ISPT Pty Ltd v City of Melbourne

ISPT Pty Ltd v City of Melbourne - [2007] VCAT 652 - VCAT 2007 case summary — Zoe

[25]

10 In 2003 the tribunal received references in relation to objections to site value in respect of 28 different properties in or nearby to the central business district of Melbourne. Most, if not all, of these references related to land which was used for commercial purposes. The objections to site value followed the same general theme: that is, that the council had erred in ascribing high levels to site value by wrongly applying sales evidence concerning vacant land which was purchased for residential development. All these proceedings were concerned with the value ascribed for various properties as at 1 January 2002.

11 Following the valuation of land within the City of Melbourne which related to the valuation date of 1 January 2004 the tribunal received references of objections in relation to 23 of the 28 properties for which it had earlier received a reference. In addition, the tribunal received references for 27 additional properties in relation to the 2004 valuation.

12 As it was apparent that all these proceedings raised substantially similar issues, the tribunal made an order on 17 May 2005 (by consent) that steps be taken to consider if any of the proceedings might proceed by way of a test case or test cases. At the same time (again by consent) the tribunal joined the Valuer-General as a party to many of the proceedings. This process led to an order of the tribunal on 30 September 2005 where two properties were identified as suited to be test proceedings (in respect of both the 2002 valuation and the 2004 valuation), namely 600 Bourke Street, Melbourne and 114 William Street, Melbourne. For reasons that need not be set out, the test case in relation to 600 Bourke Street, Melbourne was not pursued.

13 It became apparent during the procedural stages of these proceedings that the Valuer-General (but not the council) wished to pursue certain legal arguments concerning the interpretation of the meaning of "improvements". Essentially the Valuer-General wished to contend that the site value of many city allotments was enhanced by the fact that excavation had taken place for underground car parking; and, as the council had not taken this into account in its valuations, the valuations were conservatively low. At a directions hearing on 6 March 2006 the Valuer-General expressed concern that the use of the land at 114 William Street, Melbourne might not enable this important question to be determined. As a consequence I directed that at the hearing of the present proceedings, in addition to any other matters to be resolved in determining the proceedings, the tribunal was to answer the following two questions:

[33]

20 The Valuer-General submitted that the excavation of the land at 114 William Street, Melbourne below the natural surface level was not an improvement within the meaning of the first part of the definition of the term "improvements". The word "improvements" is defined to mean all work actually done or material used "on and for the benefit of" the land; which led the Valuer-General to submit that excavation below the natural surface level was not an improvement because it was not work done "on" the land. The Valuer-General submitted that excavation work was not on, but beneath, land as it removed the surface of land.

21 I cannot accept this submission. Where the word "on" is used in the first part of the definition of "improvements" it is a reference to a relationship between the work done (or material used) and the land; it is not a reference to the physical place where work is done (or material is used).

22 It is true that the preposition "on" can mean a position above and in contact with a supporting surface.[12] But the preposition can also be used to introduce an object or point of reference. An example of the latter might be in the expression "I have done some work on my car", which might be work on the engine, or tyres, or interior, and not just to the upper surface. Having regard to the context in which the expression is used in the Act, I would regard the Parliament as intending the latter meaning. This conclusion is consistent with the approach taken by the High Court in Commonwealth of Australia v Oldfield[13] where it was held that the preposition "on" did not mean "on the surface of the land". Although that case was concerned with different statutory provisions to those now under consideration, it demonstrates that the proposition "on" can mean "appertaining to" and its meaning needs to be determined by its context.

23 For the most part improvements will consist of buildings. In turn, it is trite that buildings are nearly always connected to land: for example by footings or stumps. In order to provide an appropriate connection it is usual that footings or stumps are placed beneath the surface level of the land. If the contentions advanced by the Valuer-General were correct this would make the practice of site valuation unduly complex: as work below the surface (such as footings) would not be an improvement that was to be disregarded for the purpose of site valuation. In turn, this makes it unlikely that the Parliament intended that the concept of an improvement be limited to work done (or material used) above the surface level of the land.

24 There are other difficulties with the Valuer-General's argument. It assumes that land does not include in its mass that which is beneath its existing surface.[14] If land is to include all its strata, then an improvement below the natural surface might still be "on" the land, even in the sense of being above and in contact with a supporting surface. Further, if an excavation is made which reduces the surface level of land could it not be said that the resulting improvement is then on top of the land. However it is unnecessary to explore these difficulties, as I am of the opinion that the reference to "on" the land is intended to refer to the object of the work done (or material used).

[34]

25 The Valuer-General then submitted that excavation of land for the purpose of providing car parking to be contained in a building is an improvement comprising "the removal of ... rocks, stone or earth" and therefore fell within paragraph (b)(i) of the definition of improvements. Because such improvements are excluded from the definition of "improvements", the Valuer-General contended that the site value of the land ought be determined without assuming that those improvements had not been made: in other words, that any added value of the land as a result of the excavation be included in the site value.[15]

26 The Valuer-General submitted that the excavation of land for the purposes of creating underground levels for a building to be constructed on that land involved the removal of rocks, stone or earth within the ordinary meaning of those words. By contrast, the council and the applicant argued that the context in which the expression is used indicated that it was not intended to embrace the removal of rocks, stone or earth where this was part of the process of erecting a building.

