How does this work in the real world? Let’s look at a simple example of how private infrastructure can lift the value of land located within close proximity.
Peter runs his own convenience store and business and business has been going well. Recently, there has been some new economic activity taking place nearby, with the construction of both a new apartment building and office building.
During the building phase, construction workers frequented the convenience store to buy coffee, drinks, snacks and other items. This resulted in an increase in sales during the construction period. Once the offices and apartments were completed and tenanted, these new residents also started to frequent Peter’s store. This extra permanent foot traffic has not only increased sales, but of course the convenience store’s profit. Naturally, Peter was very happy with this increased turnover and profit. Who wouldn’t be?
That is, until Jim who the owner of the commercial building and Peter’s landlord, realises his property is now better positioned and much more valuable. He naturally decides to notify Peter that on the renewal of his lease, his rent will increase. Peter is unlikely to decide to move due to the attractiveness of the location and the expense and risk of doing so.
Jim did not invest money or take any risk to build those apartments or offices. He had nothing to do with it. However, as the owner of a property in close proximity to this new investment, he is capturing some of the economic gains that are generated. Not only has the rental yield of his property increased, but the also the market value.
Granted, this is on a micro scale, but you can see this happening throughout the economy. Think of large shopping centres like Westfield. This infrastructure when constructed attracts businesses into the centre. They charge a large rental premium as they can attract and deliver more potential customers. If a business happens to succeed and can etch out a decent turnover and profit, within their lease agreements is enshrined the right for Westfield to take a share of their profits through increasing the rent. If the business fails, there is a long list of others wanting to take their place in the centre. Furthermore, as they further invest and innovate in the centre, it continues to attract a higher return. As an example of late, think of the more efficient car parking technology like number plate readers. This reduces the traffic snarls and increases the ease of access. This attracts even more people to the shopping centre, which is then captured back into higher yield and land value for Westfield as the property owner.
The Land WILL and MUST Capture the Economic Gains. This includes all types of gains from investment in infrastructure, technology and productivity gains. Once investors realise this phenomenon and understand it, they can then start to identify land which will benefit from future economic gains. It is very simple, yet few understand it and how to profit from it. To delve deeper and understand how your practice can benefit from this knowledge, register for one of our upcoming webinars.
