Trust Company of Australia Ltd v The Valuer General

DATES OF HEARING: 22 and 23 February and 15 March 2010

APPLICANT Mr M Seymour, Barrister Instructed by Applicant

LEGAL REPRESENTATIVES: RESPONDENT Mr G Newport, Barrister Instructed by Mr P Rankins, Solicitor for Valuer General

JUDGMENT: THE LAND AND ENVIRONMENT COURT OF NEW SOUTH WALES

30592 of 2009 P&N Group Holdings Pty Ltd v Valuer General

JUDGMENT 1 This is an appeal by P&N Group Holdings Pty Ltd (the Applicant), under Section 37 of the Valuation of Land Act 1916 (the Act), against the Land Value assessed by the Valuer General (the Respondent) in respect of the property known as 36-38 Victoria Street, Burwood (the subject property). Background 2 The Applicant was represented by Mr M Seymour, Barrister, instructed by the Applicant. 3 The Respondent was represented by Mr G Newport, Barrister, instructed by Mr P Rankins, Solicitor for the Respondent. 4 The Land Value of the subject property at 1st July 2007 (the Base Date) was assessed by the Applicant at $1,530,000 and by the Respondent at $3,280,000. 5 The matter was the subject of a conference under Section 34 of the Land and Environment Court Act 1979 but the parties were unable to reach agreement. 6 The matter was the subject of an on site inspection on 22nd February 2010, followed by a hearing in Court on 22nd and 23rd February and 15th March 2010. 7 Section 40(2) of the Act states: "On an appeal, the appellant has the onus of proving the appellant's case."

The subject property 8 The subject property is located in Burwood, an inner urban suburb being approximately ten kilometres south west of the Sydney CBD in an area of dense retail, commercial and residential development. 9 Situated on the southern side of Victoria Street, a side street, in a two way traffic section but with limited vehicular access to/from Burwood Road, the subject property is surrounded by residential and commercial development being within a peripheral or fringe commercial location. The subject property has a frontage/aspect facing the rear wall of the Westfield Shopping Centre and a bus parking area, being within walking distance of Burwood Railway Station and bus services. 10 The subject property comprises a four level building including split level basement car parking, ground level medical/retail/commercial uses and two upper levels of office accommodation which the parties agree is the highest and best use of the subject property.

11 With a site area of 1,849sqm, the subject property is a relatively level regularly shaped block. 12 The subject property is zoned 3(c3) Business Special (Commercial) under the Burwood Planning Scheme Ordinance 1979 (amended 2007). 13 The permissible floor space ratio is 1.5:1, giving a permissible floor space area (FSA) of 2,773.5sqm. 14 The subject property comprises Lot 101 DP714230. The issues 15 The subject property comprises a four level building including split level basement car parking created by excavation below the land surface. 16 The parties differed as to whether or not the excavation required to create the basement car park comprised improvements or land improvements for the purposes of the Act.

17 Both Mr Hepworth and Mr Fogg gave evidence concerning the cost of excavation but evidence was not tendered concerning the value of excavated land relative to unexcavated land.

18 I consider that the basement car park forms an integral part of the subject property and cannot be considered as severed from the subject property in a manner that might arise should the basement car park be a separate title or subject to a lease of the whole to a tenant totally independent of the tenants occupying the upper floors.

19 Section 6A(1) of the Act states: "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." 20 For the purposes of this matter, it is relevant to consider if the subject property in totality, being the basement car park and the upper floors, comprise improvements for the purposes of the Act and so are to be assumed had not been made. 21 Improvements are not defined in the Act but were considered in Trust Company of Australia Ltd v The Valuer General [2007] NSWCA 181 which held: "For the purposes of section 6A(1) of the Valuation of Land Act 1916 , " improvements " are any human operations on the land that have the effect, as at the date of valuation, of enhancing the land's value compared with its natural state."

and at paragraph 24: "Thus, the notion of an increase in value or profitability is an inherent part of the concept of an "improvement" ".

22 Accordingly, I consider the subject property in totality to be human operations on the land that have the effect of enhancing the land's value and so to be improvements. 23 The effect of the subject property in totality being improvements is that the subject property in totality is to be assumed to have not been made such that effect on land value of any excavation to create a basement does not require consideration.

The comparable sales evidence 6. 7. 24 Mr Hepworth, Registered Valuer, tendered as evidence a valuation of the subject property at the Base Date and gave expert evidence on behalf of the Applicant. He concluded the land value of the subject property to be $1,530,000 at the Base Date. 25 Mr Fogg, Registered Valuer, tendered as evidence a valuation of the subject property at the Base Date and gave expert evidence on behalf of the Respondent. He concluded the land value of the subject property to be $3,574,000 at the Base Date. 26 I note that Mr Fogg's valuation is in excess of the amount assessed and claimed by the Respondent of $3,280,000 at the Base Date.