27 The question raised by the Valuer-General does not appear to have arisen for decision under Victorian legislation. However a similar issue has been addressed in New South Wales in the context of the Valuation of Land Act 1916 (NSW). In Commissioner for Railways v Wynyard Holdings Limited[16] the question arose concerning the value to be attributed to the excavation of land relating to the Wynyard Railway Station in Sydney. A preliminary question was whether or not the excavation was a "site improvement" within the definition contained in the New South Wales Act that was in force at the relevant time. That definition relevantly provided that "site improvements" included "the excavation, grading or levelling of land, not being works of irrigation or conservation". Else-Mitchell J concluded that an excavation of land will be a "site improvement" if it in fact operates to improve the land.

28 In Perpetual Trustee Company Limited v Valuer-General[17] the Land and Environment Court of New South Wales was required to determine a question whether an excavation made for the purposes of an underground car park beneath a high rise building was a "land improvement" within the meaning of the New South Wales Act that was in force. The Act had been amended since the decision of Else-Mitchell J in Wynyard Holdings and the new definition - now called "land improvement" - relevantly included:

[38]

29 I find the New South Wales decisions of little assistance. First, the two decisions seem inconsistent; unlike Bannon J, I am not persuaded that the change in the applicable statutory provisions justified different outcomes. Second, the Victorian legislation does not use the word "excavation", which carries a different connotation to the removal of earth. Third, there does not appear to be any reference to the purpose of the provision or the practicality of adopting a particular approach.

30 The Valuer-General accepted that any retaining walls or other supporting structures required to maintain the structural integrity of the excavation would not themselves fall within the exclusion in paragraph (b)(i) of the definition of improvements.[18] But the Valuer-General contended that the (additional) value of the excavation may be determined on the basis that supporting structures are present, but without including the value of those structures as part of the value of the excavation.

31 It is now trite law that the meaning of individual words is influenced by, and may depend upon, the context in which they are used. This requires consideration of the whole of the definition of the term "improvements", as well as the purpose sought to be achieved by the concept.

32 It is striking that the various improvements identified in paragraph (b) of the definition all relate to works which change the form of the land as such. Although this observation does not provide an answer to the Valuer-General's contention, it provides some support to the answering submission that paragraph (b) is not at all concerned with changes to land form that are part and parcel of the construction of a building.

33 It is also significant that to fall within paragraph (b) the improvements must "comprise" one or other of the identified works. The council and the applicant submitted that this meant "consisted of"; and thus did not include works specified in paragraph (b) that were inseparable from works that were not specified in paragraph (b). In my opinion there is much force in this submission.

34 I also agree with the submission made by the council that it is illogical to separate the construction of a basement from the excavation needed to undertake the construction. Virtually every building affixed to land has a structure contained in an excavation into the land: whether it be a column, or a pier, or a stump, or a concrete footing, or a raft slab. When land is excavated for this purpose, the excavation ought be regarded as part and parcel of the building and to have merged into the building.

35 The evidence illustrates that the excavation of land within the central business district of Melbourne is not feasible without accompanying works to shore up adjoining land and public streets. It is common that these shoring up works consist of "soldier" piers that are built before the land is excavated and then left in place. Indeed, it is common that these piers ultimately form part of the construction of the building. Hence, once construction is completed, the excavation and the building are inseparably connected and the excavation no longer exists as a separate thing as it once did. Thus, in reality, there is but one improvement: namely the building with all it entails, including its occupation of the formerly excavated space.

36 The adoption of the interpretation sought by the Valuer-General would also produce unworkable and absurd outcomes. In relation to the site value of commercial land it would make the task of performing a general valuation of site values much more complex and time consuming. Moreover, there could be no basis to adopt a different interpretation depending upon whether the land was commercial land or residential land.

37 In a detailed submission the council referred to the history of the definition of "improvements" in the Act, pointing out that the definition seems to have drawn on the New South Wales Royal Commission into Rating, Land Valuation and Local Government Finance chaired by Justice Else-Mitchell. To the extent this can be relied upon as indicating the intent of the Victorian Parliament, it supports the notion that excavations for buildings should be regarded as merging with the land, not the contrary.[19]

38 Finally, I would note that it is likely to be difficult to find market evidence about the added value an excavation might deliver to a site. Although this is not a reason to adopt one statutory interpretation rather than another, it suggests that the Valuer-General's contention might be futile, as well as complex and time consuming.

39 For these reasons I have concluded that the second question ought be answered in the negative.

[49]

50 As the High Court has explained, the principal method of valuing land is to seek out relatively contemporaneous sales of comparable properties and to use those sales as a yardstick for the valuation of the relevant land. Thus if particular land was sold on the relevant date for valuation, and the land was in the form to be valued (for example, it was vacant land), and the sale was not affected by special factors (such as a distressed seller), then that sale would be a perfect yardstick in valuing that land. But rarely is the valuer that lucky. The more usual occurrence is that there are some sales that are comparable, but require either adjustment to be an accurate yardstick or to be given reduced weight in making a valuation judgment.

