WSTI Properties 490 SKR Pty Ltd v Valuer-General Victoria [2023] VCAT 734 | Case summary

Paragraphs [153] - [164] is an analysis of the correct approach to site value and whether a building adds value.

WSTI Properties 490 SKR Pty Ltd v Valuer-General Victoria [2023] VCAT 734 | Case summary | Zoe

[18]

'Landene' is a handsome Queen Anne style residence in St Kilda Road, an increasingly rare relic of a time when this location was lined with mansion houses but is now home to 20th century commercial mansions of another scale and style. Landene has an aesthetic and a social history which supports its site-specific heritage recognition under the Port Phillip Planning Scheme by way of a site-specific heritage overlay. Upon its purchase by the current owner in late 2019, it underwent a significant (primarily) internal renovation of high quality workmanship and a somewhat lavish style. The building is now used primarily for the storing and private showcasing of the owner's precious and eclectic collection of antiquities and a personal office space.
These two proceedings relate to the contested site value of _Landen_e which is located at 490 St Kilda Road, Melbourne (the subject property). The Applicant seeks review of the valuation decisions made in respect of the site value of the subject property at the relevant dates of 1 January 2020 (proceeding P1013/2021) and 1 January 2021 (proceeding P10049/2022). The review of those valuations is brought pursuant to s 22 of the Valuation of Land Act 1960 (Vic) (VLA).
The statutory scheme for valuation of land in Victoria is set out in the VLA. The VLA provides that, for the purposes of the Local Government Act 1989 (Vic), a valuation authority must cause a general valuation of rateable land within each council district as at 1 January in each calendar year.[2] These valuations are used by councils to levy rates under the Local Government Act 1989 (Vic)[3] and by the Commissioner of State Revenue to levy land tax under the Land Tax Act 2005 (Vic).[4] The valuation authority for the purposes of the relevant valuations here is the Valuer-General Victoria (VGV). The valuer who conducted the valuation now under review did so in accordance with appointment pursuant to s 13DA(1) of the VLA on behalf of the VGV.
The key issues in this proceeding turn on the correct interpretation and application of the provisions of the VLA in respect of 'site value' and 'improvements'. In particular the application of the provisions of the VLA to the task of valuation of land subject to a site-specific heritage overlay. The consequences of such an analysis will direct the identification of a correct approach in that context for determining the site value of the subject land.
This is the first proceeding which has attempted this task since the legislative changes which removed ss 2(8) and 2(9) from the VLA in 2019.[5]

[44]

The VGV contended that s 5A of the VLA sets out the framework for determining the value of land under the VLA. It noted:
- 37.1. Sub-section 1 describes the scope of relevant considerations broadly and does not prescribe what weight must be given all the relative weight to be given to various relevant considerations;
- 37.2. Sub-section 2 presupposes that the evidence of sales of other lands will be relevant to the exercise of determining land value and explicitly directs the valuer that regard must be had to certain specific factors in considering the weight to be attributed to evidence of sales of other land;
- 37.3. Sub-section 3 provides an inclusive list of a number of factors which must be taken into account, including the use to which the land is being put at the relevant time, the highest and best use which the land might reasonably be expected to be put at the relevant time, any potential use, the effect of any relevant planning scheme, the characteristics and location of the land, the extent condition and suitability of any improvements on the land, and the actual and potential capacity of the land to yield a monetary return;
- 37.4. That apart from the express requirements of section 5A(2) concerning the weight to be attributed to evidence of sales of other land, nothing about s 5A prescribes the order in which the considerations should be addressed, the weight to be given to any factor, nor the relative weight given to each factor in comparison to others; and
- 37.5. That it was equally important to observe that s 5A applies to all land valuation exercises. It follows that the manner in which a valuation is undertaken must be informed by the nature of the valuation. In this case the proceedings challenge the assessment of site value only.
The VGV submitted that it was well-established that a market value assessment for the purposes of determining compensation is a conceptually different exercise to the assessment of unimproved value because in the latter case the assessment of site value is artificially modified by the statutory definition at work.
It was argued that the valuer is required to undertake the theoretical exercise of arriving at a value of land as though "improvements" to the land had not been made. This task necessarily requires a proper understanding of the definitions of "site value" and "improvements" the identification of improvements (if any) in the adoption of a proper methodology to bring the improvements into account. The VGV emphasised that the definition of site value self-evidently required improvements to be disregarded. The term 'improvement' is defined in section 2(1) of the VLA with the explicit reference to improvements being "for the purposes of ascertaining the site value of land". It was noted that the definition of "improvements" is only relevant to the determination of site value.[12]
The VGV submitted that the definition of "improvements" expressly acknowledges that not all works are "improvements". The essential qualifying criteria is that the work must increase the value of the land.
The VGV submitted that it follows from the definition of "improvements" taken as a whole and read with the definition of "site value" that:
- 41.1. the phrase "work actually done" has a wide meaning and one sufficiently wide enough to bring within its scope buildings constructed on the land;
- 41.2. work done which does not add to the value of the land cannot be regarded as 'improvements'; and
- 41.3. work done which is not an "improvement" by definition cannot be disregarded in the assessment of "site value", or put more precisely in the language of the provision, it cannot be assumed that the works in question had not been made.
The VGV quoted[13] the second reading speech for the Local Government Amendment Bill 1968 (Vic), which introduced the definition of "site value":

[48]

The VGV argued that a central controversy in these proceedings involve the proper understanding of the relevant planning framework in particular the effect of the heritage provisions of the planning scheme. This argument was emphasised in their final submissions.
The VGV accepted that:
- 47.1. the land is subject to a heritage overlay;
- 47.2. the heritage overlay applies only to the land and building on it (i.e. it is site-specific) and the subject property is not part of a heritage precinct;
- 47.3. only external paint controls apply under the Schedule;
- 47.4. the land is not on the Victorian Heritage Register;[16] and
- 47.5. the evidence of the heritage experts is that full demolition of the building is unlikely or the building should be retained.[17]
It was argued that neither of the heritage experts say that the building cannot be demolished and to say as much would be to completely misunderstand the planning scheme; a regulatory framework which regulates the use and development of the subject land. In particular, the heritage overlay does not prohibit demolition, rather it requires a permit for demolition. In making a judgement about whether or not a permit for demolition should be granted, the planning decision maker is not confined to heritage considerations alone.[18] A planning decision maker may be confronted by an application which proposes to generate a significant benefit to the community in a way which can only be achieved if the heritage building is demolished.[19] The planning decision maker is required to have regard to the full range of planning considerations in assessing whether the planning discretion informed by an assessment of net community benefit favours the grant of a permit for demolition.
It was argued that the overlay only exists because the extant heritage fabric remains. If the house ceased to exist, but the overlay remained, development in accordance with the Commercial 1 Zone and DDO 26 could be achieved and there would be no reason to militate against the establishment of a tall building. The VGV concluded that it is the presence of the works themselves (i.e. Landene) which prevents the land achieving the value which could otherwise be facilitated by the planning controls. At the very least, a building which does not increase the value of the land cannot be an "improvement" by definition.
The VGV submitted that the proper construction of the definition of site value is not seeking "necessarily"[20] identification of the land in its vacant or natural state. They also contended that:

[52]

Whilst the VGV agreed with the Applicant regarding the importance of the 'Highest and Best Use' (HBU) analysis, where the parties differ is that the VGV contended that the exercise of the HBU assessment ought not be confused with the primary task or the first task which is to identify what is to be valued. This should not be confused or treated as a substitution for the task of examining the circumstances to ascertain whether or not the building increases the value of the land.
The VGV submitted that on the proper construction of the heritage overlay, and the other provisions in the planning scheme, it is the existence of the building which generates the heritage protection and that the constraint on value is a direct result of the existence of the building. All that is required is a sensible summation of the role that the building plays in arriving at value, having regard to the whole of the planning framework. It also follows that as a result of those controls, the HBU will necessarily be constrained compared to what else may be available.[24]
The VGV accepted that while the building is in place, a permit to demolish is unlikely to be granted and substantial development is highly unlikely and is prepared to proceed on the basis that it is highly unlikely.
However, the VGV considered that it is not the overlay which supresses the value of the land, but the presence of the building. The VGV emphasised the fact that the analysis of their expert valuer, Mr Haines, follows the provisions of the VLA by ascertaining what is to be valued; i.e. the value of the land disregarding improvements. Having concluded that the existing building does not increase the value of the land, Mr Haines was bound to take the building into account in assessing value.
The VGV contended that Mr Haines' approach was the correct or preferable approach. The task, it was argued, is what is to be valued having regard to the statutory definition. In the valuation exercise, the first question is not 'what is the HBU of the existing building?' but rather, having regard to the whole of the planning framework properly construed, 'is the existing building an improvement or not?'. Put even more simply the VGV posed the question - 'does the existing building increase or decrease the value of the land?'.
It was submitted that, as the evidence bears out, but for the building the land would be worth considerably more, whether or not the heritage overlay continued to apply.
That being the case, it follows that the building cannot be disregarded as an 'improvement' in the assessment of site value. Further, the VGV contended:
- 59.1. The approach of Mr Haines is correct - namely that in the assessment of "site value" one cannot disregard or discount the presence of Landene;
- 59.2. In the valuation exercise the existence of the most recent sale of the land is compelling evidence relevant to the assessment of site value;
- 59.3. The correct or preferable assessment of the site value informed by the proper construction of the VLA and the planning scheme would return a higher value than the assessed value of $6.2 million; and
- 59.4. The application should be dismissed because the applicant cannot establish that the value was too high.

[54]

The VGV criticised the direct comparison approach of Mr Jackson whereby he utilised an improved sales analysis which involved deducting the sale price from the estimated cost of replacing the existing buildings and works to arrive at a residual value for the vacant land. The VGV contended that a central flaw in Mr Jackson's analysis was the failure to account for the fact that the building is not an "improvement". Rather, it was said that Mr Jackson's approach incorrectly disregarded his own finding that the building does not increase the value of the land.
Notwithstanding that finding it was suggested that Mr Jackson proceeds to treat the building as an "improvement" by purporting to ascertain and adjust the replacement cost of the building. The VGV criticised Mr Jackson as erroneously commencing the valuation assessment by adopting the wrong starting point and asking the wrong question, as compared with Mr Haines.
The improved sales analysis proceeds on the basis that the HBU of the land is the current use (the existing building) and in that context because the building contributes to the economic return of the land it must be treated as an "improvement". This approach was criticised as bearing no relationship to the assessment required by the VLA.
The VGV contended that the approach was flawed in two further ways. Firstly, that the improved sales analysis undertaken by Mr Jackson was done by starting with the value of the subject land itself, assuming what he regards as the "improved value" of that land including the building, and then deducting from that figure amounts which reflect the replacement cost of the building. This approach underscores the fallacy embedded in the method as the planning controls do not require replacement of the heritage fabric. The land could be developed to a different HBU. It was submitted that assessments of site value which start with the improved state of the subject land and include the value of improvements have been specifically rejected by the courts.[25]
The second issue raised as a criticism was that the analysis assumes that the cost of construction is equal to the contribution that the so-called "improvement" adds to the value of the land. However, the value of improvements is not the same thing as the cost of improvements and cost does not always equal value.[26]

[57]

The Applicant agreed that the proceeding largely turned on the correct construction of the VLA and more specifically the definitions of "site value" and "improvement". However, it placed greater reliance on an interpretation of the effect of the planning controls than the VGV. In particular, it was argued that the effect of the site-specific heritage overlay on the existing building and works was that of restricting the HBU of the property to its existing use.
The starting point of the analysis proffered by the Applicant was that consideration of the HBU was the critical and commencing point of the assessment. The Applicant argued that the valuer's methodology on the returned valuations did not properly apply the fundamental principle of valuation recognised in s 5A(3)(a), being the HBU of the land.[29] It was argued that the concept of multiple HBU's is not countenanced in the VLA, which was in effect what the VGV's valuer had done.
It was submitted that the determination of the HBU required due regard to planning and similar restrictions on the use of the land,[30] to be assessed at the time of the valuation.[31] In the four reports prepared by Mr Haines, it was said that he did not clearly opine a single HBU.
Rather, as the Applicant contended, Mr Haines' valuation methodology and instructions adopted or sought multiple contradictory HBUs for the subject property.
- 72.1. In scenario 1 - Mr Haines is instructed to adopt a HBU of a 15 to 17 Storey residential tower.
- 72.2. In scenario 2 - Mr Haines is instructed (it appears) to assume that he HBU constrained by the Heritage controls is applicable to the property.
The Applicant argued that the view taken by the VGV, that the heritage overlay controls do not apply if the building was not on the property, was not the correct analysis. The heritage overlay applies by operation of the Port Phillip Planning Scheme, and unless or until clause 43.01 is amended the property remains subject to the heritage overlay which applies to both the land and the built form.[32] The Applicant contended that even where the valuation exercise involves making an assumption that the building does not exist, it does not follow that the heritage restriction should be ignored.[33]
The Applicant criticised the VGV's methodology as internally contradictory. The Applicant criticised the following points in particular:
- 74.1. The VGV contended that in assessing whether the building is an 'improvement' it is necessary to ignore the heritage controls on the property, on the assumption that heritage controls would not apply if the building was not on the property
- 74.2. On the VGV's analysis, it follows that the building is not an 'improvement' and should not be disregarded for the purposes of determining site value.
The Applicant stressed that this logic is flawed, because if the building is not disregarded there is no statutory basis on which the buildings can be distinguished from the land and the heritage controls disregarded. In effect, the building is treated as part of the land.
The Applicant submitted that, inconsistently with his view that the building on the property is not an 'improvement' because the works and materials do not increase the value of the land, Mr Haines recognised that the additional renovation work increases the value of the land for the 2021 relevant date in one aspect of his calculations. He also failed to deduct these recognised improvements in assessing the site value.
On the VGV analysis, assessing whether a building is an improvement would always involve the artificial comparison between a development site unconstrained by heritage restrictions and a site constrained by restrictions. In these circumstances, the Applicant submits that it is difficult to envisage any realistic scenario in which a building on a property subject to site-specific heritage overlay could be an 'improvement' within the meaning of the VLA. The Applicant argued that the VGV's approach would lead to an absurdity in the assessment of heritage properties.
The Applicant was critical of the VGV for not electing to call Ms Tan, an employee of Matheson Stephens Valuation, who was the valuer who made the decision on the returned valuations under review. Ms Tan was an employee in the same firm as Mr Haines, the valuer called on behalf of the VGV. Ms Tan was not called, nor was any evidence given by Mr Haines in respect of the methodology adopted by Ms Tan. The only information provided to the Applicant (or for that matter to the Tribunal) was that which was exchanged during the objection process.
Mr Haines valuation methodology was therefore criticised for being inconsistent with that of a member of his own firm. The return values for the relevant dates of 1 January 2020 and 1 January 2021 both showed a site value of $6,200,000 and a CIV of $7,200,000, recognising $1 million in improvements.

