How to define the term Land Value?
Why does the Land Value and property price differ?
Depending on the country and state you live in, the prices will vary based on different factors such as land use, land market, interest rates, circle rate and overall real estate value of that particular area.
The land value is determined by the economic principle of highest and best use of land which produces the highest net return in any term, over a period. The property value is dependent on the structural attributes, land rates, land use and the location of the land. It is determined by the specific character of the land such as land use, location, accessibility, aesthetics, etc. Factors affecting Land Value are of importance to calculate or estimate land prices, understanding of these factors will provide a more accurate and realistic cost of land. These factors affecting Land Value do not necessarily give the exact amount but are helpful in comparison.
Factors affecting land value
While there are number of reasons and factors which influence the price of land, these factors can be grouped into few categories:
- Accessibility & Land Use
- Physical attributes
- Price in surrounding and nearby area
- Market Value and property price
The various factors which directly or indirectly affect the land value are described below:
- Physical attributes: These include quality of location, topography, climate, availability of water, sewer lines, etc. More and better facilities are attributed to a higher price of land. Topography further has a direct effect on the construction cost and thus the overall development cost. The facilities thus developed on an uneven land will have a much higher cost as compared to the flat plain. This is the reason why construction cost is much higher in hilly and mountainous areas and the price of land is low.
- Accessibility to economic activities: The more easily economic activity is accessible, the more is the value of the land. For example, most of the metropolitan cities have the maximum land values at the center, or at the central business district of the city. This is because of the nearness to the economic activities and workplace. This factor affecting land value is the sole most important factor which led to the development of various land price models in urban economics. CBD area is the most accessible market area and thus usually houses the most expensive businesses and services. Example include the cities such as London, Ney York, Beijing, Mumbai etc which have world’s highest real estate prices.
- Neighbourhood amenities: The cost of land is also affected by the availability of the facilities such as shopping areas, medical facilities, school, parks & playgrounds, and other basic needs of the humans. This helps in saving the time of people every day, the time saved adds up the cost of land. Also, the reduced travel and reduced trip distance will directly have the monetary benefits of the person residing in an area with many such facilities in proximity. Depending on the need of a buyer, he or she may decide to live in an residential area or near a commercial area. Such location has direct impact on the daily commuting and transportation cost.
- Present and future land use: The value of the land is also determined by the land use permitted in the land premises. For example, if we compare the values of two lands of same prices and same location but the land use permitted in the lands are different, one is commercial and one is residential. In such a case the value of the land with the land use which has more rate of return over a period of time will be valued more. People are willing to pay a higher amount for commercial land and mixed use development, in some cases industrial or institutional land use might attract even higher prices. Agricultural land has lowest price since there are a number of restrictions on the permitted activities.
- Demand and Supply Function: With the significant demographic changes in the cities with time, the need for land also increases with the same factor, with the increase in population there is an increase in economic and other activities. This directly increases the demand of the land components. The anticipation of high yields may also induce false scarcity of land; hence the location advantages of the properties at any time within the urban boundaries and hence causes economic values of land to be increased. For any site, there are specific points of transition in use, closely related to the infrastructure and services, where a jump in property value is likely to happen.
- Location and Transport Linkages: The property located in the area of high level of infrastructure facilities or the one located in or adjacent to the area of intensive economic activities such as markets or industries have higher values. Transport linkages are also crucial since they govern the mobility & ease of movement to and from the area. Clearly defined hierarchy of roads, efficient public transportation and lack of congestion are some of the desired transportation attributes of any area. Residential land values are also observed to be in direct proportion to the hierarchical order of the adjacent road. Easy access and proximity to public transport such as bus or metro train is an added advantage for the resident and thus adds up to the cost of land.
- Land and Property Records: While buying a land, buyers need to be aware about the actual ownership of a land. Thus having verifiable records of the past purchase and buyers of a land become important. This is of particular importance if any dispute arises in future and the current land owner is required to prove the ownership of land. Land without any verifiable records is usually available at cheap price but should be avoided.
- Development Controls and building bye laws- Since we are discussing about he price of land, it become important to take into account the various restrictions and regulations in place related to construction. A land once purchased will be put to use in some or other manner and thus needs to be developed. The construction which will take place is governed by the various laws such as land use, land tax, premise level use, floor area ration, and other development controls. Thus such rules and regulations are major factors in the price of land.
- Real Estate Prices: In major cities the land valuation takes into account the above mentioned factors and known as market price. The price is thus driven by the market in that area based on the other deals or the similar purchases. This method is usually the quickest and easiest to get an idea about land value in an urban area and used my real estate broker.
The valuation of land is done keeping in mind the factors mentioned above; however, the actual selling price of an area is ultimately determined by the paying capacity of the buyer. All the factors mentioned above-affecting land value might give a price which no one is willing to pay, and thus the actual amount paid becomes the price instead of the evaluated price.
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