Is the land under your property more valuable than the property itself?
This premise may be counter-intuitive to you as the property owner. How can the dirt be more valuable, sometimes much more, than the entire improvements, which provide a steady rental income?
The answer is simple. Land is a finite commodity. In Vancouver, for instance, we live in a landlocked city with the mountains and Pacific Ocean presenting insurmountable obstacles to potential development. We now have to look skyward to create new housing opportunities.
Land assembly is a very complicated process to all parties involved, except for the individuals or company who own the land for sale. To you as a land owner. it should be a simple function of price.
The improvements are worthless in a land assembly deal. It could be condemned, or completely renovated, but to a potential developer it’s just dirt. The major factor, besides location, that will ultimately determine your value is the floor area ratio (F.A.R).
Higher the F.A.R, higher the land value
This gives a general indication to the size of building the City of Vancouver will allow on your property. The higher the F.A.R, the higher the land value. There are certain restrictions and requirements to maximize the F.A.R, thus maximizing the value of your land, and overall profits to you as a land owner.
For example, the City of Burnaby requires a minimum of one acre of land to assemble a high-rise site. This can equate to needing up to five or more properties packaged together in order to maximize the value of your land. In this packaged assembly, all properties are created equal.
The only differentiating factor of your property, versus your neighbour, is the size of land you have for sale. Therefore, without your neighbours, your property could potentially lose value or not qualify as a high-rise site at all, and vice-versa.
In land assemblies, it is common for the property owners to argue their property is worth more because of its location within the assembly, because they have the most updated building, or because they have the biggest plot of dirt and deserve a higher price per square foot for the land. While these may be true, they are mute points.
Only value is in the land
The only value is in the land and all the land is exactly the same in the eyes of a developer.
Some landowners have heard stories of other people getting massive prices for their properties that equate to almost double the value of the property as an apartment building. It is true the land value of your property as a high-rise site is significantly higher, but a misconception leads many apartment owners to hold out for huge amounts of money.
The general mentality is to hold out, with the reasoning the projects are so large the developers have virtually unlimited funds to pay landowners. The truth is your land may be a very valuable commodity, but like everything else in a supply/demand market, there is a market price.
Developers have a very tight budget, with every dollar meticulously calculated and accounted for. If the numbers do not work because you are holding out for an above market price, they will move on to another project.
Just as if you are selling your apartment building, the land price will eventually have to come to market value, or the market value will eventually have to reach your price for the land.
So now that you understand the process and pricing behind development sites a little better, you may be wondering: does this affect me?
Let’s take the Metrotown area in Burnaby as an example. The city is in the process of finalizing a new official community plan, which allows for upzoning in specific areas for new high-rise sites.
Transformed the feel of the area
This has completely transformed the feel of the area and moulded it into an up-and-coming metropolitan community. Qualex-Landmark, an established Canadian real-estate developer has been building these types of projects across Canada since 2001.
We discussed with them these unique possibilities for land lords and how land assemblies represent great opportunities for developers and property owners. “Through assemblies, developers are able to create vibrant new communities from properties that otherwise may not have been viable for redevelopment.
“By participating in assemblies, owners can maximize the highest and best use of their properties, thereby increasing the value of their land,” said Cyrus Navabi, vice-president of new development.
The City of Burnaby has indicated their position is to minimize vehicle traffic by promoting the development of projects around sky train stations.
In the past year alone, several multi-family apartment land assemblies sold as high-rise sites. However, many of the available sites have been bought up, and simply put, land is a finite commodity. The city will have to continue looking skyward to fulfill its goal of densifying these areas.
This could shift the focus of the official community plan to include more multi-family buildings located around the transportation hubs presenting additional opportunities to land owners.
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