27 The parties submitted six comparable sales, comprising three common comparable sales with the Applicant submitting one further comparable sale and the Respondent submitting two further comparable sales. 28 The parties submitted three common comparable sales at 20 Elsie Street, 21-23 Burwood Road and 9 Deane Street, Burwood which were inspected externally. 29 The Applicant further submitted one comparable sale at 1 Elsie Street, Burwood which was inspected externally. 30 The Respondent further submitted two comparable sales at 15 Burwood Road and 33 Burwood Road, Burwood which were inspected externally. 31 The Respondent also had regard to a comparable sale at 9 Redmyre Road, Strathfield but I have not considered this comparable sale as it was not inspected.

Consideration of the comparable sales evidence 32 20 Elsie Street, Burwood, submitted by both parties, is a substantial six level commercial building of approximately 4,100sqm lettable area being around five years old at the time of sale in May 2006 for $18.6 million. Mr Hepworth gave evidence that tenants of the building included CBA and government departments and that the likely purchaser profile comprised institutional investors. I accept Mr Hepworth's evidence that 20 Elsie Street, Burwood is a significant property investment and consider that the market would approach the valuation of the property as an investment, rendering the derivation of the land value from the sale price particularly challenging. Accordingly, as a source of evidence of land value, I consider this sale to be of limited relevance. 33 9 Deane Street, Burwood, submitted by both parties, was a sale in January 2009 which is around eighteen months after the Base Date. Evidence from Mr Hepworth and Mr Fogg indicated that the sale was to St Johns NSW who intended to refurbish and occupy the property with the transaction potentially not being an open market sale capable of satisfying the tests in Spencer v Commonwealth (1907) 5 CLR 418. Accordingly, I consider this sale to be of limited relevance. 34 15 Burwood Road, Burwood, submitted by the Respondent, was the subject of extensive evidence concerning the nature of the purchaser, who may have been associated with the vendor, with the transaction potentially not being an open market sale capable of satisfying the tests in Spencer v Commonwealth (1907) 5 CLR 418. Further, the sale was in March 2004 which is over three years before the Base Date. Accordingly, I consider this sale to be of limited relevance. 35 33 Burwood Road, Burwood, submitted by the Respondent, was the subject of extensive discussion during evidence concerning the nature of the purchaser, who may have been an adjoining owner or a party associated with an adjoining owner, and whether or not the property had been offered to the market at large. Given the uncertainty surrounding whether or not the transaction would be capable of satisfying the tests in Spencer v Commonwealth (1907) 5 CLR 418, I consider this sale to be of limited relevance. 36 Having regard to location, sale as land or as an improved property, site area, date of sale, frontage/aspect and zoning/development potential, the two remaining comparable sales may be compared with the subject property as follows. 37 21-23 Burwood Road, Burwood, submitted by both parties, sold close to the Base Date and had the same zoning/development potential as the subject property. However, the property was an improved sale, is superior to the subject property in terms of location and frontage/aspect and is very significantly smaller than the subject property. While having regard to the differences between this sale and the subject property, I consider this sale to be a directly relevant comparable sale. 38 1 Elsie Street, Burwood, submitted by the Applicant, sold close to the Base Date and was a sale of land. However, the property is superior to the subject property in terms of location and frontage/aspect, being very significantly larger than the subject property with a different zoning/development potential having an FSR of 2:1. While having regard to the differences between this sale and the subject property, I consider this sale to be a directly relevant comparable sale.

39 Accordingly, I consider the comparable sales at 21-23 Burwood Road and 1 Elsie Street, Burwood to be directly relevant comparable sales. 40 Further, I consider the comparable sales at 20 Elsie Street, 9 Deane Street, 15 Burwood Road and 33 Burwood Road, Burwood to be of limited relevance. 41 I note that Mr Hepworth and Mr Fogg analysed the directly relevant comparable sales as follows, further noting that Mr Fogg did not undertake an analysis of 1 Elsie Street, Burwood: Address 21-23 Burwood Road 21-23 Burwood Road 1 Elsie Street Valuer Mr Hepworth Mr Fogg Mr Hepworth Date of Sale April 07 April 07 March 07 Sale Price $3,136,000 $3,136,000 $6,400,000 Site Area 581sqm 580.6sqm 5,633sqm Allowance for Time N/A +1.25% N/A +$39,200 Allowance for Improvements -$2,436,000 -$1,467,822 N/A Land Value psm at Base Date N/A $1,668,178 N/A $2,873psm Land Value psm at Date of Sale $700,000 $1,628,978 $6,400,000 $1,205psm $2,806psm $1,136psm