51 It is sometimes thought that sales are either comparable or not comparable: that is, a binary paradigm should be used to classify sales. In my opinion, this is a flawed approach. Rather there will be gradations of comparability: from identical to irrelevant. As this scale of comparability approaches the irrelevant end, there will be many sales that offer so little assistance that they ought be disregarded. Further, there will be circumstances where there is a sale or sales that are strongly comparable; in which case there will be no need to closely analyse other sales, even though these may be comparable in some way.

52 The strength of the comparison between a sale and the land to be valued will depend on a comparison of the different circumstances. Suppose the land to be valued was sold, in the same condition, one year before the date of valuation. The sale may or may not be directly useful in the valuation: whether it is will depend on evidence of general market movements over the period between the sale and the date of valuation. However, even if there is evidence of substantial market movements over that period, the sale may still be relevant provided adjustments are made for that general market movement. As a matter of logic, a sale after the valuation date is just as relevant as a sale before that date. However it will still be necessary to consider market movements or trends in deciding what weight to give such a sale or whether to make adjustments to it before comparing it with the subject land.

53 The comparable size, location and condition of land must also be taken into account in a similar way. Similarly, the use to which land might be put must be considered. This exercise might produce the result that a sale is so dissimilar that it should be disregarded; or it might produce the outcome that a sale needs to be adjusted before being applied; or it might produce the outcome where a sale is given more or less weight in the exercise of a valuation judgment.

54 When the valuer is required to assess the site value of land the task of comparing sales is often more complex, as it may be necessary to consider the sales of improved land. By definition the sale of land with improvements that add value is not directly comparable with the land to be assessed for site value. Although there are methods of making the necessary adjustments, this may introduce an element of uncertainty into the process. This will tend to be so if the adjustments require the valuer to exercise a value judgment and if the final outcome is particularly sensitive to the adjustments that are made.

[50]

55 In my opinion, the direct method of assessing site value by reference to vacant, or near vacant, land sales will usually be much more reliable than the indirect method of analysing improved sales then making a deduction for improvements. Of course this will depend on the availability of sales of vacant, or near vacant, land which is comparable to the subject land. And this observation does not justify a disregard for relevant and credible evidence based upon improved sales.

56 It is extremely difficult to reliably assess the added value of improvements. This is because there is no separate market for improvements that are attached to land.[28] Rather, the improvements must be sold with the land.

57 The difficulty exists even if the improvements have been freshly made. When a speculative builder erects a house, the builder hopes the added value will exceed the cost of the house. But builders have been known to over-capitalise land; and add improvements that cost more than the added value. So we know that whilst cost is a guide to the added value of improvements, it does not determine this. As Professor Whipple has explained, forces giving rise to prices in the building supply and construction markets are different from those operating in the real estate market.[29]

58 When the improvements have been made many years ago, the exercise of valuing improvements becomes more complex. It is possible that a building on land does not add to land value at all; indeed, the building may even detract from land value by reason of the cost of demolition. One approach is to depreciate the cost of the building by reference to the building's age, condition and obsolescence. This is a legitimate approach; but one fraught with difficulty. This is because the adopted depreciation involves a significant element of judgment, yet has a substantial impact on the level of site value that is ascribed to a property.

59 The conclusions I have expressed in relation to the reliability of assessing site value by reference to the sale of improved land are consistent with those of referees appointed by the New South Wales Land and Environment Court to enquire and report upon relevant questions following the Court of Appeal decision in AMP Henderson Global Investors Ltd v Valuer General.[30] This was a case in which a similar method was used to that in this case. The referees observed:

[53]

61 Counsel for the applicant argued that it was necessary to identify a precise highest and best use for the land being valued before embarking on the process of ascertaining and considering comparable sales.

62 Highest and best use represents the most profitable potential use to which land can be put having regard to both planning and like controls and the circumstances of the land. It is to be distinguished from the present use of land; although the present use might also be the highest and best use. When land is sold, the market values the land at its highest and best use: as buyers will not be constrained to continue the existing use; and the seller will seek to achieve the highest price for the land. This is why highest and best use is relevant in assessing value, whether improved value or site value.[35]

63 As Jacobs J pointed out in Adelaide Clinic Holdings v Minister for Water Resources[36] highest and best use is not the value of land assuming there are no planning or like controls. Rather it is the most profitable use having regard to the physical, economic and legal constraints on the use of the land.

64 Often the highest and best use of land will be obvious, but this will not always be so. In a residential zone the highest and best use of a 500 square metre parcel in Cranbourne is likely to be for a single detached house. But if this parcel was in Richmond, the highest and best use might be as a small apartment block with, say, three dwellings. When land is in a business zone the identification of the highest and best use becomes even more complex: this is because the range of permitted uses is broader, and the identification of highest and best use will involve identifying both the nature and the intensity of use.

65 In a mixed zone, such as that applicable in central Melbourne, different categories of buyers of land compete for opportunities. Some buyers might seek to maintain land in its present condition and seek a rental return. Other buyers might buy to "land bank" with a view to selling or developing the land at some future time. Other buyers may seek to develop the land for commercial uses. Yet other buyers may seek to develop the land for residential purposes. The highest and best use in this situation is the use to which the highest bidder wishes to put the land.