[58]

The Applicant set out the statutory construction approach which it argued was the approach the Tribunal should adopt. The Applicant submitted that although there are a number of different valuation methodologies which may be consistent with the requirements of the VLA, the language of the VLA suggests that at least the following basic steps are required:
- 80.1. First, per s 5A(3)(a), it is necessary to identify "the highest and best use to which the land might reasonably be expected to be put at the relevant time and to any potential use". In doing so, one must consider the effect of any Act, regulation, local law, planning scheme or other such instrument which affects or may affect the use or development of such land.
- 80.2. Second, it is necessary to identify what parts of the land may or may not comprise 'improvements'. That is because in order to apply the hypothesis required by the definition of 'site value' (that improvements have not been made), all components of land comprising 'improvements' must first be identified;
- 80.3. Third, in order to identify whether any part of the land constitutes an 'improvement' it is necessary to identify all 'work actually done or material used on and for the benefit of the land' and then undertake an assessment whether that work or material has the effect of increasing the value of the land and is unexhausted at the time of valuation.
- 80.4. Fourth, it is necessary to apply the conclusion reached on the existence of 'improvements' to the definition of 'site value', by assuming that such 'improvements' have not been made and ascertaining the value of the land in that hypothetical state, applying the usual Spencer test.[34]
The Applicant submitted that on the one hand the VGV accepts that the HBU is its existing use constrained by the heritage control, but on the other hand asserts that one can disregard that HBU to determine whether the heritage building constitutes an 'improvement'. The VGV presented a case that the land could theoretically be developed for a 15 to 17 storey tower to establish that the heritage building does not constitute an improvement, and the Applicant asserted that this submission was "most egregious" because such a building could never realistically be built.[35]
Both parties discussed the two different jurisprudential approaches to the question of construction concerning the 'improvements' arising in Commonwealth Custodial Services Ltd v Valuer-General (Commonwealth Custodial)[36] and Caltex Oil (Aust) Pty Ltd v Chief Executive, Department of Lands (Caltex).[37] It was argued by the Applicant that the VGV's methodology does not fit within either of the recommended approaches in these leading cases.[38]

[59]

Applicant made a number of submissions in respect of the returned valuations in response to the VGV's submission that the returned valuations are incorrect. These included:
- 83.1. On the Rate Notice for the relevant date of 1 January 2020, the site value was $6,200,000 and the capital improved value was $7,200,000. The only conclusion that can be drawn is that the heritage building increases the value of land by $1,000,000 and therefore constitutes an improvement.
- 83.2. On the Rate Notice for the relevant date of 1 January 2021, the site value was $6,200,000 and the capital improved value was $7,200,000. The only conclusion that can be drawn is that the heritage building increases the value of land by $1,000,000 and therefore constitutes an improvement.
- 83.3. On the returned valuation at the relevant date of 1 January 2019, the site value was $6,200,000 and the capital improved value was $7,200,000. The site value was objected to and the valuer upon consideration of the objection and the objector's reasons that the land was constrained by the heritage control, recommended an adjustment that was confirmed by the VGV. The confirmed site value was reduced from $6,200,000 to $2,850,000.
- 83.4. Mr Haines accepted that the renovations to the building increased the value of the land in the 2021 valuation yet he attributed no value to the building itself.
The VGV asserted that the returned valuer adopted an incorrect methodology and asserts that the Applicant takes the same view. The Applicant disagreed with that proposition. The Applicant's analysis was that the return valuer, having found that the heritage building increased the value of the land, deducted the value of the building from the value of the land to determine site value.[39] Therefore the Applicant agreed with valuer's methodology on that point, just not with her final result for the valuations.
The Applicant submitted that the VGV is seeking to persuade this Tribunal in respect of a different valuation conducted on a different methodology, disengaged from the return valuation completely. Citing S & JG,[40] this is not permissible. The VGV makes no effort to speak to the return valuation and engage with the return valuation before the Tribunal. This is in circumstances where the VGV is uniquely placed to address the Tribunal as to what the return valuer did and the methodology used by that return valuer.

[60]

The Applicant submitted that:
- 86.1. Both valuers agree that the sale of the subject property in August 2019 for $8,250,000 is the best evidence of the market at that point in time.
- 86.2. The market was relatively flat between August 2019, January 2020 and January 2021.
- 86.3. If the starting point for the improved value is $8,250,000, the question becomes - What is the added value of improvements to that figure or at least by reference to that date?
On behalf of the Applicant, Mr Jackson's primary approach was an improved sales analysis. His improved sales analysis started with the purchase of the land in its improved state and then the following deductions were made to deduce a land value:
- 87.1. Profit and risk for a development of this nature;
- 87.2. Planning period for the construction and the estimated construction costs including a depreciation allowance; and
- 87.3. Holding costs and interest during the period for construction.
Mr Jackson's secondary approach was a hypothetical development approach.
The Applicant's Quantity Surveyor, Mr Grimes undertook a detailed costing of the building based on his inspection of the Subject property on 23 July 2020, his inspection had regard to the ornate heritage features of the building. The importance of the date of inspection is that the costs of the works were based on the condition of the building at the time of the inspection and this was before the majority of the renovations were conducted.
The Applicant raised the following matters in respect of the evidence of Mr Lau, the VGV's Quantity Surveyor:
- 90.1. Mr Lau's inspection was on 22 November 2022, and his evidence was significantly constrained by the information provided to him. The property had significantly changed and Mr Lau had to make assumptions about the state of the property and finishes used at the earlier dates.
- 90.2. Mr Lau assumed the condition of the building as at 1 January 2020 was as in the Harcourts' photographs.[41] This assumption was incorrect. Prior to the purchase in August 2019 the property had undergone a significant renovation, including repainting, installation carpets and renovations of bathrooms and kitchen.
- 90.3. Mr Lau made assumptions regarding the condition of the building at 1 January 2021 based on his own extrapolation from the Harcourt's photographs and his site inspection in November 2022.
- 90.4. Mr Lau's costings of the heritage building were infected by his assumption that the building could be recreated simplistically with off the shelf replica materials.
The Applicant's ultimately emphasised that the VGV's case is incongruous in that the heritage restrictions do not apply when determining whether the heritage building constitutes an improvement. This is despite the VGV accepting that the HBU of the land is its existing use, with both heritage restrictions and heritage controls present.

