There’s a powerful, often overlooked asset offering early-stage wealth builders capital growth in otherwise unaffordable suburbs.
It’s what is known as notional land value in apartments and units, and is essentially an owner’s proportionate share of the land the entire building sits on.
Property developers are already paying astronomical prices for it as land in premium suburbs becomes increasingly scarce. And they serve as a leading indicator of where the broader market sees value.
While houses on land have the strongest capital growth, apartments with notional land offer an accessible alternative as prices in inner and middle-ring suburbs lock out buyers without top-tier incomes or generational wealth.
According to Cotality, the number of million-dollar areas has increased by 143 per cent over the past five years, expanding well beyond traditional prestige suburbs.
To afford to get into such markets, a household on the average income of $106,000 per year with a 20 per cent deposit, would require more than 50 per cent of pre-tax income to meet repayments for a million-dollar property.
That figure rises to 60 per cent under the federal government’s first home guarantee scheme, which helps eligible buyers purchase a home with a deposit as low as 5 per cent.
While the scheme was designed to help, the reality is the caps – $1.5 million in Sydney, $950,000 in Melbourne, $1 million in Brisbane, $900,000 in Adelaide, and $850,000 in Perth – are still not high enough to purchase a house with land in most inner or middle-ring suburbs on current prices.
For first-home buyers this creates some difficult trade-offs. Either buy a home in a far-flung suburb and forgo lifestyle – or buy an apartment closer to where they actually want to live.
For many, a plush new place in an apartment tower, with brand-new fixtures, gym, pool and sauna obviously has immediate appeal, but unfortunately poor capital growth potential.
Counterintuitively and perhaps disappointingly, an older, rougher and less trendy apartment provides a much better option.
While many buyers focus on an apartment’s finishes, amenities and yield potential – it is the overall land component that is a key driver of capital growth.
The most promising capital growth generating apartments are typically low-rise buildings (two to four storeys), built between the 1940s and 1970s, located on larger land parcels with fewer than 20 units, and situated in established, high-demand suburbs with a strong owner-occupier base.
“As freestanding land becomes increasingly scarce, this notional land value will inevitably be recognised by all astute buyers – not just developers.”
These were typically built at a time when land in these premium suburbs was far cheaper than the towers built in the last 20 years. As a result, developers weren’t compelled to squeeze in the maximum number of units to achieve a decent return.
Even within this broader category of apartment type, there are large variations in notional land value between apartments, which can lead to major differences in capital growth potential.
To determine an apartment’s land value isn’t complex, but it demands a few deliberate steps beyond surface-level checks.
This is done by firstly establishing the site’s total land area and its market worth by considering comparable land sales nearby. Avoid simply dividing by unit count. Consult the plan of subdivision for unit entitlement, which reflects your proportional ownership based on size and features.
For example, if the site totals 240 unit entitlements and yours is 60, that’s a 25 per cent stake – apply this to the site’s value for your notional land share. Then compare how much of the overall purchase price that notional land represents. In general, the higher the proportion attributable to land, the stronger the growth potential over time.
To start to understand how this translates into tangible returns for the apartment buyer, we can look at an increasing trend of developers paying premiums for under-capitalised blocks in investment grade suburbs – as stand-alone lots become increasingly finite and difficult to secure.
In one standout scenario, we advised three owners holding four apartments in a street of enviable location in the Melbourne suburb of Hawthorn.
The 1000-plus square metre site was clearly under-capitalised – with a vast land component, and only a basic level of building component. Individually the four units were valued at around $1 million each. All parties aligned on selling as a whole, eyeing developer appeal.
A site tidy-up sharpened the pitch without major expenditure. The block was marketed as a whole at $7 million. And interest for the plot surged, resulting in four bidders at auction driving it past $9 million – over $2.25 million per apartment, a 125 per cent uplift.
While not every block will be bought by developers, their interest is an early signal of the value in this once-overlooked, underutilised and nuanced asset.
As freestanding land becomes increasingly scarce, this notional land value will inevitably be recognised by all astute buyers – not just developers – as a critical component for building capital growth in the years to come.