42 I note that Mr Fogg's valuation report appears to include a mathematical inconsistency and attributes $1,772,000 or $3,052psm to the Land Value at Base Date. 43 I note that both Mr Hepworth and Mr Fogg then sought to adjust the analysed Land Value for application to the subject property with regard to the relativity of the following: Address 21-23 Burwood Road 21-23 Burwood Road 1 Elsie Street Valuer Mr Hepworth Mr Fogg Mr Hepworth Land Value at Base Date N/A $1,668,178 N/A $2,873psm Land Value Date of Sale $700,000 $1,628,978 $6,400,000 $1,205psm $2,806psm $1,136psm Adjustment for Zoning/Development Potential $661psm 0% $668psm Adjustment for Excavation N/A N/A +$100psm Adjustment for Location 0% +10% -10% Adjustment for Time N/A +1.25% N/A Adjustment for Size N/A -40% N/A Adjustment for Frontage/Aspect N/A -5% N/A Adjusted Land Value psm NLA at Base Date $661psm N/A $691psm Adjusted Land Value psm at Base Date $1,205psm $1,867psm $1,175psm

44 I note that, if Mr Hepworth had not made an adjustment for excavation at 1 Elsie Street, Burwood, the adjusted Land Value at Base Date would be $1,022psm.

45 Having regard to the directly relevant comparable sales and to his analysis of other comparable sales evidence, Mr Hepworth considered the appropriate rate psm NLA for application to the subject property to be $650psm at the Base Date with an assumed 85% efficiency. I note that this equates to a Land Value of $827psm at the Base Date.

46 Having regard to the directly relevant comparable sales and to his analysis of other comparable sales evidence, Mr Fogg considered the appropriate rate for application to the subject property to be $1,800psm Land Value at the Base Date. Following the addition of $246,000 for the cost of excavation, Mr Fogg adopted a rate equivalent to $1,933psm Land Value at the Base Date. 47 I note that the Land Value as at the Base Date was assessed by the Applicant at $1,744psm.

Findings 48 Accepted valuation practice permits both explicit and implicit adjustment for differences, such as in location, area and time, to enable valuers to have evidentiary comparable values which, following adjustment, account for the various differences with the subject property. Such adjustment is generally based on a reasoning process drawing on the skill and experience of the valuer and undertaken to derive an opinion of value through a process of working forwards rather than a process of working backwards to justify an opinion of value previously formed. 49 Because properties are rarely identical, explicit and/or implicit adjustment for differences is obviously necessary but caution is required through making as few adjustments as possible, in a consistent manner, to ensure the reliability of the comparable sale when related to the subject property, with too much adjustment potentially rendering the comparable sale unsafe to use. Caution is, therefore, required where large explicit and/or implicit adjustments are required, with particular caution required for large implicit adjustments. 50 I note that under Section 40(2) of the Act, the Applicant has the onus of proof.

51 I consider that both Mr Hepworth and Mr Fogg's valuation reports lacked clarity and consistency. I further consider it to be disappointing that greater clarity and consistency could not be achieved despite their participation in two joint conferences. 52 The approaches adopted by Mr Hepworth and Mr Fogg were both based on direct comparison and variations of the hypothetical development method but differed in the adoption of a rate psm NLA and a rate psm Land Value, respectively, as the principal metric for application to the subject property. 53 Concerning the analysis of the directly comparable sale at 21-23 Burwood Road, Burwood, I note the incredible difference between the Land Value at Date of Sale derived by Mr Hepworth ($1,205psm) and by Mr Fogg ($2,806psm) which I consider to provide a weak foundation for adjustment and application to the subject property.