[75]

The key differences between the evidence of the quantity surveyors are summarised as follows:
- 103.1. General - Grimes costing reflects the complexity and bespoke design and that replacement cost should be based on identical materials and construction methodology. Lau costings are based on modern construction techniques that can be adopted to replace the building while achieving a modern replica heritage detail.
- 103.2. Preliminaries - Grimes allowed 25% for highly detailed construction work. Lau allowed 12.5% based on the assumption that the works will be replaced with modern construction techniques and modern replica materials.
- 103.3. Staircases - Grimes costings are for custom and highly detailed mahogany hardwood timber main stair and less detailed secondary timber staircase. Prowse costings are for a replacement staircase with a modern timber frame and landings with decorative handrails and balustrades.
- 103.4. Fireplaces and Chimney - Grimes costed custom fireplaces, hearths, surround and mantels with brick chimneys. Prowse has allowed for modern replica fireplaces, brick chimneys and decorative chimney pots.
- 103.5. External Walls - Grimes costed custom replica window framing with double glazing, double and triple brick walls, heritage façade detailing. Both costs include scaffolding. Lau has allowed for double brick wall using modern construction techniques and replica bricks with mouldings and arches.
- 103.6. Internal Doors - Grimes costed custom replica solid timber doors with feature door frames, architraves and reveals. Lau has costed timber framed modern replica doors and hardware.
- 103.7. Ceiling Finishes - Grimes assumed lath and hard plaster system to ceilings with heritage detailing, cornices and roses and some timber ceilings. The Michael Taylor Architecture drawings have been referenced. Lau generally allows for sheeted plasterboard with decorative timber ceiling with allowances for bulkheads, access panels and replica ceiling roses.
- 103.8. Heating - Grimes included new hydronic heating with custom replica panels and new ducted air-conditioning throughout. Lau includes hydronic hearting to current standards and modern replica panels. Fireplace and stone hearth included. Air-conditioning is excluded.
- 103.9. Electric Light & Power - Grimes costed electrical wiring and Main Switch Board (MSB) to current standards, custom replica lights, switches and General Power Outlets (GPO's), chasing cabling into brickwork. Lau's costings are for electrical wiring to current standards with modern replica light fitting with modern techniques.
- 103.10. Landscaping and Improvements - These are included in Grimes and excluded in the Lau costings.
- 103.11. Building Cost Index Adjustment - Grimes pricing was complete in January 2020 so no need for BCI adjustment. Lau based costings on rates in December 2022 and then used the AIQS Building Cost Index adjusted the costs back to January 2020. A different index has been applied to the replacement works in January 2021.
- 103.12. Additional Works - This was not included in the Grimes report as the information was not available at the time of inspecting (circ July 2020). Lau costings as at 1 January 2021 includes additional works such as additional slab to the garage, security bars to windows, glazed sliding door to garage, infill walls, decorative internal doors and gates, changes to floor finishes, installation of a feature acrylic ceiling, built in joinery and building security.
- 103.13. Construction time - This is based at 18 months in Grimes' costings and 14 months in those of Lau.
- 103.14. Design Contingency - Grimes applied 5% allowance for design changes. There was none applied in Lau's costings on the basis that all current works have been measured and quantified.
- 103.15. Contract Contingency - Grimes applied 10% allowance for additional costs during construction. Lau has allowed 5% on the basis that the project is fully documented, project risks are resolved and undertaken with modern construction methods.
- 103.16. Professional Fees - Grimes applied a 12% allowance and Lau has allowed 14% based construction costs including contingency.
- 103.17. Mr Lau's evidence is that construction time, design contingency, contract contingency and professional fees are all matters of professional judgement.[49]

[79]

The parties disagreed on the correct approach to determine site value, and on the sequencing of tasks that is required to ultimately ascertain whether the buildings add value to the property.
The Applicant considers that the first task is to consider what is the HBU of the land. The VGV disagrees. Whilst they do not quibble with the importance of the HBU as a crucial factor in the ultimate assessment, they do not agree that it is the starting point. The starting point in the VGV's approach is the assessment of 'improvements' and whether the building adds value.
The VGV in opening submitted that it is important to observe that apart from the express requirements of s 5A(2) concerning the weight to be attributed to sales evidence, nothing in s 5A prescribes the order in which considerations should be addressed, the weight to be given to any particular factor, nor the relative weight to be given to each of the factors.
We agree with the parties that the 'starting' point in the valuation process is fundamental and is the key divergent point between the parties which triggers the valuers' respective and differing approaches. The problem for the VGV is that from a practical perspective, the key element in ascertaining the role the building plays in value, that is, whether the building adds value, is first knowing what the HBU of the property is.
The VGV's approach in dealing with this problem it to apply two HBUs for the property:
- 111.1. The first is 'Scenario 1' - vacant land (without the building and works having been undertaken) where the HBU is a 15-17 storey building (unencumbered value); and
- 111.2. The second is 'Scenario 2' - with the site containing the existing building and works where the HBU is the existing use (encumbered value).
Mr Haines explains that contrasting the two scenarios enables him to determine whether the buildings on the land constitute improvements as per the definition in s 2 of the VLA. Notedly, in cross examination, Mr Haines gave his expert opinion that in the HBU assessment in Scenario 2, where the site contained the existing buildings and works, the buildings do add value.
Notwithstanding that the definition of site value includes some hypothetical elements, not only is it highly unorthodox in valuation practice to use two separate HBUs in the same valuation to complete different steps in the valuation process, it is inconsistent with our view of the proper approach to the legislation. We will come back to the importance of logic and practical sequencing in the valuation process in accordance with s 5A of the VLA shortly.
The Applicant's referred to the Caltex and Commonwealth Custodial cases (see above at [82]). The Applicant considers that both approaches have been adopted in this jurisdiction and that both approaches consider the HBU of the land before ascertaining whether the works are improvements. In the Applicant's view, the VGV's methodology does not engage with either approach.
The approach approved by Commonwealth Custodial (a NSW case) is to consider what the natural state of the land is and consider whether the building increases the value of the land by reference to that natural state.[50] In Caltex (a Queensland case), the Court endorsed the approach of considering what the HBU of the land is and whether the building increases the value of that use.[51]
The VGV considered that the Caltex and Commonwealth Custodial cases are divergent lines of authority and agrees that these decisions form no part of the VGV's case; the reasons being that neither case concerns the legislation in issue here, neither case concerns the peculiar circumstances that arise in heritage matters, and the definition of improvements does not appear in the legislation under consideration in either of the two cases. However, the VGV considers that the Commonwealth Custodial matter cannot apply here because of the nature of the legislation being dealt with, and in relation to Caltex, the VGV considers the approach draws out one factor from s 5A (the HBU) and gives to that factor determinative weight.[52]
Whilst neither of these cases are binding on this Tribunal and the role of the HBU within s 5A can be arrived at by a logical consideration of the planning process, we see the attraction of the logic in Caltex, in that it is important that the HBU test occurs at a particular point in the assessment of site value and that the answers at that point inform the subsequent consideration of other s 5A factors.
The process for the valuer is a theoretical one, as all valuation exercises are. Some valuation exercises are more theoretical than others. In the case of a 'site value' assessment, apart from the factors set out in s 5A, there is the additional import into the exercise of the definition of site value which requires the valuer to assume that the buildings and works are absent, where the buildings and works 'add value'. Where there is no added value the site is valued as a whole with whatever buildings and works are on the site.
Section 5A(3) sets out 6 elements which, where relevant, should be taken into account. The sequence in which the 6 elements are considered will largely be up to the valuer. The legislation does not direct a sequence or weighting to be given to the factors in s 5A. However, it would be logical to consider for example, the specific attributes of the subject property - such as location, land area, topography, shape, extent and condition of improvements, planning controls, other instruments etc. - before being able to consider the HBU. This would then enable the consideration of the suitability of any improvements, which can only be made in the context of the HBU. This in turn would inform what sales might be appropriate (at the relevant time) and the degree of comparability of those sales.
Following that logic, we are of the view that the factors in s 5A, including the use to which the land is being put, the HBU and any potential use (having regard to the other 5 elements in Section 5A(3)) should be fully considered before any of the statutory definitions, such as site value can be determined.
To have as the starting point the question 'do the improvements add value?', as contended by the VGV, is in our view untenable. It is untenable because the answer is - 'it depends'. It depends on the consideration of the factors in s 5A. Mr Haines has only been able to answer this question at the starting point of his valuation rationale because he has been given instructions to, essentially, compare an unencumbered site with an encumbered site. This will never result in a difference that 'adds value' in an intensive development zone purely because of the plain English meaning of the words unencumbered and encumbered. This comparison is an artificial approach which is, in our view, contrary to the legislative intent of the VLA.
Therefore, whilst we agree that the Commonwealth Custodial approach is the broader approach, we consider given the nature of the property being subject to a heritage overlay, that the Caltex approach is most similar to the approach that we consider is required in this case and in the context of the legislation of this jurisdiction. We disagree with the VGV's submission that the definition of improvements does not appear in the legislation under consideration in either case. The Caltex decision considered the Queensland Valuation of Land Act 1944 which contained at the time similar definitions to Victoria, specifically and relevantly in this matter, the added value of improvements in the definition of site value.
Fundamentally, the highest and best use will inform the next question of whether or not the improvements add value to that use.
The Caltex decision supports this view:

[80]

If the service station structures add value to the land, then the highest and best use of the land must be something which involves use of those structures, not their demolition. If the highest and best use of the land is for residential purposes, then the service station structures can add nothing to the value of the land as vacant land. If anything, the value of the land with the structures on it should be less than its value as vacant land, since the structures must be demolished and removed in order to develop the land for its highest and best use. For the purposes of residential use, they are a disadvantage.

The definitions of "improvements" (section 6), "value of improvements" (section 5) and "improved value" (section 4) demonstrate that, in this statutory context, an improvement is something which adds value to the land. It follows that a structure on land which adds no value to the land as vacant land is not an improvement within the meaning of the Act. If it detracts from the value of the land as vacant land it may amount to what has been called "worsement".

It cannot be said whether a structure on or other quality of land amounts to an improvement in this sense until it is known whether the structure or quality enhances the value of the land. Any enhancement in turn will usually depend upon whether the structure or quality advances or inhibits a particular use. Thus, whether the structure or quality constitutes an improvement cannot ordinarily be known until the highest and best use of the land is determined. In our view, to approach the valuation process in the manner contended for in the argument before us is to assume the conclusion. The Act does not require or permit such an approach.

The Valuation of Land Act is not a code of valuation methodology. It assumes the existence of the valuation process and requires its application in the cases and with the modifications prescribed by the Act. The starting point of that process is the determination of the highest and best use of the land being valued. Only when that is done can it be seen whether the land is to be valued as improved or unimproved land. If, but only if, it is to be valued as improved land, the statutory assumption must be made. The highest and best use of the land is not to be determined on the assumption that the structures do not exist because whether the Act requires that assumption to be made ultimately depends on what is the highest and best use of the land.[53]

[87]

A central argument in this case concerns the impact or effect of the heritage overlay when assuming the improvements had not been made, for the purposes of assessing site value.
A key fact evidenced in these proceedings (evidence on which both parties agree), is that the building on the subject property should and would in fact be substantially retained. It was agreed though that there was no absolute prohibition on the demolition of the building.
The VGV argued that as the heritage overlay is site-specific (that is the heritage significance is dependent on the extant building being in place) removal of the building meant that the effect of the heritage overlay was diminished such that a very significant development opportunity presented itself. As a significant development opportunity would arise, that demonstrated that it was the building which had a chilling effect on the value of the site. It was argued that the effect of the removal of the buildings caused the overlay despite remaining in place was effectively redundant or had no work to do.
The fallacy in this analysis is that it equates the theoretical assumption of removal of the building, for the purposes of site value assessment, as being the same as if the building were in fact not there. Rather, it is the value of the building, assuming it adds value, that is to be ignored. The VGV's analysis would also not be consistent with the policy approach to improvements in that the land owner is given the benefit of the works done to improve the land, thus not adding to the valuation which results in a taxation consequence, but the results in the labour and improvements are discounted or removed from the value of the site.
Outcomes based on the planning matrix of controls which govern a decision on a specific development of high social value are possible, such as exemplified by the factual circumstances in Boroondara City Council v 1045 Burke Road Pty Ltd[55] and The University of Melbourne v Minister for Planning.[56] However, this is theoretical in the circumstances here. This analysis also does not take into account the temporal component, in that the assessment is being made at a particular date. In our view a realistic, rather than highly hypothetical approach, needs to be taken and one which recognises that it is the planning control effect which is to be taken into account not the theoretical removal of the building to effectively retrofit an argument that no building equates to no heritage control. To equate a vacant site devoid of heritage controls as equivalent in the circumstances here is plainly an error.
In assessing the value of improvements, s 2(2) of the VLA prescribes how this is to be done:

[98]

The assessment of site value

It is desirable that I briefly reflect on the concept of site value and methods of assessing site value.

The concept of the "value" of land is simple enough, even though often difficult to assess. Traditionally this has been based upon the principle of a transaction between a willing buyer and a willing seller. This concept was elaborated upon by Isaacs J in the oft-quoted case of Spencer v The Commonwealth. A contemporary interpretation might be the amount that would result from voluntary bargaining between a vendor and a purchaser, both being fully knowledgeable of the property being transacted and of all the factors that influence its value.

Site value is an artificial construct; that is, it depends on assumptions. However the valuation of vacant land will generally require no assumptions, with the result that the Spencer principles can be used without modification. However in a case like the present, where the land is improved by a substantial building, it is necessary to make an assumption (or assumptions). This can make the valuation process difficult.

