Properties with excellent redevelopment potential have been solid gold investments in many parts of Melbourne and Sydney for the past decade and they’re poised to do even better in the next 10 years.
It’s easy to see why. Residential land values are escalating at a significantly faster rate than building costs.
Australia’s low-inflation environment is the driving factor that keeping building costs reasonably stable. Low building costs, in turn, are widening the differential between the cost of building and the cost of land and make it more cost-effective to knock over an old home and construct something new.
The head of Melbourne-based James Buyer Advocates, Mal James, says property owners who have encumbered land or no land – including apartments, townhouses and heritage-restricted homes – are increasingly being disadvantaged when they sell up.
“If you have got good unencumbered land, you are still on fire,” he says.
So-called “land-only” listings are attracting the strongest prices for residential real estate, especially in the inner suburbs of the east coast capitals. These properties often have an old house that is not protected by a council heritage overlay.
It doesn’t seem to matter much if a block of land is protected by a single dwelling covenant. These covenants, introduced by some councils in the 1920s and 1930s to protect neighbourhood character, mean an old house can be replaced with a new house, but not by flats or townhouses.
The important consideration for a growing proportion of buyers is whether a house can be demolished and replaced.
Domain Group chief economist Andrew Wilson says buyers today are well aware they are unlikely to overcapitalise by taking a knock-down-and-rebuild approach to real estate transactions.
He says because of rising land values this approach works just as well with mega mansions as it does with middle-market properties.
“Building as a factor of the total cost of the property is declining as a proportion,” Dr Wilson notes.
“It is why it’s quite feasible to buy a property and just knock down the house. You are buying something for $1.5 million or $2 million and the house on it is virtually worthless as a proportion of the property’s total worth. You can’t over capitalise by putting a very nice $300,000 to $400,000 house on it.”
Dr Wilson says both the Melbourne and Sydney markets are seeing an interesting trend in which larger blocks are being bought by people intending to build a single new luxury home, rather than by developers of multi-unit projects.
Real Estate Institute of NSW president John Cunningham says a fast-growing group of Sydney home owners are choosing to stay put in their current houses and either renovate or knock down and rebuild.
“There has never been as many knockdown and rebuilds in Sydney as there has been in the last few years.”