The Valuation Report
81 The valuation report contained advice and opinions expressed by Mr Taormina on behalf of the respondent. The statements in the valuation report conveyed various representations to the reader about that advice and those opinions and the work which had been done in order to formulate them. The applicants' pleas about the representations conveyed by the valuation were not seriously disputed by the respondent. I find that the valuation report conveyed the following representations to the reader:
1. that the advice and opinions it contained were based on reasonable grounds;
2. that the advice and opinions were the product of due care and skill;
3. that the advice and opinions were not outside of the range of latitude properly to be allowed to a valuer;
4. that the advice and opinions were based on the methodology which would be applied by a proper qualified valuer exercising all reasonable skill, diligence and competence, and care pursuant to its retainer; and
5. that the valuation was suitable for mortgage securities purposes.
82 The applicants rely on a number of matters in support of their case that these representations were misleading or deceptive. Twelve matters were alleged by the applicants in paragraph 31 of their Further Amended Statement of Claim:
31. The Valuation and the Further Advice were prepared negligently, and conveyed to Angas, Barker and KWS in breach of a duty of care and in breach of the Retainer in that:
31.1 the valuation opinion contained in the Valuation and the Further Advice incorrectly overstated the fair market value of the Property for mortgage security purposes as at the Valuation Date to be $3,600,000.00 when in fact it was not more than $2,500,000.00;
31.2 the valuation opinion in the Valuation and the Further Advice incorrectly overstated the forced sale value of the property as at the Valuation Date at $3,200,000.00, when in fact the forced sale value was significantly less than its fair market value of $2,500,000.00;
31.3 the advice that the specific and market related risks associated with mortgage lending on the Property represented a low risk was given without appropriate basis, when in fact the Angas Loan, the Barker Loan and the KWS Loan which were secured by the Property were of high risk;
31.4 Valcorp took into account sales which were not relevant or comparable in preparing the Valuation, in that sales of apartments in the city and North Adelaide areas were not comparable sales.
31.5 Valcorp failed to [properly] take into account the sales evidence from properties in the Glenelg locality.
31.6 Valcorp applied a rate per square metre basis from comparable sales which was inconsistent with sales in the Glenelg locality.
31.7 Valcorp used a methodology of comparing properties on a rate per square metre basis without regard to comparison of such sales in toto;
31.8 Valcorp failed to take into account that there was an oversupply of apartments for sale in the Glenelg locality at that time;
31.9 Valcorp failed to take into account that demand for apartments within the Glenelg locality was weak, and that apartments were being sold for prices representing a discount of 10% to 20% from the initial sale price;
31.10 Valcorp failed to recognise that the comparable sales relied upon for the purpose of the Valuation related to properties that were listed for sale over an elongated marketing campaign in the order of 12 months;
31.11 Valcorp negligently concluded that the Property was comparable to the larger penthouse apartment within the "Air" complex at Eastwood, when it was not comparable;
31.12 Valcorp negligently concluded that the Property should be valued at a rate around the uppermost level rate per square metre derived from apartment sales whether coastal or city.
83 The 'Further Advice' referred to in the above pleading is the advice given by Mr Taormina on 27 November 2007 (see [60] above). The allegations set out above are also pleaded as the particulars of the acts of negligence or lack of reasonable care comprising the breaches of the terms of the retainer between Angas and the respondent and of the duty of care.
84 The applicants' pleas as to the alleged contraventions of the Trade Practices Act and the Fair Trading Act are similar to the applicant's pleas in MGICA (1992) Ltd (formerly MGICA Ltd) v Kenny & Good Pty Ltd (1996) 140 ALR 313 ('Kenny and Good') at 355-357. Ultimately, the trial judge in that case found that the valuer had contravened s 52 of the Trade Practices Act and the equivalent section of the Fair Trading Act in New South Wales. The case went on appeal but not on this point (Full Court: Kenny & Good Pty Ltd v MGICA (1992) Ltd (1997) 77 FCR 307; High Court: Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413.