Methods of assessing site value

The Privy Council has sought to explain the way in which unimproved value is to be assessed. In Toohey's Ltd v The Valuer General it made the following observations in relation to the concept of "unimproved value" (which is a similar concept to site value):

Words could scarcely be clearer to show that the improvements were to be left entirely out of view. They are to be taken, not only as non-existent, but as if they never had existed. It is, therefore, to approach the question from a completely wrong point of view to begin with a calculation which takes in the improvements and then proceed by means of subtraction of a sum arrived at by an independent valuation in order to find the required figure. What the Act requires is really quite simple. Here is a plot of land; assume there is nothing on it in the way of improvement; what would it fetch in the market?

In Tetzner v The Colonial Sugar Refining Co Ltd the Privy Council qualified this by observing that the assumption required by the statute was that the improvements "had not been made" - not that "they never had existed" - so that improvements on all other land ought be taken into account in assessing the unimproved value of a particular property, even if those improvements were consequential on the improvements required to be disregarded.

The "simple" method identified in _Toohey's Ltd i_s not always easy to apply in practice. This is because there may be few, if any, sales of vacant land which are comparable to the subject land when the latter is assumed to be without improvements. Hence it is now recognised that it is also legitimate to assess site value by assessing the value of the land as improved, calculating the value of the improvements, then deducting the latter from the former to deduce site value.

The "improved sales" method is recognised in section 2(2) of the Act, which I have set out in paragraph [8]. But I do not regard this provision as establishing the only or the main method of assessing site value. Rather the purpose of the sub-section is to emphasise that when using this method the value of the improvements is not the cost of those improvements (or the current day cost of those improvements), but the sum by which the improvements increase the value over the value it would have if it was vacant.[65]

[100]

The decision of the High Court of Australia in Maurici v Chief Commissioner of State Revenue might be thought to place some of the matters I have set out in doubt. However this is not so.

The legislation considered in Maurici was section 6A of the Valuation of Land Act 1916 (NSW) which, although different to the Victorian legislation, adopted the same essential framework

The Maurici decision has been carefully considered by the New South Wales Court of Appeal in AMP Henderson Global Investors v The Valuer General. Speaking for the court, Tobias JA said that, in his opinion, Maurici stood for the following propositions only:

a) Section 6A(1) of the Act does not require when utilising the comparable sales method of valuation that only sales of vacant land should be considered.

b) Confining one's consideration to only sales of scarce vacant land and disregarding sales of improved land which would otherwise be as comparable as the vacant land sales in terms of timing, location, outlook and other relevant features, offends the principle that a reasonably representative group of comparable sales should be considered when applying that methodology.

Tobias J continued that, in his opinion, Maurici does not stand for the proposition that if the only comparable sales are those of vacant land, they must be rejected because they are too few in number to constitute a "representative group of comparable sales". He observed that Maurici proceeded upon the assumption, and also the fact, that there were many sales of improved land in the vicinity of the land to be valued which could have been established as comparable and the fact that those sales were of improved land would not detract from their comparability. I agree with Tobias JA as to what the Maurici decision stands for; and what it does not stand for. I would add that it does not stand for the proposition that improved sales are generally more reliable than unimproved sales in determining the unimproved value of land.[66]

[112]

Mr Haines in cross-examination was asked whether, if he undertook the same exercise of comparison between Scenario 1 and Scenario 2 but made one fundamental difference, that in Scenario 1 instead of assuming a 15 to 17 storey tower could be built all that could be built is the form of the structure that is presently there, would he accept that the work or material that is there increases the value of the land. Mr Haines's response was "Yes".[75]
The Tribunal was assisted by the ability to question the valuer experts concurrently. The Tribunal put the following general propositions to the valuers:[76]
- 159.1. If the site value equals the capital improved value the buildings add no value - Mr Jackson and Mr Haines both agreed;
- 159.2. If the site value is less than the capital improved value the buildings add value - Mr Jackson and Mr Haines both agreed; and
- 159.3. Building cost may or may not equal value - Mr Jackson and Mr Haines both agreed.
The Tribunal accepts that the site value and the capital improved value and their respective definitions require separate valuations. However, the difference between the valuations (site value and capital improved value) as is the evidence given by both valuers, provides the answer to whether or not the buildings add value to the land.
There may be buildings that do not add value that form part of the site value and therefore the site value may be the same as the capital improved value. However, as required by the definitions of site value and improvements, if the buildings (as is in issue in this case) do add value, they must be excluded from site value and included in capital improved value, to do otherwise would be 'double dipping' and inflating the site value.
Therefore, in our view, we consider that the correct approach in ascertaining whether the improvements add value is to compare the market value in its full current state, that is, including its limited development potential and existing structures with the market value that the land would have with the same development potential, without the buildings on the land.
As the High Court said in Maurici, what is required is that the physical improvements, with any value which they attached to the land on which they are situated be excluded from the valuer's computation.[77]
Turning to construction costs, cost does not always equal added value, which is why building costs should be treated cautiously and cross checked with sales evidence where possible. The construction cost may represent an overcapitalisation or simply a misalignment with what a property owner spends on construction or renovation as compared to what the market is prepared to pay for.

[149]

