AMP Henderson Global Investors Limited and Others v Valuer General; AMP Henderson Global Investors Limited v Valuer General

RESPONDENT The Valuer General FILE NUMBER(S) : 31066 of 2002; 31069 of 2002 CORAM: Cowdroy J KEY ISSUES: Valuation of Land :- challenge to valuation - methods of valuation - whether premium attaches to land because of limited availability of vacant city land - whether sales relied upon are comparable - onus of proof. Central Sydney Development Control Plan 1996 Central Sydney Heritage Local Environmental Plan 2000 LEGISLATION CITED: Central Sydney Local Environmental Plan 1992 Central Sydney Local Environmental Plan 1996, cl 32, cl 35, cl 42, Sch 1, Sch 7 Land and Environment Court Act 1979, s 69 Valuation of Land Act 1916, s 4, s 6A, s 14B, s 40(2) Crompton v Commissioner of Highways (1973) 32 LGRA 8; Daandine Pastoral Company Proprietary Ltd v Commissioner of Land Tax of the Commonwealth of Australia (1943) 7 The Valuer 299; Flack v Valuer General (1952) 18 LGRA 157; Gould and Another v Vaggelas and Others (1983-1985) 157 CLR 215; CASES CITED: Kizbeau Pty Limited and Others v WG & B Pty Limited and Another (1995) 184 CLR 281; Maurici v Chief Commissioner of State Revenue (2003) 212 CLR 111; McCathie and Others v The Federal Commissioner of Taxation (1944) 69 CLR 1; Perpetual Trustee Co Ltd v Valuer-General (2001) 115 LGERA 287; Sher v Commissioner for Main Roads (1975) 24 The Valuer 150 DATES OF HEARING: 01/12/2003; 02/12/2003; 03/12/2003; 04/12/2003; 05/12/2003; 08/12/2003 DATE OF JUDGMENT: 02/18/2004

APPLICANT Mr M. Craig QC Ms Jayne Jagot (Barrister)

SOLICITORS Mallesons Stephen Jaques LEGAL REPRESENTATIVES: RESPONDENT Mr J. Maston (Barrister)

SOLICITORS Crown Solicitor

JUDGMENT: IN THE LAND AND ENVIRONMENT COURT OF NEW SOUTH WALES 31066 of 2002 31069 of 2002

18 February 2004 31066 of 2002 AMP Henderson Global Investors Limited (ABN 59 001 777 591) First Applicant 255 George Street Investment A Pty Limited (ABN 68 064 751 471) Second Applicant 255 George Street Investment B Pty Limited (ABN 81 064 751 588) Third Applicant v The Valuer General Respondent 31069 of 2002 AMP Henderson Global Investors Limited (ABN 59 001 777 591) Applicant v The Valuer General Respondent Judgment

1 The applicants challenge the disallowance of their objections to the assessments of land value made by the respondent ("the Valuer-General") pursuant to s 6A of the Valuation of Land Act 1916 ("the Valuation Act") in respect of two properties.

2 In proceedings 31066 of 2002 the applicants challenge the Valuer-General's valuation made in respect of land located at 243-259 George Street, Sydney, being lot 2 in deposited plan 630217 ("243-259 George Street"), upon which is erected a commercial tower building known as National Australia Bank House ("NAB House"). The Valuer-General assessed the value of 243-259 George Street in the amount of $58,000,000 as at the base date of 1 July 2001. By letter dated 30 May 2002 the applicants objected to such assessment. The Valuer-General replied by letter dated 21 October 2002 stating that the applicants' objection had been considered but disallowed. The applicants submit that the correct valuation is $44,875,000. 3 In proceedings 31069 of 2002 the applicants challenge the Valuer-General's valuation of land located at 52-56 Martin Place, Sydney, being lot 1 in deposited plan 633736 ("52-56 Martin Place"). Upon such land is a commercial tower known as the "Colonial Centre". As at the base date of 1 July 2001 the Valuer-General assessed the land value of 52-56 Martin Place to be $70,000,000. The applicants' objection to such assessment was again disallowed by the Valuer-General. The applicants submit that the correct valuation is $55,000,000. 4 Proceedings 31066 of 2002 and 31069 of 2002 have been heard together as the evidence is essentially the same in each matter. The applicants rely upon valuation evidence provided by Mr Grant Jackson, a registered valuer of M3 Property Strategists. The Valuer-General relies upon the valuation evidence of Mr Derek Hill, a registered valuer of QV Australia Pty Ltd. For convenience 243-259 George Street and 52-56 Martin Place will be referred to collectively as "the subject sites".