66 When it comes to the assessment of site value, the land is to be assumed to be without improvements that add value. Land in such an assumed state may not attract the investor seeking a rental return; but the land banker, the office developer and the residential developer will all compete in the market to purchase the land. Indeed there will be developers who build both offices and apartments or some mix of the two, depending on what is regarded as more profitable. The decision as to how to develop the land might not even be made at the time of the purchase.

67 The applicant's submission does not recognise the reality of the marketplace. In my opinion, at least, in the circumstances of this case, it is not necessary to identify a precise highest and best use of the land in order to assess site value. I would add that, if the highest and best use must be ascertained, it might be identified in general terms: such as an intense use for office, residential, hotel, club or retail purposes (or some combination of these); without specifying a single, precise use.

68 I accept that in identifying comparable sales it will be relevant to consider what uses are likely to be most profitable for the subject land and to look for sales of land with similar characteristics in that respect. And if a sale was in respect of land with a different use profile, then it might be disregarded or be accorded less weight. But where realistic options for the development of land might be a residential tower or an office tower, the sale of such land is likely to be relevant even if the actual purchaser had one or other type of development in mind when the land was purchased. [37]

[54]

69 The land has a frontage to William Street of 46.12 metres and a frontage to Little Collins Street of 36.36 metres. The total site area of the land is 1,858 square metres. A light and air easement, approximately 3.9 metres wide, runs along the eastern boundary of the site. There is also a footway easement, approximately 1 metre wide, which runs along the Little Collins Street frontage.

70 The land is zoned "Capital City Zone 1 - Outside Retail Core" pursuant to the Melbourne Planning Scheme. The purpose of this zone is to provide for a range of financial, legal, administrative, cultural, recreational, tourist, entertainment and other uses that complement the capital city function of the locality. Significantly, land within this zone may be used and developed for both commercial (office) uses and for residential uses.

71 The land is centrally located within Melbourne's central business district. Traditionally Collins Street has been a major street containing office accommodation, particularly east of King Street. However there are also substantial offices in Bourke Street and William Street. Major tram services operate along Collins Street and Bourke Street. There is also a less frequent tram service along William Street. The subject land is within reasonable walking distance of railway stations which form part of the City Loop.

72 At the relevant dates of valuation the property was improved by a 25 level office building, comprising basement car parking for 100 vehicles over two levels, a ground floor foyer and retail tenancies, and 22 upper levels of office accommodation. The property had a net lettable area of approximately 20,912 square metres.

73 Evidence was given to the effect that the existing building on the site could easily be adapted to residential use. However I do not regard this evidence as relevant to an assessment of the site value of the land. As I have explained, this task is to be approached by assuming that there is nothing on the land by way of improvement.

[55]

74 One matter which has commanded agreement in these proceedings is that the relevant market was relatively stable between 1 January 2002 and 1 January 2004. This means that sales during that period, and shortly before 1 January 2002 and shortly after 1 January 2004, are likely to provide guidance without the need to make any adjustment for time.

75 Because the parties also relied on sales before and, indeed, after, the 2002-2004 period, it is necessary to say something about the general movement in the market over a longer time frame.

76 As I have explained, purchasers of vacant, or near vacant, land in the central business district of Melbourne are usually developers or speculators. These types of purchasers have a strong focus on the likely movement in the market; and land values are strongly influenced by perceptions as to demand from end users that will arise two or three years down the track.

77 Mr Grant Jackson, who is an experienced valuer and a director of the company "m3 property", gave evidence that, after accelerating through 1999 and 2000, demand for office space in the Melbourne central business district went into reverse during 2001. He said that in 2002, as the market was expected to experience an oversupply, there was a tendency for major developers to avoid purchasing development land in Melbourne in favour of other commercial markets around Australia. Mr Jackson said that in 2002, given the lack of demand from potential purchasers, if sales were to occur they would most likely be at levels below that experienced in 1998 and 1999 when supply conditions were more favourable.

78 Mr Mark Karutz, a senior valuer employed by the council since 1998, gave evidence that the commercial property market had performed strongly since the late 1990s and that prior to January 2002 the commercial market had achieved significant growth in all areas, including office rentals, as demand for space outweighed supply. Mr Karutz was of the view that in relation to site values the market peaked in mid to late 2002 and settled at that level to at least 2004. Mr Karutz gave evidence that he had analysed and mapped all sales in the central city over an extended period and considered that, from 1999 onwards, these sales retained some relevance and indicated - at a minimum - the lower level of land value in the City of Melbourne.

79 Based upon this evidence, I find that sales from 1999 to 2004, inclusive, are relevant; although caution needs to be used in placing reliance on sales distant in time from the relevant dates. However it would also seem to be common ground that the market picked up from 2005 onwards, with the consequence that more recent sales need to be treated with great care.

[66]

106 The improved sales relied upon by Mr Jackson were in respect of 40 Market Street, 555 Collins Street, 589 Collins Street and the subject land itself. The essential method used by Mr Jackson was to use a "cost less depreciation" method to determine the added value of improvements, which (together with other deductions in respect of existing tenancies and holding costs) was subtracted from the sale price of the property to deduce site value.