54 I note that Mr Hepworth adopted a more unconventional approach to the adjustment process and does not appear to have adjusted for differences between the directly relevant comparable sales and the subject property in terms of passage of time, size and frontage/aspect. 55 Conversely, I note that Mr Fogg adopted a more conventional approach to the adjustment process with explicit adjustment for differences between the directly relevant comparable sales and the subject property in terms of zoning/development, location, passage of time, size and frontage/aspect. 56 Concerning adjustment for zoning/development potential, I note that the subject property is zoned 3(c3) with a permissible floor space ratio of 1.5:1 but that 1 Elsie Street, Burwood is zoned 3(c2) with a permissible floor space ratio of 2:1. Accordingly, adjustment is required to the analysed rate for 1 Elsie Street, Burwood for zoning/development potential for application to the subject property. 57 Further, I note that for a hypothetical site of 1,000sqm, the permissible floor space area on an FSR of 1.5:1 would be 1,500sqm and on an FSR of 2:1 would be 2,000sqm, being approximately 33% larger. Following Mr Hepworth's evidence, I consider that a hypothetical purchaser may be likely to pay more for a site of 1,000sqm with a permissible FSR of 2:1 than for a site of 1,000sqm with a permissible FSR of 1.5:1. 58 Concerning adjustment for passage of time, Mr Fogg gave evidence based upon the analysis of repeat sales and with regard to statistics provided by a national property data organisation that there was a general rise in commercial property values from 2006 to 2008 equating to approximately 5%pa. Mr Hepworth gave evidence based on judgment that commercial property values remained unchanged over the period 2006 to 2007 and softened in the period 2007 to 2008. However, I note that the directly relevant comparable sales are transactions in March and April 2007 being close to the Base Date such that little, if any, adjustment may be required. I note that, based on Mr Fogg's evidence, a period of up to approximately three to four months would equate to an approximate adjustment of 1.25% - 1.67% for passage of time. 59 Having regard to Mr Hepworth and Mr Fogg's analysis of the sale of 21-23 Burwood Road, Burwood and adjustment for application to the subject property, I prefer Mr Fogg's approach which I consider to be a more conventional approach. 60 Concerning Mr Fogg's analysis of the sale of 21-23 Burwood Road, Burwood, I note that Mr Fogg estimated the replacement cost of the building to be $2,828,775 (based on an FSR reflecting the existing building on the site rather than the permitted FSR) and the cost to renovate to new to be $2,500,000 (which Mr Fogg was unable to substantiate in evidence) implying depreciation of 88.4%. I further note in the Joint Statement, Mr Hepworth adopted a depreciation rate of 57.5%, from within a band of 55%-60%, which I consider to be more appropriate given the characteristics of the property. Accordingly, I note that if a depreciation rate of 57.5% is expressed as the cost to renovate to new in Mr Fogg's analysis, the Land Value at date of sale may be approximately $1,301psm and at the Base Date may be approximately $1,369psm rather than the rates of $2,806psm and $2,873psm, respectively, referred to in the table above. 61 Concerning Mr Fogg's application of the analysed rate from 21-23 Burwood Road, Burwood to the subject property, I note that Mr Fogg made adjustments of +10% for location, -40% for size and -5% for frontage/aspect.

62 Concerning the adjustment for location, I note that the addition of 10% represents Mr Fogg's opinion that 21-23 Burwood Road, Burwood is an inferior location to the subject property which I do not accept and note that Mr Hepworth gave evidence in Court that he considered 21-23 Burwood Road, Burwood to be a superior location. I consider that, on balance, the subject property location is, at best, comparable and potentially inferior such that a downward adjustment should be made to the analysed rate for application to the subject property. The effect of a downward adjustment for location would be to reduce the adjusted rate for application to the subject property. 63 Concerning Mr Fogg's adjustment for size, I consider the adoption of an adjustment of 40% to be at or beyond the upper bounds of reasonableness of adjustment in this case. Accordingly, to reflect the comparability of the sale, I consider a smaller downward adjustment should be made to the analysed rate for application to the subject property. The effect of a smaller deduction for size would be to increase the adjusted rate for application to the subject property. 64 Concerning Mr Fogg's adjustment for frontage/aspect, I note that the deduction of 5% represent's Mr Fogg's opinion of the relativity of the superiority of a Burwood Road frontage/aspect to a Victoria Street frontage/aspect. I concur with Mr Fogg that a deduction is appropriate but consider that this should be much greater reflecting the relativities of the respective frontage/aspects. The effect of a larger deduction for frontage/aspect would be to reduce the adjusted rate for application to the subject property. 65 Accordingly, therefore, I consider that a downward adjustment for location, smaller deduction for size and larger deduction for frontage/aspect would potentially have the cumulative impact of very significantly decreasing the $1,301psm amended analysed rate as at the date of sale, referred to above, to a level in the range of below to approximating the $827psm ($1,530,000) contended by the Applicant for the subject property.

66 Having regard to 1 Elsie Street, Burwood, I note that Mr Fogg did not undertake an analysis of this transaction. 67 I note that Mr Hepworth's analysis, though more unconventional, resulted in a Land Value of $1,136psm as at the date of sale and his adjustment resulted in a Land Value as at the Base Date for application to the subject property of $1,175psm.