The subject sites 5 Commercial multi-storey tower buildings are erected on each of the subject sites which are used for the purpose of commercial offices. NAB House has a frontage to three streets, namely George Street, Grosvenor Street and Jamison Street and has a total site area of 3,849m². It is agreed that the title of 243-259 George Street is affected by a proposed road widening to the George Street frontage of 629m², thereby decreasing the net land area to 3,220m². NAB House was completed in 1985 and comprises basement car parking and storage, ground floor foyer and retail component and twenty-nine upper levels of office accommodation. NAB House has a net lettable area of 40,178.10m² and it is agreed that the floor space area ("FSA") is 44,875.70m². According to Mr Jackson the floor space ratio ("FSR") is 11.66:1. 6 The Colonial Centre also has a frontage to three streets, namely Martin Place, Phillip Street and Elizabeth Street. The total site area is 3,558m². The Colonial Centre was also built in 1985 and comprises thirty-three upper levels of office accommodation, ground floor retail and banking chambers over two levels, basement retail arcade and car parking. The valuers initially disagreed on the FSR and FSA for 52-56 Martin Place but by final submissions it was agreed for these proceedings only that the FSA is 45,862.60m².

Zoning of the subject sites. 7 Each of the subject sites is affected by the provisions of the Central Sydney Local Environmental Plan 1996 ("the LEP") and is subject to the provisions of the Central Sydney Development Control Plan 1996 ("the DCP"). The subject sites are zoned "City Centre" under the LEP which allows a FSR of 8:1. An additional FSR of 4.5:1 is obtainable for commercial uses pursuant to cl 35 of the LEP. Therefore the maximum FSR for the subject sites is 12.5:1. 8 Clause 32 of the LEP provides that the maximum height of a building on any land is not to exceed 55m unless otherwise permitted by the consent authority. It is agreed that the maximum height for 243-259 George Street as at the base date of 1 July 2001 was 235m. The height of 52-56 Martin Place as at 1 July 2001 was 55m to the Martin Place frontage rising to 145m. 9 NAB House is listed as an "opportunity site" in Sch 7 of the LEP. Clause 42 of the LEP provides that an FSR in excess of the permitted amount is allowed on some "opportunity sites" to achieve a higher level of amenity for pedestrians and the public environment. 10 The subject sites were also affected by the Central Sydney Local Environmental Plan 1992 - Conservation of Heritage Items which has been repealed by the Central Sydney Heritage Local Environmental Plan 2000. Such plans recognise that notional floor space above buildings listed in Sch 1 comprise an asset which may be sold or assigned a use within a development site within the City Centre zone, as described in the zoning map contained within the Heritage LEP. The transfer of heritage floor space ("HFS") from a heritage site to a development site results in the deletion of that HFS from the Sydney City Council's HFS Register. The concept of transferable heritage floor space ("THFS") can thereby enable a developer to achieve a FSR in excess of the maximum FSR determined by the LEP. Within the "A1 zone" shown on the Floor Space Ratio Map for Central Sydney (in which each of the subject sites is situated) the maximum FSR is 8:1, excluding HFS. With HFS, the FSR of a development may be increased to 12.5:1. Relevant considerations for valuation of subject sites

11 The experts agree that the highest and best use of each of the subject sites is the existing use, namely commercial office development with basement level retail. 12 Section 6A of the Valuation Act is relevant for the purpose of the valuation of the subject sites. It provides:- (1) The land value of land is the capital sum which the fee-simple of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona-fide seller would require, assuming that the improvements, if any, thereon or appertaining thereto, other than land improvements, and made or acquired by the owner or the owner's predecessor in title had not been made. (2) Notwithstanding anything in subsection (1), in determining the land value of any land it shall be assumed that: (a) the land may be used, or may continue to be used, for any purpose for which it was being used, or for which it could be used, at the date to which the valuation relates, and (b) such improvements may be continued or made on the land as may be required in order to enable the land to continue to be so used, but nothing in this subsection prevents regard being had, in determining that value, to any other purpose for which the land may be used on the assumption that the improvements, if any, other than land improvements, referred to in subsection (1) had not been made. (3) Notwithstanding anything in subsection (1), in determining the land value of any land, being land in relation to which, at the date to which the valuation relates, there was a water right: (a) the land value shall include the value of the right, and (b) it shall be assumed that the right shall continue to apply in relation to the land. It is agreed that s 6A(2) of the Valuation Act is particularly relevant due to the over-development of the subject sites. 13 Section 4 of the Valuation Act defines "land improvements" as follows:- Land improvements means: (a) the clearing of land by the removal or thinning out of timber, scrub or other vegetable growths, (b) the picking up and removal of stone, (c) the improvement of soil fertility or the structure of soil, (d) the restoration or improvement of land surface by excavation, filling, grading or levelling, not being works of irrigation or conservation, (d1) without limiting paragraph (d), any excavation, filling, grading or levelling of land for the purpose of the erection of a building, structure or work, not being for the purpose of irrigation or conservation, (e) the reclamation of land by draining or filling together with any retaining walls or other works appurtenant to the reclamation, and (f) underground drains. 14 The parties also agree that the recent decision of the High Court of Australia in Maurici v Chief Commissioner of State Revenue (2003) 212 CLR 111 is relevant although the Valuer-General submits that Maurici does not dictate the appropriate method of valuation in the present proceedings. It is appropriate to summarise the findings in Maurici since these proceedings appear to be one of the first instances in which the Court may have need to consider the application of the High Court's decision. 15 In Maurici the High Court was concerned with the valuation of a parcel of land in the Sydney suburb of Hunters Hill pursuant to s 6A of the Valuation Act. At par 16 the High Court stated that s 6A of the Valuation Act firstly requires improvements "other than land improvements" to be identified; secondly "notionally to remove the improvements from the land"; and thirdly to determine how "the land in its notionally unimproved state [is] to be valued". It is the third step which the High Court recognised as the stage at which "difficulties arise". Their Honours said at par 16:- The traditional, and usually unexceptionable method is to seek out relatively contemporaneous sales of comparable properties between parties at arm's length, unaffected by special circumstances, such as, for example, a strong desire by a purchaser to buy an adjoining property, and to use those sales as a yardstick for the valuation of the relevant land. 16 The High Court at par 17 criticised the evidence of the Chief Commissioner of State Revenue's valuer for refining comparable sales to sales of vacant or substantially vacant land because such sales were not representative of sales in Hunters Hills "as vacant land in Hunters Hill is scarce, if not to say, very scarce". The High Court continued with the following comment at par 17:- The approach of the respondent, taken to its ultimate conclusion would mean that if there were one only (reasonably comparable, in location, outlook and other relevant features) vacant parcel of land left in a district, the likely or actual recent sale price of that parcel would effectively set the value for each and every improved parcel of land in that district. 17 At par 18 the High Court made it clear that in valuing land the following principle cannot be ignored:- …that sales to be treated as comparable sales need to be truly comparable; or, to put it another way, in valuing the land the respondent's valuer did not proceed rationally, in that he was unreasonably selective in ultimately confining himself to two sales of scarce vacant land for the purposes of the comparison… A group of comparable sales cannot be representative if it does not go beyond sales of scarce vacant land.

