Investing in land can be quite profitable but requires a very careful selection of the land plot to be acquired in terms of its characteristics, its legal status and its location, both in terms of urban area and particular sub-market.
Land values, in theory, should follow an upward secular trend, since land supply is fixed, while population grows and the need for houses and all types of structures/buildings needed to serve this growing population increases as well.
Land values in reality though, do not always increase, but follow cyclical movements, as they are driven by the property value and the construction/development cycle.
In particular, when property values and rents go up land values go up as well for two reasons:
1) When property values go up the value of the developments that can be build on the land increase in value as well. Since the value of land is calculated as the residual between the value of the development and the development cost (including the developer’s profit) rising property values lead to rising land values, as long as they increase faster than development/construction costs.
2) When rents and property values are rising, developers assuming continuation of these trends in the future, intensify their activity, which results in an increased demand for land and rising land prices.
When rents and property values go down, land values go down as well, because the value of the structures that can be build decreases and the construction/development activity slows down.
One disadvantage of investing in land for the long hold in anticipation of strong future price increases is the holding cost, which includes mostly mortgage payments and taxes.
A very profitable land investment strategy is the acquisition of land plots that are on the path of urban growth before of course such growth reaches them. These are plots away from developed neighbourhoods, that can be acquired at relatively low prices, but will increase significantly in value when urban growth reaches them. That is why anticipating the path of urban growth can be a valuable guide in locating and acquiring land plots with significant profit potential.
Investing in land (at the right price) in neighbourhoods that are at their early stage of development can also be very profitable since by the time the neighbourhood will fully develop with increased density, population and services, the value of those land plots should increase considerably
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