85 Two general matters may be mentioned at the outset. First, the applicants submit that I should conclude that the valuation was negligently prepared because of the gross disparity between the stated value of $3.6 million and what they contend to be the true value of the property at that time, namely, $2.4 million. No doubt that approach may be adopted once the true value of the property is ascertained. In that regard, I refer to the remarks of Lindgren J in Kenny and Good at 335-337. That approach is open to me here, but I do not need to adopt it because I have been able to conclude on various grounds that the valuation was prepared without reasonable care. Secondly, there was a brief reference by counsel for the applicants to the fact that the respondent had not called independent valuation evidence and that this should engage the process of reasoning referred to in Jones v Dunkel (1959) 101 CLR 298 ('Jones v Dunkel'). The applicants submit that I should infer that the respondent has been unable to obtain any independent valuation that would support its valuation. There is no evidence either way as to whether the respondent has approached any independent experts. It is not necessary for me to pursue this issue because I have been able to reach a clear conclusion without relying on the process of reasoning referred to in Jones v Dunkel.
86 I start by identifying the key aspects of the respondents' valuation report.
87 Mr Taormina states in the valuation report that it has been prepared under instructions from Angas and could be relied upon by Angas for mortgage security purposes. Mr Taormina then sets out a definition of 'market value'. There is no dispute about the appropriateness of the definition. Mr Taormina then sets out details of the property, the statutory land use controls with respect to it, its location, site entitlements and improvements.
88 The important part of Mr Taormina's valuation report appears in Section 8 under the heading 'Valuation considerations'. Mr Taormina expresses the opinion that there is 'increased momentum' for high-density residential accommodation within multi-storey complexes. This 'trend' had been most concentrated and even more magnified in beachside/coastal areas, where water views can be provided, and in the city centre.
89 Mr Taormina refers to the conversion of buildings to residential complexes and gives as examples the Queen Victoria Hospital complex, the Hotel Adelaide at North Adelaide and the ETSA Tower on Greenhill Road, Eastwood. He refers to the advantages in terms of views of upper level penthouse apartments. He refers to the uniqueness of the property and the fact that it has a high level of finishes, fixtures and services. He states that he considers that the most 'comparable evidence' were the apartments in Glenelg Holdfast Shores (although these were inferior) and apartments in 'other landmark buildings of this nature throughout Adelaide'.
90 Mr Taormina states that he has also had regard to:
1. off-the-plan contract sales of the redevelopment of the Hotel Adelaide. The redevelopment was known as 'Place on Brougham'; and
2. sales of smaller complexes and one-off Esplanade homes in Glenelg South and Brighton where views of the foreshore are provided.
91 Mr Taormina sets out a schedule of 'comparable sales'. There are 23 sales in the schedule and they are of apartments in complexes in Eastwood (Air Apartments), Colley Terrace, Glenelg, Glenelg North, Holdfast Promenade, Glenelg and the Adelaide city area. The earliest sale date is November 2006 and the latest date is September 2007.
92 The sale prices range from $3.9 million to $1.01 million; the area in square metres ranges from 382 square metres to 174 square metres; and the dollar rate per square metre ranges from $10,400 per square metre to $5,248 per square metre. Sales of two penthouse apartments in the Air Apartments are included the first is apartment 134, 220 Greenhill Road, Eastwood, which sold in January 2007 for $2.7 million. The area of that apartment was 382 square metres and the rate per square metre was $7,068. The other apartment was apartment 139 which sold in February 2007 for $3.9 million. The area was 375 square metres and the rate per square metre was $10,400.
93 Mr Taormina states that the 'most comparable' sales included the two penthouses under construction in Place on Brougham. After describing the development he refers to each penthouse as having an area of some 500 square metres with an extra 250 square metres of terraced area featuring a lap pool and wet bar. He states that he understands the apartments to be under contracts for about $3.8 million. He then refers to the Air Apartments and the evidence generally.