Their Honours qualified the above statements and said "[t]hat is not to say that sales of comparable vacant land may not provide useful evidence of value", but it must be recognised that sales of scarce vacant land are special and likely to attract a "different class of buyer from buyers of improved land" and consequently may not "provide a reliable indication of value." 18 The High Court concluded (at par 19) that improved sales are constantly used "by subtracting the added value of the improvements to them from their sale prices to derive unimproved values." The Chief Commissioner of State Revenue was not entitled to "ignore reasonably contemporaneous sales of comparable improved land" since such "sales, particularly in the case of a scarcity of vacant land cannot be disregarded." Finally their Honours said at par 21:- And whilst it is true that s 6A is intended to apply to each valuation made under it, its statutory operation in relation to all valuations, that is, all pieces of land to be valued, is another factor which cannot be ignored, and requires that a scarcity of vacant sites not be the determinant factor in valuations made under the Act.

19 The difficulties the High Court recognised in the third step in undertaking land valuation pursuant to s 6A of the Valuation Act arise in these proceedings. Similarly to Hunters Hill, vacant land in central Sydney is scarce. The Court will resolve this issue first and determine how the subject sites in their notionally unimproved states are to be valued, before identifying the improvements and subsequently the unimproved value of the subject sites.

Applicants' method of valuation 20 Mr Jackson's approach to valuing the subject sites is set out at the beginning of his reports. He stated that he acknowledged that improvements were present on the subject sites but "proceeded on the basis that the improvements do not exist other than land improvements". Mr Jackson believed however that there were no "land improvements" to consider. He "then adopted comparable sales" which he explained in his report as follows:- In assessing the Land Value for the property, my primary approach to value has been to adopt a direct comparison of sales evidence of vacant sites which have been sold within the immediate locality. I then compared these sales on a rate per square metre of floor space area to the property.