107 There are two main problems with this method. First, the selected depreciation rate is not based upon market evidence. Second, when there are substantial improvements on land, the method is extremely sensitive to the selection of the depreciation rate.[41]

108 In relation to the second problem, I note that a variation of, say, 5% in this rate will produce dramatically different site value outcomes. Yet one can have no confidence that a particular depreciation rate is more accurate than one 5% higher or 5% lower than the selected rate. As an example, in Mr Jackson's analysis of 555 Collins Street, he selected a depreciation rate of 70%. However if he had selected 67.5% the resulting land value would have been 50% lower than what he assessed. And if he had selected 75% the resulting land value would have been more than double that which he had assessed.

109 It is to be noted that the reasons given by Mr Jackson for selecting a particular depreciation rate for each analysed sale were much the same, yet the rates adopted varied from 40% to 70%. Although this does not show Mr Jackson to be wrong, it underscores the qualitative nature of the selection of an appropriate depreciation rate. It is this qualitative nature that robs the method of confidence. The Valuer-General invited the inference that, in selecting his depreciation rates, Mr Jackson had regard to the impact of the selected rate on the analysed site value.[42] However it is not necessary to make such an inference to conclude, as I do, that the method is too unreliable in this case to provide a sound yardstick to the assessment of the site value of the subject land.

110 I note that Mr Jackson assessed the site value of the land at 555 Collins Street at $1,539 per square metre and the site value of the land at 589 Collins Street at $1,537 per square metre. In my view these assessments are inconsistent with his assessment of the site value of 565 Collins Street at $2,156 per square metre. It would be surprising if the land at 555 Collins Street, which has excellent exposure, is a corner allotment and is a smaller parcel, was worth less that the mid-block land at 565 Collins Street. The main consequence of this inconsistency is that it further undermines confidence in the improved sales assessments made by Mr Jackson.

111 The method of analysing improved sales also requires adjustments for the letting up period, interest charges and holding costs; and requires a judgment to be made about whether a developer's margin is to be added. All these factors add further uncertainty to any resulting calculation.

[71]

120 This site was purchased by the RACV in November 1999 for $20,000,000. The land has an area of 6,209 square metres, with extensive frontage to both Bourke Street and Little Collins Street. This land is in close proximity to the subject land. Mr Jackson analysed this sale at $3,221 per square metre. Mr Karutz analysed the sale at a similar figure; and Mr Kensley analysed the sale at $3,000 per square metre.

121 Mr Jackson gave evidence that the RACV paid a premium for the site as it had a requirement to secure a large site for redevelopment as its club within the same central business district block of the previous RACV Club. As a consequence he did not place weight upon this sale.

122 Mr Karutz also regarded the price paid by the RACV as containing a premium, which he (wrongly, in my view) described as "adjoining owner influence".

123 There is support for the fact that the RACV wanted to re-establish its club within the same part of the city as its former club, but whether this meant it had to purchase in the same block is doubtful. What is clear is that the RACV had to compete with other purchasers, who would have appreciated the attributes of the site but are unlikely to have been compelled to buy in a particular block; and only had to offer a price in excess of those other prospective purchasers. I find that it is unlikely that any "excess" was greater than 10% of the purchase price. Thus I would accept the rate ascribed to the site by Mr Kensley.

124 The fact that the RACV site was purchased for a mixed development, with a private club being the main component, does not make the sale irrelevant to the assessment of the site value of the subject land. The RACV would have had to compete in the marketplace with those proposing to build offices and even dwellings. Moreover - and importantly - the RACV site is close by to the subject land.

125 I record that, for reasons given above, I do not regard as relevant the fact that the council has ascribed a site value for the RACV land at the equivalent of $2,400 per square metre.

[72]

126 This land was sold in September 2002 for $17,130,000. The land has an area of 4,942 square metres. The site fronts Bourke Street, with a secondary frontage to Little Collins Street and was used for many years as a McEwans hardware store (later a Bunnings store). The improvements on the land have been subsequently demolished, with the exception of the four level façade fronting Bourke Street, which has heritage restrictions.

127 Mr Karutz analysed this sale: and this analysis indicated a range of values for the site between $3,500 to $4,000 per square metre, depending upon the treatment of the added value of the improvements. Mr Karutz adopted a value of $3,700 per square metre.

128 Mr Kensley also analysed this sale, and arrived at a land value of $3,458 per square metre.

129 I do not regard the fact that the Bunnings site was purchased for a residential development as meaning that it is not a comparable sale. I accept that the subject land would be regarded as more of an "office" precinct than the Bunnings site. But there are no hard and fast rules. There are major office towers adjacent to the Bunnings site, on the corner of Bourke and Elizabeth Streets and in Collins Street. If the market support was there, it would be no surprise to find another office tower on the Bunnings site. Equally, although the subject land is most obviously suited to an office tower, if vacant one could not rule out a purchaser wishing to erect a tower for residential or institutional purposes.