68 I further note that, if Mr Hepworth had not made an adjustment for excavation at 1 Elsie Street, Burwood, the adjusted Land Value at the Base Date would be $1,022psm. 69 Concerning Mr Hepworth's analysis of 1 Elsie Street, Burwood, I note that Mr Hepworth gave evidence that he considered 1 Elsie Street, Burwood to be in a superior location to the subject property and made a downward adjustment of 10% to the analysed rate. I accept Mr Hepworth's evidence in principle and consider that a significant downward adjustment of the analysed rate from 1 Elsie Street, Burwood for application to the subject property would be appropriate. The effect of a significant downward adjustment for location would be to reduce the analysed rate for application to the subject property. 70 Accordingly, therefore, I consider that the exclusion of an adjustment for demolition and a significant downward adjustment for location would potentially have the cumulative impact of decreasing the $1,136psm analysed rate as at the date of sale and so further supporting the $827psm ($1,530,000) contended by the Applicant for the subject property.

71 Having regard to the more conventional approach to adjustment for zoning/development potential, location, time, size and frontage/aspect, as adopted by Mr Fogg for the adjustment of other analysed sales, I consider the principles and metrics proposed by Mr Fogg may be applied to the adjustment of the analysed rate for 1 Elsie Street, Burwood as follows.

72 Concerning zoning/development potential, I noted above in a hypothetical example that the floor space increase arising from a difference in floor space ratio of 1.5:1 to 2:1 could be in the order of +33%. While specific evidence was not tendered concerning the level of adjustment of Land Value for differing floor space ratios prevailing in the market as at the Base Date, following Mr Hepworth's evidence I consider that such adjustment for zoning/development potential would be substantial resulting in a downward adjustment of the analysed rate from 1 Elsie Street, Burwood for application to the subject property. The effect of a downward adjustment for zoning/development potential would be to substantially reduce the analysed rate for application to the subject property.

73 Concerning location, I note Mr Hepworth's evidence above and consider that a significant downward adjustment of the analysed rate from 1 Elsie Street, Burwood for application to the subject property would be appropriate. The effect of a significant downward adjustment for location would be to reduce the analysed rate for application to the subject property.

74 Concerning time, I noted above that little if any adjustment may be required and that, based on Mr Fogg's evidence, a period of approximately three months between the date of sale in March 2007 and the Base Date would equate to an approximated adjustment of 1.25% for passage of time. The effect of an upward adjustment for time would be to increase the analysed rate for application to the subject property.

75 Concerning size, 1 Elsie Street, Burwood has a site area of 5,633sqm that is significantly larger than the subject property. I note that the Joint Statement by Mr Hepworth and Mr Fogg contains an attachment illustrating the generally inverse relationship between land value psm and land area upon which Mr Fogg gave evidence. Accordingly, I consider that a significant upward adjustment of the analysed rate from 1 Elsie Street, Burwood would be appropriate for application to the subject property. The effect of an upward adjustment for size would be to significantly increase the analysed rate for application to the subject property.

76 Concerning frontage/aspect, 1 Elsie Street, Burwood, has a significantly better frontage/aspect that the subject property which faces the rear wall of the Westfield Shopping Centre and a bus parking area. I consider that a downward adjustment of the analysed rate from 1 Elsie Street, Burwood for application to the subject property would be appropriate. The effect of a downward adjustment for frontage/aspect would be to reduce the analysed rate for application to the subject property.

77 Accordingly, therefore, I consider that a substantial downward adjustment for zoning/development potential, a significant downward adjustment for location and a downward adjustment for frontage/aspect, offset by an upward adjustment for time and a significant upward adjustment for size, would potentially have the cumulative impact of very significantly decreasing the $1,136psm analysed rate as at the date of sale, referred to above, to a level in the range of below to approximating the $827psm ($1,530,000) contended by the Applicant for the subject property. 78 Having regard to the evidence tendered, the cross examination and the summation presented, I consider that an analysis of the directly relevant comparable sales at 21-23 Burwood Road and 1 Elsie Street, Burwood and an adjustment of the analysed rates for application to the subject property support the assessment of value contended by the Applicant.

79 Having regard to the evidence tendered, I consider that the Applicant sufficiently proved the Applicant's case as required by section 40(2) of the Act.

Orders 80 The orders of the Court: 1. The Appeal is upheld. 2. The Land Value for the property known as 36-38 Victoria Street, Burwood as at the base date of 1 st July 2007 is $1,530,000. 3. No Order is made as to costs. 4. The exhibits are returned.

      Dr David Parker
      Acting Commissioner of the Court

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