I also had regard to the number of vacant land sales which I considered to be comparable and, in order to determine whether those sales incorporate any premium for scarcity, I undertook further analysis of improved sales within the Sydney CBD to ascertain whether any scarcity premium exists. The valuers agree that a "land sale" means a sale of land which is either vacant or which has on it buildings intended to be immediately demolished by the purchaser. Such term can also include a sale of vacant land. "Site sale" is a sale in which the buildings have no value. "Improved sale" means a sale of land which has buildings erected on it, where the purchaser intends to hold the land and buildings for the purposes of deriving an income stream from the property by way of rent. 21 Mr Jackson had "further regard to s 6A(2) of the Act and in particular, the nature of existing improvements" of the subject sites. He considered that s 6A(2) of the Valuation Act was applicable since the FSR for the existing improvements was higher than that permitted by the LEP. His final assessment of the value of the subject sites was as follows:- In assessing the value of the subject property in comparison to the sales evidence, allowances have been made in each instance to recognise the individual elements pertaining to each sale. In formulating a basis for comparison, factors such as date of sale, development potential of the land, exposure and prominence of the land, and size of the land were all considered in formulating an appropriate view of the Land Value for each property. 22 In relation to 243-259 George Street Mr Jackson stated in his report that, based "on the vacant land sales evidence and the analysis of improved sales", he calculated the existing FSA to be $1,000/m². Accordingly the agreed FSA of 44,875.70m² multiplied by $1,000/m² derives a land value of $44,875,000. 23 Mr Jackson did not believe that there were "land improvements" to take into consideration as he believed that it was difficult to estimate the value of excavation works undertaken on 243-259 George Street and he could not find any recent sales in Sydney to assist him. Instead Mr Jackson undertook a wider analysis and considered two sales of commercial office property, one in Collins Street Melbourne and the other located at St Georges Terrace Perth. From these two sales Mr Jackson concluded that a prudent purchaser would not pay a premium for the excavated state of the land. 24 As a secondary check method Mr Jackson undertook a hypothetical development of the subject sites to derive the price which a developer of such sites would prepared to pay for them assuming they were vacant. He began his valuation process with the completion value, subtracted selling costs and added rental income, allowed a 20% deduction for profit and risk and other costs including development costs, interest costs, purchase costs, and rates and taxes. By this method Mr Jackson arrived at a final figure of $44,240,000 for 243-259 George Street. 25 In relation to 52-56 Martin Place adopted a value of $1,200/m² based on the vacant land sales evidence and the analysis of improved sales. Therefore he calculated the land value to be $55,000,000 being the agreed FSA of 45,862.20m² multiplied by $1200/m². Mr Jackson did not consider any "land improvements" to be relevant to 52-56 Martin Place for which allowance should be made. 26 Mr Jackson considered that his analysis of the comparable sales demonstrated the existence of a scarcity premium for each of the subject sites. In relation to 243-259 George Street he believed a scarcity premium was evident from his examination of a vacant land sale at 232-248 Pitt Street compared with the improved land sale of 233 Castlereagh Street. He concluded that 232-248 Pitt Street reflected $970/m² FSA and 233 Castlereagh Street showed a FSA of $735/m². He made an adjustment of 10% to allow for the inferior location of 233 Castlereagh Street compared to 232-248 Pitt Street resulting in an estimated $800/m² FSA for 233 Castlereagh Street. He compared this rate to $970/m² FSA for 232-248 Pitt Street and concluded that a scarcity premium of 20% was demonstrated from such comparison. 27 With respect to 52-56 Martin Place Mr Jackson undertook a similar analysis to ascertain the scarcity premium using historic land sales. He calculated that depending upon the comparisons he made, a scarcity premium after adjustments of up to 45% was identified. He compared 35-43 Clarence Street being a "historic land sale" completed in June 1997 to an improved land sale namely 14 Martin Place which was finalised on 1 June 2001 to assess the existence and extent of the scarcity factor. Valuer-General's method of valuation

28 Mr Hill used the comparable sales method to derive the $/m² of FSA which a potential purchaser was prepared to pay for a site in the "City Core" sector of the Central Business District ("the CBD") at the base date of 1 July 2001. (The "City Core" comprises the area between Alfred Street to the north, King Street to the south, York Street on the west and Macquarie Street on the east. The CBD lies between Alfred Street to the north and Central Railway Station to the south). Mr Hill considered that sales of improved property which were tenanted and which the purchaser did not plan to demolish in the short term were less reliable for the purpose of determining their unimproved land value. Mr Hill referred to numerous adjustments which were required which rendered them unreliable for the purpose of comparison. Such adjustments related to the value of the income stream for each lease, historical construction costs, the difficulty of attributing valuation to the improvements and the loss of interest on capital utilised during the construction period. Mr Hill considered that several of the sites selected by Mr Jackson were not truly comparable because of their location outside the City Core. Mr Hill also believed that the numerous adjustments that Mr Jackson had made by deduction, for example, of the original cost of the building and the income stream for rent and heritage issues, created uncertainty and doubt and produced an unreliable result. 29 Mr Hill primarily relied upon eight sales in the CBD. Seven were improved sales but the building improvements were subsequently demolished. His enquiries revealed that the purchases were made for the purpose of obtaining future vacant development sites. The remaining sale was a vacant land sale located at 11 Jamison Street. 30 In relation to 243-259 George Street Mr Hill adopted the agreed FSA of 44,875.7m² and applied a rate of $1350/m² to obtain a land value of $60,582,195. Mr Hill believed that the value of the excavation of 243-259 George Street should be added as it constituted a "land improvement" and needs to be included in the final land value according to s 6A of the Valuation Act. The excavation of 243-259 George Street was made to a depth of 10.5m and extended over an area of 3,849m² amounting to 40,414m³. Mr Hill adopted $40/m³ for the value of excavation amounting to $1,616,560. The final land value of 243-259 George Street was assessed by Mr Hill to be $62,200,000. 31 For 52-56 Martin Place, Mr Hill multiplied the agreed FSA of 45,862.6m² by his adopted value of $1,650m² from his analysed market sales evidence. Mr Hill similarly made an adjustment for the value for excavation of $1,120,770 (being a depth of 7m multiplied by an area of 3,558m² multiplied by a rate of $45/m³). Mr Hill adopted a final land value of approximately $76,750,000.