We now turn to the approaches of each of the Valuers, Mr Haines, Mr Jackson and take into account the work undertaken by Ms Tan and the evidence that each relies upon.
Mr Haines and Mr Jackson in considering what the HBU is have concluded that the existing use is essentially the HBU. Inherently, Mr Jackson considers that the building adds value. In cross examination, Mr Haines, agreed that the building adds value (for a heritage encumbered HBU).
There is no debate by either valuer that a greater than the 2 storey building could be achieved. It was also agreed that any potential small change to the GFA would be immaterial.
We reject the methodology of comparing the HBU of the site essentially unencumbered (albeit that Mr Haines says that the Heritage Overlay exists it just has no work to do) with an encumbered site. We consider this approach to be flawed, for the reasons we have already given. By comparing an unencumbered site with a HBU of 15 to 17 storeys, with an encumbered site with a HBU of a 2-storey single building, this is not an 'apples versus apples' comparison. It therefore fails the objective of ascertaining whether the building adds value.
For the 2020 site value, Mr Haines considers that the buildings are not improvements because they do not meet the definition of improvements. On this view, the buildings are not artificially removed because they do not add value.
Mr Haines flawed analysis continues in his 2021 valuation. He attributes value to the renovations but attributes no value to the 679m2 two storey building itself. Once ascertaining that these improvements do add value, he then 'adds' the value to the site value rather than deducting the value of what he has determined to be improvements. The VGV conceded this approach was incorrect and we agree. We note that any added value should be deducted from the market value (capital improved value) not the site value. The site value by definition excludes the added value of improvements, therefore in these circumstances there was no need for any adjustment to be made to the site value.
The sales evidence that Mr Haines relied upon of other heritage sales, we consider were underutilised and could have been further analysed to dissect the added value of the buildings and hence the indicative value of the land in each case. Mr Haines analysed the sales on an 'all in' land and buildings rate per m2, his opinion was that the land and buildings were indivisible.
We disagree that the land and buildings were indivisible. The Summation Method is used precisely for this objective. The Summation Method splits the integrated parts of a property into value components which can then be directly compared to available sales evidence analysed on the same basis. We consider that the land and buildings were capable of dissection and the results could have been informative, particularly in the context of a market sale of the subject property in market conditions the same at the relevant dates.
In questions from the Tribunal as to whether the Valuers had considered comparing comparable sites and analysing improved sales to attribute an added value of improvements, Mr Haines said that he had considered in a general sense but had more contemplated the notion in the reverse of how much they would sell for without a heritage overlay or restriction and determined that those buildings don't add value. Mr Jackson's view was that there needed to be consistency of the HBU.[103]
We agree with Mr Jackson in the importance of consistency in the HBU. We observe that an analysis of comparable land sales of prestige sites with a similar HBU and a similar analysis on quality period houses of substantial size may have enabled an added value to be deduced and then a summation methodology applied. The very purpose of a summation approach is the separation of land and buildings as we have explained.
Turning to Mr Jackson's analysis and his two methodologies; Mr Jackson appears to have proceeded on the basis that the hypothetical purchaser is a developer or like profiled buyer with the intent to 'flip', that is, buy with the intent to develop and then re-sell in both his methodologies. This may be a profile of a willing but not anxious purchaser but does not fully consider other potential purchasers such as owner occupiers who would not factor in a substantial 'profit and risk' or factor in full recovery of interest and holding costs at full commercial interest rates.
We do not agree that the market for this type of property - a two storey single occupancy building, would be restricted to a buyer with a developer profile (and developer profit expectations). We consider that other buyer profiles, whether it be investors or owner occupiers, would not factor in immediate profit and risk in the way the analysis has been done and would be more focused on beneficial occupation, with long term capital growth.
We also consider that the Hypothetical Development Approach (commonly known as the Turner method) albeit a secondary methodology, has greater application for developments such as subdivisions and multi-unit developments where a land parcel, purchased in-globo and then developed for re-sale of created lots to multiple end purchasers. It has limited application or robustness in this type of scenario before us.
Both of Mr Jackson's valuation methodologies can be characterised as 'residual land value' calculations methods also known as Hypothetical Development Approach. It is a method which requires multiple high impact assumptions that are difficult to verify through market sales analysis. That presents material reservations in relying on the method. The methodology would have been enhanced if he had shown, through sales analysis, that this method does actually lead to the price that this type of property (single occupancy prestige house) would achieve.
It is not suggested that this is an easy or straight forward exercise. However, both Mr Haines and Ms Tan in their respective lists of sales, have some sales that could have been examined with Mr Jackson's methodology.
The reliability of different methods was considered by Justice Morris in ISPT as follows:

[150]

The reliability of different methods

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.

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. Rather, the improvements must be sold with the land.

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.

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.

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. This was a case in which a similar method was used to that in this case. The referees observed:

... where there are "land sales" which provide a reasonably "representative group of comparable sales", it may not, and usually will not, be necessary to have regard to "improved sales". That is because in the case of the latter a very subjective deduction has to be made for the value of the improvements. The complexity and wide disparity of such deductions was clearly evident in both valuers submissions. Because this exercise involves a subjective judgment, its intrusion into the valuation process will tend to make the resulting valuation less reliable than it would be based upon a truly comparable set of "land sales".

Subsequently, Cowdroy J found that there was no error in such an approach.

My conclusions are also consistent with decisions of the Queensland Land Court, including the recent, detailed, decisions in Multiplex 240 Queen Street Landowner Pty Ltd v Department of Natural Resources, Mines and Water and Multiplex 324 Queen Street Landowner Pty Ltd v Department of Natural Resources, Mines and Water.[104]

[154]

For similar reasons we have some concern on the inclusion of other similar costs such as the planning costs, holding costs and interest as they are not usual costs for an owner occupier or single occupancy property whether it be residential or commercial. The costs we have identified do not form part of a 'usual' improved, single occupancy, sales analysis to deduce the added building value.
We consider on the sales evidence available, this could have been achieved however, this is not the added value of improvements analysis that is before the Tribunal.
Mr Jackson in his primary method has endeavoured to analyse the improved sale of the subject property, after satisfying himself that this sale is reflective of a market sale.
Mr Jackson's market value of $8,250,000 and analysed land value of $1,340,000 by deduction concludes that the buildings add $6,910,000. Whilst we have previously said that cost does not necessary equate to value, in this instance, the added value is greater than all the QS costings. Given the origins of the building were in circa 1897 even with extensive renovations this appears implausible. However, we turn to the available sales evidence for further insights.
Mr Jackson' Land Value of $1,340,000 in his Improved Sales Analysis approach equates to approximately $1,975/m2 on a GFA basis.
The subject property has a FSR of 0.64:1 (On the PlanCost GFA) or 0.62:1 on Ms Tan's GFA. The only sale in Ms Tan's sales evidence that has a GFA of less than 1 is 56-58 Eastern Road, South Melbourne that sold for $1.4 million in July 2019. The analysis of this sale with a GFA of 201m2 is $6,965/m2 of GFA.
The only two sales that have a $/GFA of circa $2,000 is 3-5 Craine Street, South Melbourne sold $3.405 million in Dec 2019 and 143-144 Clarendon Street, South Melbourne sold $4.25 million in August 2017 at the highest end of the FSR's at 5.1:1 and 4.2:1 respectively.
The conclusion drawn on the sales evidence is that a land value of $1,340,000 for the subject property is out of line with the sales evidence; which confirms our reservations about relying on that method in this set of circumstances.
We considered Mr Jackson's Improved Sales Analysis needs some adjustment. We will come to each adjustment in turn.
Firstly, we do not consider that there should be any allowance for profit and risk for the reasons we have already given.
Secondly, Mr Jackson has relied on the Construction Costs in the PlanCost Report which essentially provides a costing for a two-storey bespoke building of the same materials and construction methodology as the existing building. Mr Lau's (the VGV's Quantity Surveyor) costings are based on modern replica of materials and construction techniques.
The answer to the question of which costs should be used we consider is in the planning controls, specifically in the provisions of the Heritage Overlay applicable to the subject property. The schedule to the Heritage Overlay HO331 applies external heritage controls only, no internal heritage controls apply. This was confirmed by the evidence of Mr Raworth and is detailed in the Schedule in the Port Phillip Planning Scheme as follows:

[158]

