Investing in Apartment Complexes: Unlock Hidden Windfall Gains

hotspotting.com.au and propertyU

It’s no secret that home prices are rising across much of the country, leaving many people out of the market.

But there is still a prime opportunity to buy an affordable property investment that could yield a hidden windfall. I’m talking about units, the strategic value of investing in apartment complexes, and the notional land value tied to body corporate ownership.

Notional land value refers to the value each unit owner has in a complex’s parent site, and in some circumstances, it can be hundreds of thousands of dollars more than the unit’s stand-alone price.

Notional land value

You see, when you buy an apartment, unit, or townhouse, you don’t only own the space you live in. You also own a proportion of all the shared, or “common” assets and improvements controlled by your body corporate. Your share of that asset is defined by your unit’s entitlements under the body corporate, or survey, plan.

For example, if you are one of five apartments in a complex, and the body corporate agreement describes each as having equal entitlements, then you own 20 per cent of all common areas. The pool, the gardens, the driveway… everything is 20 per cent yours.

Best of all, that includes the original site upon which your complex was built.

If that allotment was 1000 square metres of land zoned medium density just a few kilometres from a city centre, then the value of your share of that site might surprise you.

Why? Well… while Australia offers a massive amount of space, the simple fact is that developable land is scarce in premium inner city and middle-ring suburbs. As a result, developers are constantly looking for highly desirable land, despite overall construction costs remaining quite elevated right now.

What we’ve seen lately is developers looking for underutilised land in these hot locations, and that includes sites that already hold an older, less densely developed project where they can buy the entire complex from all of the unit owners.

Suppose your land has the right ingredients for a more comprehensive development. In that case, there’s a good chance a developer will come knocking and potentially offer you and your fellow owners a premium to secure the site.

Notional land value can enable unit owners to pocket significant returns. Older, individual apartments and units are generally cheaper than houses in any given area, too. In fact, we’re currently buying apartments for our clients at below replacement cost.

The key to this equation is being a savvy buyer—or relying on an expert who understands the true value of this land component.

This can be a real ace up your sleeve when purchasing.

You see, many unit buyers just look at the apartment they’re purchasing and the facilities that go along with it. They will pay extra for the niceties. An ultra-luxury apartment in a high-rise building with a pool, gym, and lift might draw plenty of competition and big dollars. But these unit complexes don’t have the same element of underutilised land that older complexes tend to have. As such, I’d suggest that if you’re looking for an investment unit, seek something in an older, low-rise apartment block. These are often under-capitalised and can be prime targets for developers in the future.

Keys to success

There are some essential elements you must watch out for when selecting an apartment with excellent notional land value.

Firstly, avoid heritage-listed buildings as planning laws may stifle future development and severely impact the value of the parent parcel of land.

Next, carefully check the local planning maps and legislation to determine whether the property is underutilised. Essentially, could it yield a development of higher density than currently stands on it now?

Another critical move many people forget to make is checking their particular unit’s lot entitlements under the survey plan. Not all lot entitlements are the same. If, for some reason, your unit holds 40 lot entitlements of a total of 100, then you own 40 per cent of the notional land value. Of course, you are also responsible for 40 per cent of the complex's running costs while holding that unit. As such, you must be careful when selecting the property to maximise notional land value.

Also be aware that developers often move slowly. While a suburb may have been recently rezoned for higher density, it doesn’t necessarily mean that every apartment block will be knocked down and rebuilt in two years. The economics of a development are very complex and the market values may not support a rebuild scenario until five or 10 years down the track.

We have assisted some developers securing these types of opportunities—otherwise know as a “collective sale”—i.e., all the owners get together and agree to sell to a developer for an agreed price. Typically, the sale process takes considerable time, and a longer settlement period is required – one to two years is common. But developers are usually willing to pay above-market rates to secure the deal.

We helped a prominent Sydney developer secure 29 apartments across three separate older-style blocks in Kurraba Point (Neutral Bay) with stunning views over the Harbour several years ago. It wasn't easy to get agreement from all owners, but with patience and persistence, a mutually beneficial outcome was achieved.

Overcoming the hurdles

The challenge when chasing developer property profits is getting your neighbours on board for a collective sale. This can be tough, but when talking to your fellow unit owners, you’ll have a good reason to sell together: higher capital growth for all. On this point, the fewer people you must persuade, the better. This is another good reason to choose properties in smaller buildings or complexes.

But what if a developer doesn’t come knocking at your door? Well, at worst, you’ve bought a property in a great location with excellent rental demand and great capital growth potential. If you’ve done your research and studied the market carefully beforehand, you should still be enjoying plenty of upside.

You can certainly still renovate or update older properties that you bought with potential developer profits in mind. And even without such changes, an excellent sale is still very possible, especially in our current tight market.

The key to success is ensuring that you utilise the skills of an experienced, independent buyer’s agent. We have specialists across various cities who understand notional land value. If you’re keen to explore the options, then contact our team and we’ll begin the hunt for a property with overlooked diamond development potential.

  To have one of the friendly Propertybuyer  Buyers' Agents  to contact you:

   or

call us on 1300 655 615 today.