32 With regard to Mr Jackson's attempt to reach a scarcity factor, Mr Hill believed that the greater the number of mathematical adjustments and subjective assessments which were necessary, the less reliable the valuation calculation. He disputed Mr Jackson's conclusion that a scarcity factor existed. Disparity between valuers' methods of valuation of improved land sales

33 The example of an improved sale of 233 Castlereagh Street, Sydney ("Telstra House") demonstrates the divergent approach of the valuers to the improved sales.

34 Telstra House was constructed in 1976 and refurbished in 1991. The valuers agree that the sale date was December 2002 approximately six months after the base date. It sold for $55,000,000, has a land area of 2,495m² and a FSR of 8.7:1. 35 Mr Jackson adjusted the sale price to allow for the terms of sale which comprised a 10% deposit with the balance payable in six months. He also adjusted the sale price to a cash sale with a 10% deposit with the balance payable in 90 days to derive an analysed purchase price of $54,025,018. Mr Jackson deducted the present value of $640,858 to derive the existing income from tenants under the leases current at the time of sale to ascertain the value of Telstra House unaffected by rental income. Mr Jackson also deducted the value of existing improvements on a cost less depreciation basis. The replacement cost of both the gross lettable area and the net lettable area was $76,422,487. He then allowed for depreciation at a rate of 55%, and accordingly subtracted $34,390,119 from the adjusted sale price. Mr Jackson finally made a deduction for loss of interest during the estimated period of development of 8%. These deductions achieved a final land value of $15,955,000 for Telstra House, representing a sum of $6,395/m² of land and $735/m² of FSA.

36 Mr Hill rejected Mr Jackson's method of ascertaining the land value of Telstra House because it relies on numerous adjustments and a significant number of variables and assumptions. Mr Hill considered that the assessment of the replacement costs of the building, the allowance of the interest rate for the period of development and the length of the further development were speculative. The attempted adjustment of the sale price back to the base date also gave rise to subjective adjustments. Since the same methodology was applied by Mr Jackson in respect of all other improved sales, Mr Hill regarded Mr Jackson's conclusions as being flawed. Vacant land sales

Vacant land sale common to both parties 37 The applicants submit that both Mr Jackson and Mr Hill have only found one "land sale". Such sale occurred at 232-248 Pitt Street and comprised a series of sales from April 2001 to December 2001. It is agreed that the sale price of the amalgamated property was $54,350,000. It has a land area of 4,490m² and there was a requirement of the development application that the developer purchase an additional 5,051m² of THFS. The valuers disagreed upon the final rate of $/m² to measure the value of the FSA for 232-248 Pitt Street. It was disputed whether the additional THFS, the cost of retaining a heritage component and the gross or net income received prior to demolition were to be included. Accordingly Mr Jackson came to a value of $970/m² and Mr Hill derived $1,153/m² for this property.

Applicants' vacant land sales 38 Mr Jackson relied upon another land sale being 30-34 Hickson Road, which sold in May 2002 for $10,130,000 and has a land area of 4,088m². The Valuer-General submits that this sale is irrelevant as it is a sale after the base date of 1 July 2001, it has heritage constraints, it is not located in the CBD and there was an issue of contamination of the site. 39 The Court accepts the Valuer-General's submission that 30-34 Hickson Road is not a comparable sale because it was located on the fringe of the CBD and not within the City Core. As will be considered subsequently, this site is also rejected because of the date of the sale, namely 11 months after the base date. Valuer-General's vacant land sales 40 Mr Hill relied upon seven land sales which were sold between November 1995 to June 1997. These sales included 35-43 Clarence Street sold June 1997, 11-19 Jamison Street sold November 1996, 400 George Street sold November 1995, 88 Phillip Street sold June 1996, 126 Phillip Street sold November 1996, 44-62 Castlereagh Street sold September 1997 and 357-365 George Street sold from March 1996 to May 1997. The Valuer-General relies on Wells J in Crompton v Commissioner of Highways (1973) 32 LGRA 8 and submits that the range of sale dates is important because the comparable sales method requires valuers to consider sales over a wide temporal range. 41 The applicants submit that the subject sites must be compared with similar properties: see Sher v Commissioner for Main Roads (1975) 24 The Valuer 150 at p 151. The applicants reject 11-19 Jamison Street as being comparable. They claim that the proposed use must be the same as that of the subject sites. Such site was bought by a hotel developer and developed for hotel purposes. The applicants also submit that the sale of 88 Phillip Street was misconceived by Mr Hill as he did not understand that the development consent attached to the property was for a mixed residential and commercial development. Finally the applicants claim that 126 Phillip Street was not a land sale as it was bought with buildings producing income and was held by the purchaser for five years prior to re-development. The applicants contend that the remaining four sales are too dated and cannot be regarded as "relatively contemporaneous sales of comparable properties": see Maurici at par 16. 42 The applicants submit that the net absorption of office space accommodation is an important consideration to a developer when purchasing land for development in the CBD. The net absorption is directly affected by the level of demand and supply of available office accommodation. Mr Jackson relied upon data issued by the Property Council of Australia entitled "Market Profiles" which analysed the vacancies of commercial office space in the Sydney CBD. He said that during early 1996 to late 1997 the forecast predicted a high level of net absorption for commercial developments scheduled for completion in two to fours years into the future and the net absorption figures for the period July 1999 to June 2001 were at record high levels. Mr Jackson said that for the period projecting forward from July 2001 to December 2002 the market experienced negative levels of net absorption as office accommodation provided by the completion of new buildings was absorbed.

