4 Economic Characteristics Of Land

By on March 3, 2017

Differentiating economic and physical characteristics of land is not as simple a a task as separating black and white.

The intuitive reason behind this is that economic aspects of land are often referred to as a consequence of it’s physical aspects.

However, there are are 4 factors that are generally accepted by investors, professionals, and academics as economic characteristics of land.

1) Scarcity

Scarcity when it comes to real estate, describes a geographic area of land where there is high demand but low supply.

We seldom think about land in this manner, but scarcity is a man-made circumstance rather than a natural occurrence created by generic market forces.

Governments and private sectors take on projects to create vibrant cities or side projects that makes a location desirable. This can attract an increase in population.

But when the land in the area is not used efficiently, supply bottlenecks will arise… causing the scarcity effect.

Land is not scarce on earth. There is more than ample land to house the global population.

But when we put it in the context of real estate, where money, status, and capitalism comes into play, it is the demand and supply in specific attractive geographic areas that creates scarcity.

2) Modification

Modification refers to the lucky bloke who acquired a piece of empty land for next to nothing and a month later hears the amazing news that a casino is going to be built beside it.

Making him a world class real estate investor.. sort of…

The value of land is greatly influenced by what is available in the surrounding parcel of land. Facilities and amenities have long been coveted by people young and old.

You don’t need to be a genius to figure out that a house surrounded by theme parks, shopping malls, and 5-star hotels, will be valuable in the eyes of the pubic.

This concept of value in land has led to many land rush events in history where investors and regular Joes snapped up land just from news that certain plots of land are going to be developed into commercial centers.

3) Fixity

There are 2 main points to fixity (investment permanence) that need to be understood from an academic perspective.

The first being that capital used in the buying and improvement of land will only reap it’s financial benefits in the long term. This is assuming that we take speculators out of the picture.

It generally takes 20 to 30 years for the rental income of a property to pay for the investment itself. Which is probably why banks and lenders are more than happy to offer mortgage terms with tenors of that time frame as well.

When making improvements to land, how relevant those improvements are in future will also determine it’s fixity.

For example, it’s not uncommon for cities to build multiple world-class stadiums in preparation for hosting the Olympics. It gives a rise to value of land in those parts. But many of these facilities serve no purpose after the event. Making them next to worthless.

The second thing about fixity concerns the fixed location of… a location. It is impossible to move your land to the next street because it has easier access to the highway.

And even though it is actually physically possible to move a house to another plot of land, the costs involved with restoring the functions could outweigh the value of the house itself.

This is how fixed and sunk costs are regarded in real estate.

4) Situs

Situs is a location preference people have towards certain geographic areas due to various natural  and man-made reasons.

Natural factors can refer to weather, climate, air quality, close to nature, etc. While man-made factors can refer to job opportunities, proximity to friends and family members, infrastructure, schools, etc.

In the industrial and commercial sense, situs can refer to a whole different set of factors including availability of manpower, access to industrial supplies, logistics etc.

Other than from a large scale perspective, situs can also have significant influence on the micro perspective.

For example, corner units along a road often fetch higher prices compared to those along the road. This is due to the preference of buyers for more open space… and 1 less neighbor.

Apartment unit with a great unblocked view is also proven to be a valuable attribute of a house. This is why penthouse apartments command such a premium price.

Even apartments in condominiums that avoid the harsh afternoon sun can command a higher price.

Lastly, it is important to realize that because situs is a function of personal preferences, you must also acknowledge that people’s preferences can change over time.

This means that penthouses could go out of fashion one day. And the unit at the ground floor becomes the one with the highest value bearing the brunt of an all-out bidding war from multiple interested parties.



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