94 Mr Taormina expresses the opinion that the property is superior to much of the evidence he analysed. He states that when viewed in its entirety the sales evidence suggested that the property warranted a value of at least the mid $3 millions 'when applying an appropriate rate per square metre of equivalent floor'.
95 Mr Taormina states that the evidence suggested that the property was about on a par with the larger penthouse apartment within the Air Apartments. By that he meant apartment 139, although in fact apartment 134 is physically larger. He said that adopting a rate around the uppermost level of the prevailing range of say $10,450 square metres gave an implied value rounded of $3.6 million. In fact, the figure of $10,450 square metres was $50 per square metre more than the top of the range in his schedule of comparable sales.
96 Mr Taormina fixed a fair market value for the property of $3.6 million. He also fixed a forced sale value of $3.2 million, saying that the property would be readily saleable within a normal marketing period of say eight weeks, and could be expected to warrant only a marginally reduced value. He also expressed the opinion about the specific and market-related risks associated with mortgage lending on the property which I have set out above (at [46]).
97 This then is a summary of the respondent's valuation.
98 Before turning to consider the specific criticisms of Mr Taormina's valuation report, I must address the Savills valuation report and the two witnesses who gave valuation evidence.
99 In its closing submissions the respondent asked me to place a good deal of weight on the Savills valuation report. I do not think that it is proper to do so. The valuation date in the Savills valuation report is some months before the valuation date which is relevant in this case. The precise qualifications of Mr Trnovsky are unknown and I do not know whether Mr Trnovsky continues to hold the opinions expressed in the report. Furthermore, I have not had the advantage of seeing him in the witness box.
100 Ms Joanne Gaetjens was qualified to express the opinions which she did. She is an associate member of the Australian Property Institute and is a certified practising valuer. She is an associate director and senior valuer at Southwick Goodyear Pty Ltd. She holds a Bachelor Business Property (Valuation) Degree conferred by the University of South Australia in 1998. She had given evidence on previous occasions. Ms Gaetjens has valued in excess of 8,000 residential properties, including apartments. I consider that Ms Gaetjens was an honest witness. On occasions she was more defensive in cross-examination than I would have expected from an expert witness who had given evidence previously, but that did not affect my overall assessment of her as a witness upon whom I could rely.
101 Mr Taormina gave evidence in support of his valuation. He is also a certified practising valuer. He holds a Bachelor of Applied Science in Valuation. He has had many years experience as a valuer. He had difficulty confining himself to the question he was asked and in some of his long answers he was at pains to try to justify his valuation. His evidence concerning the differences between the two penthouses in the Air Apartments was not persuasive and his evidence about the areas of the apartments at Place on Brougham was unsatisfactory. I prefer the evidence of Ms Gaetjens to that given by Mr Taormina.
102 Ms Gaetjens' report is divided into two parts. The first part contains her valuation of the property as at 26 September 2007 and the second part contains her criticisms of Mr Taormina's valuation.
103 Ms Gaetjens provides her comments on the market in September 2007. She expresses the opinion that the apartment market within the Glenelg foreshore was considered to be oversupplied. Ms Gaetjens referred to evidence that in the market there was a thinning of trading volumes, declining prices and extended settlement periods. Ms Gaetjens discusses the sales of apartments in other developments in the locality, including Holdfast Promenade, 'Platinum on the Beach' and 'The Moorings' complex.
104 Ms Gaetjens then refers to sales of apartments in the city, the Air Apartments, the Queen Victoria Hospital and Place on Brougham. Her conclusion is that save for Glenelg, where the apartment market was suffering from an oversupply of stock, the residential market including the residential apartment market continued to show high levels of demand. Ms Gaetjens considered the seaside apartment market at Glenelg to be saturated.