Economic conditions 43 The applicants submit that the economic data establishes that there was a fundamental difference in the Sydney CBD property market at the time of the sales relied upon by the Valuer General compared to those prevailing at the base date. The evidence relied upon by the applicants in support of such submission comprises the absorption rates of office space, the applicants contending that by July 2001, all of the new office space had been absorbed. Additionally the applicants claim that the number of land sales in the CBD demonstrates that the market had experienced a significant downturn. 44 The data in "Market Profiles" for the CBD total market showed that in the 12 month periods ending January 1996 and July 1996 respectively, there were high net absorption rates of office space in the Sydney CBD and that such absorption reached a maximum of 235,631m² by the end of January 2001. By July 2001 the absorption rate had fallen to 200,784m², and thereafter fell steadily away. In the 12 month period ending July 2002 the absorption rate was minus 134,558m². 45 For Sydney CBD Grade A commercial office space, the data records a similar downturn. For example, in the 12 months to July 1996 the audited net absorption was 66,466m². By July 2001 that had been reduced to 52,874m² and by July 2002 the absorption was reduced to 150m². 46 Based upon this information Mr Jackson considered that the demand for commercial space in "Grade A" buildings in the Sydney CBD had diminished between 1996 and 2001. Mr Jackson believed that NAB House and the Colonial Centre had been built to a "high quality A grade standard". Sales of commercial office space during this period were regarded by him as too unreliable too be used as comparable to the base date valuations of the subject sites, since demand for such space directly affected sale prices. Mr Jackson also observed that the downturn in the market was also evidenced by the lack of land sales. Whilst there were several sales between 1995 and 1997, only one land sale took place between November 1997 and January 2002. Mr Jackson believes that office space which had become available on the market between 1997 and 1999 had been absorbed. 47 In addition to the above data, economic data published by Access Economics entitled "Inflation Forecasts" for the period 1977-2002 were tendered. Additionally Consumer Price Index data for the period 1977-2002 and Building Price Index for the same period were relied upon by the applicants.

48 The Valuer General's evidence challenges Mr Jackson's conclusions. Mr Hill relied upon data in "Market Profiles" relating to net absorption rates for Premium Grade office accommodation in the CBD for the period ending July 2001. Those figures show that the lowest audited net absorption rate to January 1997 was 154,414m². The absorption rate declined to the lowest level in the 12 months to January 1998 when the rate reduced to 5,365m². However it steadily increased thereafter until January 2001. The 12 month period ending January 2001, 275,631m² set a record for audited net absorption for the decade. By July 2001 that rate reduced to 200,784m². 49 Additionally Mr Hill referred to data relating to premium grade office rents published by Colliers International. They establish that average office property rents steadily increased in the Sydney CBD throughout the period of September 1995 to September 2000 and then remained constant until September 2001. The Colliers International data showed a rise in office property capital values between September 1997 and June 1998 in the Sydney CBD and then after a small decline remained relatively static but showed an increasing trend by December 2000 to June 2001. During the same period interest rates generally declined.

50 The data showed a 45.8% increase in rentals between December 1996 to September 2001, or 9.16% per annum. The rent for premium grade office space as at December 2000 for the Sydney CBD was the highest ever recorded. By September 2001 that amount had dropped slightly to $589m². 51 With respect to yield for office space, the data published by Colliers Jardine showed that as at December 1997 the yield was 5.7%, and that the rate had risen to 6.3% by December 2000 and remained at that figure until September 2001. 52 The office capital value for premium grade office space published by Colliers International for December 1997 was $7,895/m². That figure steadily increased to 2001, then the figure reached $9,335m². This represents an overall increase of 18.2%, or 5.2% annually. 53 Mr Hill concluded that based upon such information, low interest rates and consumer price indexes the commercial market for premium office space was stronger in 2001 than in previous years. The evidence satisfied Mr Hill that no adjustments to the sales on which he relied were necessary. Mr Hill rejected the applicants' claim that events subsequent to the base date could be relied upon as reflecting market conditions, such as the disaster of 11 September 2001. Conclusion as to suitability of vacant land sales

54 Despite the above economic evidence, the Court regards Mr Hill's remaining land sales as being too dated to constitute comparable sales. Adjustments would be necessary to Mr Hill's sales to reflect all of the economic factors between 1995-1997 and 2001 which might impact upon property valuers in the Sydney CBD. It is evident from the difference in land sales themselves (seven such sales between 1995-1997 and one land sale in 2001) that the market in 1995-1997 for properties in the CBD was different to that in 2001. 55 In Crompton Wells J observed at p 23 that a valuer should firstly "look at the sales of land over a wide geographical and temporal range" but also his Honour added "and from those select those that appear potentially useful as a basis for comparison." Wells J noted on p 24 that sales become unhelpful when "adjustments and allowances that would need to be made are of such a magnitude that it ceases to be safe or sound to treat them as sufficiently similar to the assumed sale of the subject land". Comprehensive evidence of real estate sales would be required before the Court could be satisfied that sales completed up to six years prior to the base date could be regarded as truly comparable.

