This article evaluates land as a property investment, analysing its pros and cons to ascertain its financial viability.
Investing in real estate has long been considered a sound financial strategy, offering both stability and potential for growth. In Australia, the prospect of buying land, in particular, has gained popularity in recent years.
Investing in Land
Investing in land, also known as land banking, is a strategy where individuals or organisations acquire parcels of land with the expectation that its value will appreciate over time. The rationale behind this type of investment is multifaceted and includes the following factors:
Land is a finite resource, and it cannot be manufactured or created. In Australia, urbanisation and population growth have placed increasing pressure on the available land supply. This limited supply can potentially drive up land values, making land an attractive long-term investment.
Over the years, land has historically shown the potential for capital growth. As demand for land increases due to a growing population and urban expansion, the value of land can rise. This capital growth can lead to substantial returns on investment, making it a compelling option for those willing to hold land for an extended period.
Investing in land can also generate passive income. Some landowners lease their land for various purposes, such as agriculture, grazing, or mining, earning a regular rental income. This income stream can provide a stable source of cash flow, contributing to the overall profitability of land investments.
Diversifying one’s investment portfolio is a common financial strategy to mitigate risks. Land investments can be an excellent addition to a diversified portfolio, as they tend to have a low correlation with other asset classes like stocks and bonds. This can provide stability during economic downturns and market fluctuations.
Benefits of Investing in Land as Property
Investing in land can offer several advantages for property investors.
Tangible Asset
Land is a tangible asset, which means it has intrinsic value and is not subject to depreciation in the same way that structures or buildings are. This tangibility makes land a stable investment that can withstand economic turbulence.
Potential for Capital Appreciation
Land values tend to appreciate over time, especially in high-demand areas. As the population grows and urban development expands, land in strategic locations can experience substantial capital growth. This potential for appreciation can result in significant profits for investors.
Tax Benefits
Investors may benefit from various tax incentives when holding land. These incentives may include deductions for expenses related to land management, depreciation on improvements (if applicable), and even potential capital gains tax exemptions under specific conditions.
Low Maintenance Costs
Compared to other real estate investments, land typically has lower maintenance costs. There are no structures to maintain, repair, or renovate, which reduces ongoing expenses. This can enhance the return on investment.
Diversification
Land investments can provide diversification to an investment portfolio, reducing overall risk. They often have low correlation with other asset classes, making them a valuable addition for risk management.
Drawbacks of Land as Property Investments
While land investments offer various advantages, they also come with their fair share of disadvantages.
Illiquidity
Land investments can be illiquid, meaning they cannot be easily converted into cash. Selling land can be a lengthy and complex process, and it may take a considerable amount of time to find a suitable buyer.
Holding Costs
Owning land can be costly due to holding expenses such as property taxes, insurance, and maintenance. While these costs are generally lower than those associated with developed properties, they can still add up over time.
Lack of Income
Unless you lease the land for various purposes, it doesn’t generate regular income. This can be a drawback for investors who rely on cash flow from their investments to cover expenses or fund other projects.
Market Volatility
The value of land can be subject to market volatility. Economic downturns, changes in zoning laws, or shifts in demand for specific types of land can affect its market value. This can lead to periods of stagnant or declining property values.
Uncertainty
Investing in land involves a certain level of uncertainty, as it relies on factors beyond an investor’s control, such as government policies, infrastructure developments, and changes in demographics. These external factors can impact the success of the investment.
The above five factors were given further detailing by Richard Wakelin in the Australian Financial Review. Mr. Wakelin stated that Victoria’s plans to raise more taxes on vacant properties have raised attention in light of issues of land banking exacerbated by the housing crisis. He took note of a recent Prosper Australia study which indicated that land banking practices resulted in home buyers being forced to pay $5.9 billion for the properties. An accounting of public land parcels the government made available to developers also found that only 23 per cent of that public land was eventually sold to private homebuyers in the end.
Conclusion
Investing in land in Australia is a strategy that has gained prominence due to its potential for capital growth, limited supply, and diversification benefits. However, it is essential for investors to consider the advantages and disadvantages carefully. Land investments may not be suitable for everyone, and their illiquidity, holding costs, and lack of regular income should be taken into account when making investment decisions. The decision to buy land should align with your long-term financial goals and risk tolerance.
DISCLAIMER: This article is for informational purposes only. 2 Ezi has no relationships with any landowner or property agent.
