Price of Land

The market value of any property, in simple terms, is whatever someone is willing to pay for that property and other similar properties. Land is fixed in supply (we only have one earth), therefore value is determined by supply and demand. The price of land is a function of how the land is utilized in terms of its most profitable use given the location and (economic) preferences of consumers and the society.

The productivity of land can be optimized with the greater demand and the more intensive application of capital. The available land stock at a specific point in time is fixed in price, but will gradually relax or become more elastic as the period extends and the same or lesser demand remain. A typical full circle property cycle for South Africa is every 20 years, therefore property investments and risk analysis should be based on a minimum time frame of between 10 to 15 years. The price of land is in correlation to the earnings in excess over and above the opportunity cost required, though capital growth can be factored as long as realistic assumptions are termed.

Considering development potential…

The time of redevelopment is encouraged mainly by economical reasons such as excessive increases in operating expenses versus gradual sinking or diminishing in rental revenue. At this point an investor/developer will consider redevelopment and or the buying of opportunities of similar or preferably less risk. Reliable census information such as the number of people who fall in the catchment area of the proposed development, their age, composition, socio-economic standings and the average household formation will inform the process.

A property becomes ready for redevelopment when the marginal revenue productivity of capital becomes equal to the cost of capital. In other words, the same yield or return but with vastly different risk factors.