to be to get permission to remove those and that might prevent what they would like to construct.

So these are the sorts of things that can come into play around this development side of things.

But it's definitely something to keep an eye on and it's particularly if you are entering that market, there's opportunities there and it's only going to continue to grow over the coming years.

I've got plenty of case studies in this scenario, but I've got one in particular that I'll, I'll discuss with you today.

It's a very, it's probably the extreme example of what, what, what I've discussed today, but it certainly gives you a really good understanding as to how this can play out.

We had a, a client or a couple of clients that we purchased in a block of four apartments over the years.

And there was another person that owned the other two.

So there was 3 owners for four apartments within this complex in Melbourne's eastern suburbs and it was in a very, very well regarded St.

in Hawthorne.

And this property was extremely undercapitalized in terms of its site.

So 4 apartments on a side of in excess of 1000 square meters, so well undercapitalized in a very high land value location.

But they came to us with the understanding and all three parties were very keen to proceed and progress with this that they would like to sell the the development as a whole.

Individually the apartments were probably worth around $1,000,000 each.

They were in fairly basic condition.

The site had been maintained but was not overly attractive in terms of individual apartment ownership.

So around $1,000,000 per apartment.

We felt that if we took it to market with a bit of a tidy up around the site that we would be able to pitch it in the $7,000,000 range.

So it's significant increase in terms of individual value of each apartment, which we did, took it to the market, it went really well, had lots of interest.

I think there was 3 or 4 bidders on the day of the auction and it ended up selling for an excess of $9 million.

So there, that was sort of two and a quarter in excess of two and a quarter mil per apartment.

So significantly more than what they would have achieved on their own.

And as I said, it is an extreme example because it was significantly undercapitalized, but it, it paints the picture of, of what's happening and how this can continue to occur in in coming years.

So that's about it.

It's really important to focus on on that LAN component.

Get as much of it as you possibly can.

But thanks for joining me for episode one O 9 of the rewarding property Decisions podcast.

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