130 Although the Bunnings site is closer to the centre of the retailing precinct than the subject land, it is still comparable in terms of the quality of the location. Nevertheless, in terms of location, it is not as good a comparator as the RACV site. It may be that some downwards adjustment needs to be made to the Bunnings per square metre rate to reflect the fact that it is close to, or part of, the retail precinct.

131 On the other hand, the Bunnings site was more than three times the size of the subject land; and this factor needs to be taken into account in comparing a per square metre rate with the subject land. I accept that generally a larger site will attract a lower square metre rate, as the number of buyers, and the depth of the market, is less than with a smaller site.

132 The sale of the Bunnings site requires adjustment to account for the improvements on the site, which is made more complex by the fact that some of the improvements were required to be retained for heritage reasons. Nevertheless, I find that the price reflects a rate significantly greater than $3,000 per square metre for the land component; and that this rate is relevant to the subject land. The applicant made much of the fact that parts of the building were to be retained and recycled for residential use. But I am not satisfied that is of great moment, as the cost of recycling an old building (especially where there are heritage restrictions) is often comparable with the cost of erecting a new building.

[73]

133 This property comprises a large vacant development site with a wide frontage to Collins Street of 72.32 metres. It is situated between two office buildings of 23 and 18 levels respectively and is to the north of a 12 level car park. The land was purchased by a private investor controlled by Harry Stamoulis in February 2003. The purchase price was $8,500,000. As the land has an area of 3,942 square metres, this translates into $2,156 per square metre.

134 The land was sold in an excavated state, with the site being approximately 3 metres below its Collins Street level. However I find that this would not have had any noticeable impact upon the price paid for the land.

135 I regard this sale as important, but hardly decisive, in assessing the site value of the subject land. It is important because it was a sale of vacant land; the land was suited for intense development, including for office development; and the sale was around the time of the valuation dates. It is not decisive because it is just one sale; the sale occurred in circumstances that place doubt upon its reliability when considered as a separate sale; and the location of the land, west of King Street, was not as desirable at the time of the valuation dates as was the subject land.

136 I accept the evidence given by Mr Kensley that this sale was affected by the fact that the purchaser also purchased the office building at 555 Collins Street (from the same vendor). Mr Kensley explained that the sale of 555 Collins Street proved difficult and the vendor decided to use the vacant land at 565 Collins Street to entice a transaction which also involved selling 555 Collins Street. No doubt the vendor would have focused on the bottom line of the two transactions, whereas the purchaser would naturally have sought to structure the arrangement in a way that suited its own commercial ends, including maximising the depreciation tax benefits that flow from improved properties.

137 More significantly, I find that at the time this sale was effected there was a strong market perception that land in the central business district west of King Street was inferior to land east of King Street. In particular, I find that the subject land was significantly better located and was more attractive as a development site, whether for office or residential purposes, than 565 Collins Street. In this respect, I do not accept that a Collins Street address is everything; rather, I find that it depends where in Collins Street the land is located. I accept Mr Kensley's evidence that, at the relevant dates, the locational attributes of the two sites were "oceans apart". The fact that 565 Collins Street has remained undeveloped for several decades - and through several property cycles - tends to confirm this observation.

138 It is arguable that a further adjustment needs to be made in respect of this sale for the size of the land. Generally smaller parcels tend to attract a higher price per square metre, probably because the total price is less and the market is deeper. However the development opportunities presented by a large parcel can sometimes result in a higher price per square metre. Notwithstanding Mr Jackson's evidence to the contrary, I am inclined to think the former force was more influential in the case of 565 Collins Street. However, in the end, I do not place reliance on this factor.

139 At the resumed hearing evidence was introduced that 565 Collins Street had been resold in May 2006 for $25,100,000, which represents a rate of $6,340 per square metre. The evidence was that the land had been exposed to open market competition and had received interest from a number of parties. The purchaser was proposing to erect office towers, though not necessarily of the design allowed by the permit that had passed with the purchase.

140 Mr Karutz gave evidence that since 1 January 2004 there had been a positive movement in the market, which had been reflected in investment property sales. But he thought the extent of the change in the market could not explain the sale of 565 Collins Street in February 2003 for only $8,500,000. Rather he concluded that the recent sale tended to confirm the levels of value displayed by the sale of properties in or near Spencer Street, such as those at 182-200 Spencer Street, Melbourne and 677-689 Bourke Street, Melbourne (Savoy site).

141 Mr Jackson gave evidence that market conditions changed dramatically between 1 January 2004 and May 2006. He supported this evidence with details of the net absorption of office space in the Melbourne central business district over the period. According to Mr Jackson, it was this change in the market conditions - together with the value of the planning permit in respect of the land - which explained the substantial increase in the value of the land.

142 I find that the resale of 565 Collins Street does add to my doubts as to the reliability of the earlier sale as a comparable sale. However the resale is not itself a comparable sale, as it post-dates the relevant valuation dates by too long a period in which market conditions changed significantly. The reason the resale adds to my doubts on the earlier sale is that: first, there is no reason to question the recent resale as a fair indicator of the market in May 2006; and, second, the increment in value appears to be so large (more than a tripling of value). In making this latter comment, I rely upon the evidence of Mr Karutz as to movements in the market over the period to May 2006.