105 Ms Gaetjens adopts the 'Direct Comparison Method' of valuation and refers to four comparable sales being apartment 37, 31 Colley Terrace, Glenelg (February 2007), apartment 65, 3 Holdfast Promenade, Glenelg (April 2007), unit 5, 4 North Esplanade, Glenelg North (March 2007) and unit 15, 9 Holdfast Promenade, Glenelg (June 2007). Ms Gaetjens expresses the view that given the non-generic nature of the property it was appropriate that the evidence as a whole be weighed, and that rates per square metre were no more than 'a useful indication'.
106 Ms Gaetjens considered other sales evidence from the Glenelg Foreshore area. She also noted the sales of apartments or penthouses at Air Apartments and Place on Brougham. She said that those properties were considered to be in significantly superior locations and that one would expect them to trade at a significant premium over the subject property.
107 Ms Gaetjens considered that the value of the property fell within a range of $2.3 million and $2.5 million. She adopted the mid point of that range. That implied, she said, an overall rate of $7,310 per square metre. Ms Gaetjens expressed the view that the forced sale value of the property was $1.8 million because this equated with a reduction in price of approximately 25 per cent and is 'considered fair and reasonable for the subject property on a forced sale basis within this location and price range as at the date of valuation'.
108 Ms Gaetjens' major criticisms of Mr Taormina's valuation are as follows.
109 First, she said that the apartment market was in a state of oversupply with declining values, decreasing trading volumes and longer marketing periods being experienced. Contrary to Mr Taormina's statement, the apartment market had been in a state of decreasing momentum for some years in the Glenelg location. The higher prices and active sales in Place on Brougham were inconsistent with experiences in the Glenelg area. The apartment market in the Glenelg area was separate from the apartment market in North Adelaide, Eastwood and the central business district of Adelaide. The sales in those areas were in a different market sector and were of 'limited comparability'.
110 Secondly, Ms Gaetjens refers to Mr Taormina's reliance on the sales of apartments in Place on Brougham and Air Apartments. The figures Mr Taormina quotes in relation to the penthouses in Place on Brougham support a rate per square metre of $7,600 or less if the 250 square metres of terraced area is taken into account. As to the two penthouses in the Air Apartments, Mr Taormina had chosen as his most comparable sale the high-priced one without providing a convincing reason for doing so.
111 Thirdly, Mr Taormina had placed too much weight on the rates per square metre approach without considering adequately the points of similarities and differences with comparable sales.
112 Fourthly, Mr Taormina had ignored the prices achieved within the Glenelg foreshore area including apartments and adopted a rate of 20-40 per cent more than those rates.
113 Fifthly, Mr Taormina had adopted a rate of $10,450 per square metre which is higher than any of the sales which he identified as comparable.
114 Sixthly, Mr Taormina's valuation was $1.075 million or approximately 42 per cent more than had ever been achieved for an apartment within the location of Glenelg North, Glenelg or Glenelg South.
115 Ms Gaetjens gives her reason for disagreeing with Mr Taormina's forced sale value (see [107] above.
116 The respondent criticised Ms Gaetjens' valuation report on a number of grounds. First, it was said that she had impermissibly used hindsight in that she had taken into account sales after the valuation date and she had taken into account the effects of the global financial crisis. Ms Gaetjens used one sale which was under contract but had not settled as at the valuation date. That is not a reason to reject her valuation report if it is otherwise soundly based. There is nothing to suggest that she impermissibly took into account the effects of the global financial crisis. Secondly, it was said that she miscalculated the implied rate per square metre in her valuation. That is correct; her rate per square metre appears to be based on a value of $2.5 million rather than $2.4 million. However, that error does not cause me to doubt the correctness of her opinions. Thirdly, it was submitted that her valuation was inconsistent with the comparable sales she identified. I reject that criticism and I accept Ms Gaetjens' evidence as to the differences between the property and the comparable sales and the reasons why it was inappropriate to simply calculate value by the rate per square metre approach.