56 With regard to sales after the base date, authority exists for the proposition that comparable sales after the base date need not be disregarded. However evidence must exist to show that the economic circumstances and land values have not changed between the base date and the date of the subsequent sale. In Daandine Pastoral Company Proprietary Ltd v Commissioner of Land Tax of the Commonwealth of Australia (1943) 7 The Valuer 299 Williams J said at p 304:-

Values must be calculated in the light of circumstances which existed on the material date, in this case 30th June, 1939, but subsequent events can be taken into account in order to determine the proper weight to attach to such circumstances. Subsequent sales are just as admissible in evidence as prior sales provided that in all the circumstances they are comparable. If between the material date and the date of the subsequent sale, supervening events occur which alter the conditions previously existing, the subsequent sales would not be comparable and would be useless. But if on the material date there was a tendency in a district to closer settlement and for prices to rise, subsequent sales of property in subdivision at rising prices would be evidence in support of the view that it was correct to value land in the district suitable for subdivision which was being applied for some other purpose in the light of this potential value. The whole tendency of the Courts is to admit evidence of any events prior to the date of trial which will throw any real light on the issues.

Williams J subsequently applied his reasoning in McCathie and Others v The Federal Commissioner of Taxation (1944) 69 CLR 1 at p 16. The High Court has made a similar finding in Gould and Another v Vaggelas and Others (1983-1985) 157 CLR 215 and in Kizbeau Pty Limited and Others v WG & B Pty Limited and Another (1995) 184 CLR 281 in relation to the valuation of damages. In Kizbeau the High Court said at p 291:-

Nevertheless, although the value is assessed as at the date of the acquisition, subsequent events may be looked at in so far as they illuminate the value of the thing as at that date (13). A distinction is drawn, however, between subsequent events that arise from the nature or use of the thing itself and subsequent events that affect the value of the thing but arise from sources supervening upon or extraneous to the fraudulent inducement (14). Events falling into the former category are admissible to prove the value of the thing, those falling into the latter category are inadmissible for that purpose. (13) Gould (1985) 157 CLR 215 at 220. (14) Potts v Miller (1940) 64 CLR 282 at 298; Gould (1985) 157 CLR 215 at 220. 57 Section 14B of the Valuation Act provides that land that "is to be valued as at 1 July in the valuing year", a provision similar to that considered by the High Court in Kizbeau. There is no provision in the Valuation Act which stipulates a temporal requirement for comparable sales. Accordingly subsequent sales are admissible to shed light on the correct valuation of the subject sales provided there is evidence to show that such sales are comparable and importantly that there are no supervening events after the base date which would alter the conditions existing as at 1 July 2001. 58 There has been no evidence adduced to establish that economic circumstances have not changed between the base date of 1 July 2001 and the date of each subsequent sale. In the absence of such evidence the Court does not know whether any subsequent sales are truly comparable. Accordingly sales relied upon by the applicants subsequent to the base date cannot be considered as constituting comparable sales.

59 Accordingly there is only one vacant land sale, namely 232-248 Pitt Street which is available for comparison. However the High Court in Maurici made it clear that one sale of vacant land will not provide a reliable value of the subject sites due to the scarcity factor. It is unlikely that it was the High Court's intention to encourage valuers to ascertain a "scarcity" premium. The valuation process using the comparable method of valuation requires a comparison of sales which are truly comparable. In Maurici, the error of the Commissioner of State Revenue arose because the valuations upon which he principally relied were not truly comparable. Those sales were of vacant land, which he acknowledged attracted greater prices than if the land had improvements erected on them. Accordingly they were not properly comparable. The High Court sought to acknowledge that the scarcity premium existed and the few sales of land that attracted such a premium could not be considered to form part of a "reasonably representative group of comparable sales." Remaining Sales

60 As a result of the rejection of the comparable sales after the base date relied upon by Mr Jackson and of the sales relied upon by Mr Hill which have been found to be too dated, only three sales become relevant. They are 25 Bligh Street and 23-25 O'Connell Street as analysed by Mr Jackson and 232-248 Pitt Street relied upon by each valuer. The analysis of the latter site has been summarised above. A description of 25 Bligh Street and 23-25 O'Connell Street is set out hereunder. 25 Bligh Street 61 This site was sold in January 2001 for $54,550,000. It contained a land area of 1,092m² and had an estimated existing FSR of 16.2:1. Mr Jackson considered that the sale produced a FSA analysis of $824/m² by making the following calculations. He adjusted the sale price to a cash sale of 10% with the balance payable in 90 days to reach an analysed purchase price of $54,152,690. He deducted $6,093,883 to allow for the present value of letting up all the existing leased areas which were present at the time of sale leaving a net of $48,058,807. The added value of existing improvements was deducted by adopting a replacement cost based upon his assessment of the insurance value of the improvements. Mr Jackson then deducted a depreciation of 45% representing the quality and condition of the building. He then deducted a loss of interest during the period of development for which he allowed 24 months to reflect the time necessary to reconstruct the building. After these deductions he derived a land value of $14,536,000 or $13,311/m² which allowing for the estimated FSR of 16.2:1 derived $824/m² FSA.