There was no challenge to Mr Jackson's opinion on the depreciation rate at 25% or interest rate of 6.5%. However, as identified in the judgements we have referred to, utilising a cost less depreciation approach in a methodology raises two concerns that have already been expressed. Firstly that building cost does not necessarily equate to added building value and secondly, rates such as depreciation rates are highly sensitive and highly subjective in these type of valuation models.
We agree with Mr Jackson's assessment that the refurbishment works add no additional value.
The returned valuer, Ms Tan has assessed that the improvements attribute $1,000,000 in added value in the 2020 and 2021 valuations and $4,350,000 in the 2019 valuation.
Ms Tan in considering the 2019 objection, has correctly in our opinion, turned her mind to the task at hand. Ms Tan firstly considers the objection and the objector's submissions and supporting documentation. Secondly, considers the HBU of the site and concludes that development would be restricted to within the existing footprint of the building and then thirdly, considers sales evidence of other development sites with similar proposed Gross Floor Area (GFA) as the subject site. Importantly, the GFA Ms Tan considers is the existing GFA of the subject site and not an unencumbered site.
Ms Tan concludes after analysing 12 sales that the sales with similar GFA sites range between $3,500 and $4,500/m2 GFA. Considering the subject property has a much larger parcel and a much lower plot ratio than most of the sales, together with its prime commercial location, she considers that it should be at the higher end of the scale and then adopts $4,500 m2 of GFA.
We also observe that Ms Tan's approach could have also been expanded to consider other sales with similar composition in a prime location on a land per square metre basis with a single 2-storey significant building in excess of 600m2.
Similarly, Ms Tan's analysis, with some necessary adjustments to allow for permissible development density variations could have been applied to some of the heritage sales of Mr Haines to dissect the breakup of land and buildings.
Ms Tan's calculation on the correct GFA of 679m2 would be $3,055,500. We consider Ms Tan's adjusted calculation is strongly aligned with the Tribunal's adjustments to Mr Jackson's approach that conclude a site value of $2,925,000 but importantly, is supported by Ms Tan's sales evidence.
We do not consider that the approach of Direct Comparison that Ms Tan has used for all three relevant dates (2019, 2020 and 2021) is an erroneous methodology. Ms Tan has selected different sales in 2019 to the 2020 and 2021 relevant dates and then analysed the sales on a land rate per m2 and GFA per m2 in 2019 and concluded on a GFA per m2 basis; and on a land rate per m2 basis for the 2020 and 2021 relevant dates.
We do not agree with the selection of sales that has been used for the 2020 and 2021 relevant dates, because in our view, they are not comparable to the HBU of the subject property. Thus, the comparison has not been done on a 'like with like' basis. However, if comparable sales to the subject property and its HBU had been selected, an analysis of land area per m2 could have been informative.
For the reasons we have given, we conclude that the site value of the subject property to be $2,925,000 at each relevant date.

[160]

The Applicant submits that the VGV is seeking to persuade this Tribunal in respect of a different valuation conducted on a different methodology, disengaged from the return valuation completely. The VGV makes no effort to speak to the return valuation and engage with the return valuation before the Tribunal. This is in circumstances where the VGV is uniquely placed to address the Tribunal as to what the return valuer did, the methodology, analysis and conclusions reached which we are of the view would have been forensically useful to the task before the Tribunal.
The VGV submits that the returned valuer did not engage fully or at all with the relevant statutory definitions of site value and improvements in the statutory context; and that the return valuer's method was inadequate in the 2020 and 2021 valuations. Whilst VGV confirmed that they were not seeking to increase the returned site value with a higher site value, they submitted that the deficiencies in that methodology permits the VGV to rely on new valuation evidence which addresses the calculation of value by alternate methods. In our view, the VGV's perception of errors in the return valuer's methods and rationale were misplaced.
The Tribunal stands in the shoes of the valuer and determines on the merits of the evidence before it whether the decision of the valuer on the objection was the correct or preferable decision. At paragraph 139 of the Tribunal's decision in S & JG investments, step 1 is what does the evidence say about the returned valuation and what valuation does the Tribunal arrive at on the basis of the evidence, applying 5A of the VLA. In this case the Applicant has provided more relevant information to assist the Tribunal in this task than the VGV.
It is not the role of the VGV to determine whether or not the returned valuer's decision was correct. The VGV's role is set out in the S&JG Investments in paragraphs 22 to 34 under the heading 'Two Roles of the Valuer-General'. The Valuer-General in this case is in its role as the Valuation Authority and not its administrative and supervision role. The Valuer-General has not sought to intervene or become a party in this case.
It is the Tribunal's role to consider whether or not the Valuer made the correct decision that no adjustment was required, in this case, to reduce the site value.
The VGV submits that it cannot be right that if the authority concedes methodological error on the part of the return valuer that the Applicant wins. As we have previously said, it is the role of the Tribunal to review the returned valuation and consider whether or not an adjustment should have been made. As said in the Caltex case 'The Valuation of Land Act is not a code of valuation methodology. It assumes the existence of the valuation process and requires its application in the cases and with the modifications prescribed by the Act'. Different valuers may use different methods, and all arrive within the same range of value.
It is also noted that Section 13DF of the VLA provides provisions for supplementary valuations to be carried out where appropriate.
As the Tribunal has said in the S&JG Investments decision, evidence of a higher valuation must be in addition and not in substitution of the returned valuation. What would not be permissible is an entirely new valuation on a different basis.
However, as elaborated upon in S & JG:

[166]

Having thoroughly considered his evidence, we do not think Mr Haines' methodology (albeit under instructions) is correct nor relevant. Ironically, as the Applicant submits, the Applicant's and the returned valuer's approaches are more aligned.
We do not consider the returned valuer's methodology to be incorrect; a Direct Comparison methodology based on land $/area/m2 and $/m2 GFA was applied. It is the selection of sales in the 2020 and 2021 valuations that raises questions of comparability. As we have detailed in our reasoning, we consider the 2019 return valuation highly relevant and therefore probative; in circumstances where the market conditions are vastly similar, if not the same. This is reflected in the same capital improved value for all three years. We consider the methodology Ms Tan used in the 2019, Direct Comparison of GFA/m2 highly relevant and technically sound. We would have benefited from Mr Tan's oral evidence to expand on her selection of sales, analysis and reasoning.
If the VGV seeks to engage an expert valuer to demonstrate that the valuation is not too high (or too low as applicable) this cannot be in substitution of evidence on the returned valuation, the very subject of the Tribunal's review. The VGV has already had an opportunity to adjust the valuation, if required, at the objection stage and adhere to the processes stipulated in the VLA. This should not be done lightly but rigorously by the Valuer as the statue provides. On further review by the Tribunal, it may be that the availability of further information requires further adjustment. However, this does not mean that the VGV moves into the Tribunal's role and concludes the review on our behalf, and then informs the Tribunal of methodological error as justification for abandonment of the returned valuation and substitution of an entirely new valuation.
Having considered the new valuation evidence by the VGV we find that it is an entirely new valuation, untethered in any way to the returned valuation. Whilst the VGV could have contended a new valuation by an independent expert to demonstrate that the returned valuation was not too high, this should only be done in addition to the written and oral evidence from the Valuer who made the decision and not in substitution of the evidence required to review the decision.

WSTI Properties 490 SKR Pty Ltd v Valuer-General Victoria

At a glance

Court

Decision date

Before

Source

Judgment (231 paragraphs)

Parties

Legislation Cited (8)

Cases Cited (13)

WSTI Properties 490 SKR Pty Ltd v Valuer-General Victoria (Red Dot) (Land Valuations) [2023] VCAT 734 (30 June 2023)