117 In their closing submissions the applicants condensed their particulars (see [82] above) into five areas in which they said the respondent's valuation fell below the standard to be expected of a reasonably competent valuer. The five areas identified overlap in the sense that an error in one respect is, or leads to, an error in another respect.
118 The first alleged error relates to the methodology adopted by Mr Taormina. It is said he erred in adopting a rate per square metre analysis rather than the Direct Comparison Method. The valuation of a property by the 'Direct Comparison Method' involves an analysis of recent comparable sales and a comparison of those sales with the subject property having regard to various attributes or features such as location, building features and characteristics, general presentation and other improvements. Those attributes or features have the potential to affect value. The two processes (if indeed there are two) overlap in the sense that the 'more comparable' the sales identified as comparable sales are the less need there will be for adjustments for differences.
119 It is possible to calculate from comparable sales the rate paid per square metre for the properties. That rate can be of some assistance in determining the value of the property to be valued. In the case of properties used for industrial, retail or office purposes it may be a particularly useful guide to value. That is because in the case of those uses other factors such as location will, generally speaking, be of less significance to the purchasers of such properties. In the case of residential properties the properties are less likely to be homogeneous and the rate per square metre analysis is likely to be of less assistance.
120 The proper valuation method for the valuation of the property was the Direct Comparison Method. That was Ms Gaetjens' evidence and Mr Taormina agreed. The rate per square metre analysis may be used as a check or guide where the Direct Comparison Method has been properly applied. Error might arise if the rate per square metre analysis is applied instead of the Direct Comparison Method. Error might arise if the Direct Comparison Method is not applied properly and then the rate per square metre analysis is applied without a proper foundation. Mr Taormina said that he applied the Direct Comparison Method. I am not persuaded that he did not attempt to do that, but he erred in applying that method and then he applied the rate per square metre analysis without a proper foundation. Mr Taormina erred because he did not identify the proper comparable sales and because he failed to identify Glenelg (including Glenelg, Glenelg South and Glenelg North) as a separate market.
121 The second alleged error relates to the rate per square metre actually adopted by Mr Taormina. The applicants' submission is that the primary sale relied on by Mr Taormina according to his report was the sale of apartment 139 at the Air Apartments and that it should have been excluded from his list of comparable sales. It was, to use the term used in the evidence, an 'outlier'. Another term is an anomalous sale, that is to say, one outside an apparent range of values where the reasons for the apparent aberration are unexplained. The applicant submits that the sale was an anomalous sale for two reasons. First, it was anomalous when compared with the sale price achieved for apartment 134. There was a difference of $1.2 million. Secondly it was anomalous because the price achieved in January 2007 of $3.9 million was considerably more than the price of $2.317 million achieved on a sale of the same apartment in January 2006. As part of the investigations Ms Gaetjens carried out she made some inquiries about the different prices achieved for apartments 139 and 134. The highest it can be put is that there might have been substantial improvements made to apartment 139.
122 Mr Taormina offered various explanations for the two matters identified by the applicant. He said that the price differences between apartments 139 and 134 might be explained by the superior views offered by apartment 139. The differences between the sale prices for apartment 139 might be explained by the fact that the sale in January 2006 was pursuant to a contract signed some years earlier. I did not find his explanations at all persuasive. Even if he took those matters into account in September 2007 they were insufficient to remove the doubts attending the sale of apartment 139. Mr Taormina should not have relied on the sale of apartment 139 as the most comparable sale as there was enough to suggest that it was an anomalous sale. In my opinion, a reasonably competent valuer would have reached that conclusion.
123 Removing the sales evidence in relation to apartment 139 is very significant in terms of Mr Taormina's valuation. If regard is had only to the rate per square metre analysis for present purposes and Mr Taormina's schedule of comparable sales is considered, the average rate per square metre for apartments above 250 square metres in area in the Glenelg area is $6,109 and for all areas is $6,861. If all apartments above 200 square metres in area are taken into account, the corresponding figures are $6,127 and $7,068 respectively. This is significantly less than the rate applied by Mr Taormina.