143 What this all means is that I would not be prepared to accord the sale of 565 Collins Street significant weight in assessing the site value of the subject land, without making adjustments for both location and the circumstances of the sale. When such adjustments are made, the sale of 565 Collins Street should be seen as in line with the sales of the RACV site and the Bunnings site.

[74]

144 I find that the sale of the RACV site in September 1999 supports the adoption of a rate of $3,000 per square metre for the site value of the subject land. In making this finding I regard it as significant that the subject land is located very close to the RACV site and has many of the locational attributes of that site. I have taken account of the fact that the RACV site has a Bourke Street frontage. On the other hand, I have also taken into account the fact that the subject land is smaller in area and, as Mr Kensley has observed, is likely to attract a deeper market because the overall price is likely to be lower. I have also taken into account the time of the sale.

145 The sale of the Bunnings site in September 2002 also supports a rate of $3,000 per square metre for the subject land. Taking account of the complexities in analysing the sale of the Bunnings site and its location closer to the retail core of the central city, this sale nonetheless provides support for the rate of $3,000.

146 I also find that the sale of 565 Collins Street in March 2003, at an indicated rate of $2,156 per square metre, supports the adoption of a rate of $3,000 per square metre for the subject land. I regard this sale as requiring substantial adjustment to take account of the superior location of the subject land and also its smaller total area. I am also concerned that the sale of 565 Collins Street might not have fully reflected the value of the 565 Collins Street site at the time of its sale in April 2003; and I take this factor into account as well.

147 I also find that the adoption of a rate of $3,000 per square metre for the subject land is consistent with other sales. It is consistent with the sale of the Grand Central site in April 1998. In this respect, I do not regard this sale as being one where the improvements on the site added much, if any, value: so I regard this sale as indicating a rate of about $3,000 per square metre. Notwithstanding that the Grand Central site is clearly a better site than the subject land, the sale occurred as early as April 1998 and this is a factor working in the other direction.

148 The adoption of a rate of $3,000 per square metre for the subject land might be thought to be a little high having regard to the sale of the Southern Cross site in July 2001. There is no question that the Southern Cross site is in a better location. On the other hand the land area was very large (five times the area of the subject land) and it is difficult to know on the evidence what, if any, adjustment needs to be made for this factor. Bearing these matters in mind, I do not regard this sale as requiring a different answer than that indicated by the more comparable sales.

149 For what it is worth, the adoption of a rate of $3,000 per square metre for the site value of the subject land is also consistent with the sale of the BCL car park site in October 2001.

150 I also regard the adoption of a rate of $3,000 per square metre for the subject land as consistent with the sale of sites such as 9-27 Downie Street, 182-200 Spencer Street and 677-689 Bourke Street. All these sites sold at rates that are in excess of $3,000 per square metre - in some instances considerably in excess - and are sites west of King Street, which is generally considered inferior for commercial development. I take account of the fact that the sites were purchased for residential development, which is not the most likely option if the subject land is assumed to be vacant. However, having regard to the mixed nature of the market for developable land, these sales retain some relevance and support my finding of $3,000 per square metre for the subject land. Certainly these sales would be inconsistent with the adoption of a figure of $2,000 per square metre for the subject land (as contended for by Mr Jackson), even after taking into account all the factors which might be identified to differentiate the circumstances of these sales.

151 My conclusions are largely consistent with the evidence of Mr Karutz and Mr Kensley, particularly the latter. In essence I accept their evidence as to value insofar as it relies upon the sales of vacant, or near vacant, land; and I would note that this was the foundation of their evidence, rather than their evidence about improved sales.

[91]

[1] Section 2AA is concerned with works relating to a port and is not relevant in the present context.

[2] In making these comments I put to one side the additional provisions added by the Water (Resource Management) Act 2005; none of these additional provisions are relevant to these proceedings. Section 5A(1) requires all relevant matters to be taken into account. Section 5A(2) requires that evidence of value be weighed according to factors such as the time of the transaction, the terms of the transaction and the degree of comparability. Section 5A(3) provides that, where relevant, factors to be taken into account include the highest and best use of the land, planning and like restrictions, and the qualities of the land. Section 5A has been touched upon in various cases: see, for example, Australian Postal Commission v Melbourne City Council [2005] VSCA 295, Pioneer Concrete (Vic) Pty Ltd v Commissioner of State Revenue [2001] VSCA 55, 101 Collins St Pty Ltd v City of Melbourne (unreported, 2 April 1996, per Batt J) and City of Castlemaine v Scott (No 2) [1973] VicRp 28; [1973] VR 277. In the 101 Collins St case at [70] Batt J, in discussing section 5A(2), observed that the provision "reflects the common law".

[3] See ISPT Pty Ltd v Melbourne City Council [2006] VCAT 1304.

[4] Valuation of Land Act 1960 section 25(1). This section has now been amended but there has been no change of substance.

[5] Compare Spurling v Development Underwriting (Vic) Pty Ltd [1973] VicRp 1; [1973] VR 1, at 10.