23-25 O'Connell Street 62 This site was sold in January 2001 for $12,500,000. It contained a land area of 462m² and had an estimated existing FSR of 11.77:1. Mr Jackson undertook a similar analysis as he did for 25 Bligh Street and derived a FSA of $984/m².

Mr Hill's response 63 Mr Hill adopts Mr Jackson's analysis for 25 Bligh Street and 23-25 O'Connell Street except for the allowance of depreciation for existing improvements. The valuers could not agree upon the appropriate rate of depreciation or the method of achieving the depreciation of the improvements on the sites of the improved sales. Mr Jackson adopted the method prescribed by Rost & Collins "Land Valuation and Compensation in Australia" (3rd ed): see p 122-124. Mr Hill has made his determination using three methods each of which is criticised by Mr Jackson. 64 Mr Jackson's method involved a consideration of the maintenance and refurbishment of the building that had been undertaken and the date of that work, the building design, the shape of floor plate and location of services. Having made such assessments he applied a depreciation allowance using a percentage which varied according to his judgment. 65 In contrast Mr Hill in his method (described as "Method 1") applied a depreciation rate to the existing building to ascertain the value of the building improvements. He adopted Mr Jackson's analysis except for Mr Jackson's depreciation rates. By "Method 2" Mr Hill ascertained the added value of the existing improvements by deducting the cost of a total refurbishment and by applying a depreciation rate in respect of the gross building area. "Method 3" involved a straight-line tax depreciation rate being applied to the improvements. 66 The applicants submit that Mr Hill's Method 2 is not referred to in Rost & Collins. At p 163 Method 3 is described as "arbitrary". In each case Mr Hill's depreciation rates exceed the rate of Mr Jackson. Accordingly Mr Jackson submits that Mr Hill's methods should be rejected on the ground that they are arbitrary.

67 The Court finds that the adoption of a depreciation percentage is likely to lead to an unreliable assessment of the value of the improvements. The Court accepts Mr Hill's evidence that separate depreciation rates would need to be applied to numerous components of the building such as hydraulic services, lifts, air conditioning and finishes if an accurate assessment is to be derived. The adoption of a single rate is too simplistic. 68 It follows that reliance cannot be placed upon Mr Jackson's conclusions in respect of the derived FSA values for 25 Bligh Street and 23-25 O'Connell Street. As a result, only one sale remains for comparison, namely 232-248 Pitt Street. However, Maurici confirms that the use of one comparable sale is inadequate when adopting the comparable method of valuation.

Further consideration of the applicants' valuations 69 The economic evidence summarised above indicates that the absorption rates for CBD office accommodation was increasing between 1995 and the base date. Such evidence suggests that developers would regard the purchase of new sites for future office accommodation as a viable investment as at the base date. The Court cannot conclude that such market was declining as submitted by the applicant. Additionally, the Court is not able to ascertain that there has been any "scarcity factor" resulting from any evidence relied upon by either party. Accordingly Maurici does not assist. 70 In view of the findings made above it is unnecessary for the Court to determine several subsidiary issues raised by the applicants, including the valuation of excavation and THFS.

Onus of proof 71 Section 40(2) of the Valuation Act now provides that the appellant, on appeal to this Court against the determination of the Valuer-General, bears the onus of proving that the valuation of the Valuer-General is erroneous. The statutory provision reflects the principles referred to in Flack v Valuer General (1952) 18 LGRA 157 at p 158 and Perpetual Trustee Co Ltd v Valuer-General (2001) 115 LGERA 287. 72 The Court is not satisfied that the Valuer General's valuations for 243-259 George Street or 52-56 Martin Place are erroneous. Accordingly the applicants have failed to discharge the necessary onus.

Costs 73 In the exercise of the Court's discretion pursuant to s 69 of the Land and Environment Court Act 1979 costs are usually awarded in favour of the successful party. Costs have not been argued, but prima facie the usual rule should apply and an order to this effect will be made subject to liberty to apply to vary such order. By this order the costs of a further hearing confined to costs may be avoided.

1. The appeal in proceedings 31066 of 2002 be dismissed;
2. The appeal in proceedings 31069 of 2002 be dismissed;

3. The applicants pay the costs of the Valuer-General of proceedings 31066 of 2002 and of proceedings 31069 of 2002 unless an application is made to vary this order within 21 days of the date of such order;
4. The exhibits be returned.

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