124 Mr Taormina referred to the sales of two apartments in Place on Brougham in his valuation report. They were not referred to in his schedule of comparable sales, presumably because the sales had not settled. In his valuation report, Mr Taormina said of the apartments in Place on Brougham the following:
Each penthouse is to have some 500 sq m of living area with an extra 250 sq m of terraced area featuring a lap pool and wet bar. We understand these are under (now dated) contracts for about $3.8 million.
125 When it was pointed out to Mr Taormina in cross-examination that those figures, even leaving the terraced area out of account, implied a rate per square metre of $7,600, he initially said that this was a 'typo' and that he meant to say 500 square metres 'all up'. The agent had given him figures which were 'roughly' correct. Then he said he had worked on figures of 450 to 430 square metres. That gave a range for the rate per square metre of $8,444 - $8,837. Eventually, he said that he performed calculations at the time based on an area of 365 square metres. He accepted that there were no workings or calculations to this effect on his file. I found Mr Taormina's evidence on this topic unsatisfactory.
126 It seems that in fact one of the apartments with a mean equivalent area of 410 square metres subsequently settled for $4.1 million, implying a rate per square metre of $10,105.60. This sale does not support Mr Taormina's valuation report because, for reasons I will now give, it is not a comparable sale.
127 The third, fourth and fifth alleged errors can be dealt with together. The third alleged error is that Mr Taormina placed most weight on sales which were not comparable sales. Those sales were the sales of the two apartments in Air Apartments and the two apartments in Place on Brougham. The fourth alleged error is that Mr Taormina failed to recognise that the Glenelg area was a different market sector from those outside Glenelg. The fifth alleged error is that Mr Taormina failed to recognise that apartments in Glenelg were part of a falling market.
128 Mr Taormina proceeded on the basis that there was one market and he certainly did not proceed on the basis that the market for apartments in Glenelg was falling. On the contrary, he proceeded on the basis that there was increased momentum in the market for high-density residential accommodation within multi-storey complexes such as the property particularly 'in beachside/coastal where water views can be provided or in the city centre'.
129 I am satisfied, based on the evidence of Ms Gaetjens, that the third, fourth and fifth errors are made out and that a reasonably competent valuer would, on proper investigation, have reached the following conclusions. First, whilst in general terms the Adelaide residential market had, as at 26 September 2007, experienced buoyant conditions for a number of years, the apartment market in the Glenelg foreshore area was considered to be oversupplied. The declining market was characterised by a thinning of trading volumes, extended marketing periods and a decrease in prices. Secondly, the maximum sale price achieved for an apartment in the Glenelg area up to the date of the valuation was $2.526 million for an apartment purchased off the plan in September 2006 in the 'Platinum on the Beach' complex. I accept the evidence of Ms Gaetjens that this sale took place in considerably superior market conditions. Thirdly, in contrast to the Glenelg market, the market for apartments in the central business district of Adelaide and the eastern fringe areas continued to exhibit growth and some very significant prices were achieved (for example, the sale of the apartment in Place on Brougham at $4,143,297). Fourthly, there were two distinct features of the Glenelg area. First, sales above $2.5 million were extremely rare to the date of valuation and, secondly, the residential apartment market was suffering the effects of an oversupply. Finally, an apartment in Place on Brougham, North Adelaide, could not be considered highly comparable with an apartment on the Patawalonga Frontage.
130 The sales Mr Taormina placed greatest reliance on were not comparable sales. Mr Taormina should have prepared his valuation on the basis that the most comparable sales were in the Glenelg area.
131 Based on the evidence of Ms Gaetjens, I find that the market value of the property as at 26 September 2007 was $2.4 million. Furthermore, I find the errors made by Mr Taormina would not have been made by a reasonably competent valuer.
132 The representations made in the valuation were misleading or deceptive. The valuation report was prepared negligently and without due care and skill.