[6] The tribunal's jurisdiction has been inherited from the Land Valuation Board of Review, an expert body set up in 1963. Recent amendments to the Valuation of Land Act 1960, which increase the role of the tribunal in resolving valuation disputes, were made in the knowledge that the tribunal is organised in lists to promote expertise in decision-making. One of these lists is the Land Valuation List.

[7] In this respect section 51 of the Victorian Civil and Administrative Tribunal Act 1998 is relevant.

[8] (1973) 6 SASR 541, (1973) 32 LGRA 170.

[9] (1973) 6 SASR 541, at 544-545, (1973) 32 LGRA 170, at 174-175.

[10] (Unreported, Supreme Court of Victoria, 2 April 1996) at para [83]. This excellent decision should be reported. The reason it has not been reported may be that it was overturned on appeal (on what might be thought to be a somewhat fortuitous ground). The fact that the decision was overturned does not affect the issue presently being considered.

[11] See the classic statement in Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577, at 589, per Bowen CJ and Deane J to the effect that the role of an administrative tribunal is to make the "correct or preferable" decision in the circumstances. The Administrative Review Council prefers the words "correct and preferable" (see Better Decisions: Review of Commonwealth Merits Review Tribunals, Report 39, 1995), but nothing turns on this.

[12] See the first meaning given for the word in the Macquarie Dictionary, 3rd edition.

[13] [1976] HCA 17; (1976) 133 CLR 612, at 620.

[14] Compare Commonwealth v New South Wales [1923] HCA 34; (1923) 33 CLR 1 at 33 per Isaacs J and Gas and Fuel Corporation of Victoria v City of Williamstown [1978] VicRp 64; (1978) 40 LGRA 390 per Harris J.

[15] The Valuer-General acknowledged that this exclusion was subject to the "fifteen year rule", that is that the improvements were not excluded where they can be shown to have been made by or at the expense of the owner or occupier of the land within a period of fifteen years before the relevant valuation. The fifteen year rule did not apply in the context of the subject land.

[16] (1969) 17 LGRA 269.

[17] (1994) 83 LGERA 206.

[18] By reason of paragraph b(ii) of the definition, a retaining wall is excluded if it is appurtenant to the draining or filling of land; but not, it would seem, if the retaining wall was appurtenant to the excavation of land.

[19] Report of the Royal Commission of Inquiry into Rating, Valuation and Local Government Finance, July 1967, paragraph 3.51.

[20] [1907] HCA 82; (1907) 5 CLR 418, at 441.

[21] Compare Michael Fibbens, "Principles and Methods of Valuation", in Valuation Principles and Practice, First Edition, Australian Institute of Valuers and Land Economists, at page 1.

[22] [1925] AC 439, at 443.

[23] [1958] AC 50.

[24] [2003] HCA 8, (2003) 212 CLR 111.

[25] [2003] HCA 8, (2003) 212 CLR 111, at 120[16].

[26] [2003] HCA 8, (2003) 212 CLR 111, at 120[17].

[27] [2004] NSWCA 264, at [66].

[28] There may be some exceptions, such as transferable water rights.

[29] R T M Whipple, Property Valuation and Analysis, 1995, Law Book Company Ltd, 488-450. This extract contains a scathing and persuasive criticism of the depreciated replacement cost method.

[30] [2004] NSWCA 264.

[31] Quoted in AMP Henderson Global Investors Ltd v Valuer General [2006] NSWLEC 16 at [48].

[32] AMP Henderson Global Investors Ltd v Valuer General [2006] NSWLEC 16.

[33] [2007] QLC 10.

[34] [2007] QLC 36.

[35] See Spicer v Valuer General (1963) 10 LGRA 319, at 320 per Else-Mitchell J.

[36] (1988) 65 LGRA 410, at 415.

[37] I am not persuaded that the decision of the Land Appeal Court of Queensland in Department of Natural Resources and Mines v QNI Metals Pty Ltd [2002] QLAC 71 affects this analysis. In this respect I adopt what was said in Multiplex 240 Queen Street Landowner Pty Ltd v Department of Natural Resources, Mines and Water [2007] QLC 10. Nor am I persuaded that section 5A of the Valuation of Land Act affects the analysis.

[38] In his initial report Mr Kensley adopted a different rate for the easement affected land at the east of the subject land; but it is easier to compare rates if a common averaged rate is used.

[39] I include in this category a use for a club or a government entity, such as a large tribunal.

[40] AMP Henderson Global Investors Ltd v City of Melbourne [2003] VCAT 2046.

[41] The method is likely to be more reliable when the ratio between the value of the improvements and the value of the land is weighted in favour of land value. I note that this would have been the case with the houses in Hunters Hill considered by the High Court in Maurici.

[42] In this regard Mr Jackson was criticised for assessing the site value of the subject land at exactly the same amount as contended for in the objection lodged by his client, notwithstanding that he relied on different sales.

[43] AMP Henderson Global Investors Ltd v City of Melbourne [2003] VCAT 2046.

[44] [1986] VicRp 29; [1986] VR 289.

At a glance

Court

Decision date

Before

Source

Judgment (91 paragraphs)

ISPT Pty Ltd v City of Melbourne (Land Valuation) [2007] VCAT 652 (3 May 2007)

Parties

Cases Cited (7)