CPT Custodian Pty Limited and GT Management Pty Ltd v Valuer General
[2009] NSWLEC 1426
•18 December 2009
Land and Environment Court
of New South Wales
CITATION: CPT Custodian Pty Limited and GT Management Pty Ltd & Others v Valuer General [2009] NSWLEC 1426 PARTIES: 1st APPLICANTS
CPT Custodian Pty Limited and GT Management Pty Ltd2nd & 3rd APPLICANT
RESPONDENT
CPT Custodian Pty Limited
Valuer GeneralFILE NUMBER(S): 30278 OF 2007 and 31086 of 2007 and 30811 of 2008 CORAM: Miller AC KEY ISSUES: VALUATION OF LAND :- Use of comparable sales and hypothetical development method of valuation. LEGISLATION CITED: Valuation of Land Act 1916
Bankstown Local Environmental Plan 2001
Bankstown Development Control Plan 2005CASES CITED: Toohey’s Ltd v. Valuer General [1925] AC 439
Valuer General v. Fenton Nominees Pty Limited [1982] 150 CLR
Tetzner v. Colonial Sugar Refining Co Ltd [1958] AC 50
Maurici v. Chief Commissioner of State Revenue [2001] 51 NSWLR 673 at 682
Redeam Pty Ltd v. South Australian Land Commission [1977] 40 LGRA 151
Leichhardt Municipal Council v. Seatainer Terminals Pty Limited [1981] 48 LGRA 409
Pamalco Pty Limited v. The Minister (No 3) [1991] 71 LGRA 441
Spencer v. The Commonwealth [1907] 5 CLR 418
MLC Properties Pty Limited and Australian Prime Property Fund Custodian Pty Limited V. Chief Commissioner of State Revenue [1999]
A. G. Robertson Ltd V. Valuer General [1952] 18LGR 261
Gwynvill Properties Pty limited v. Commissioner for Main Roads [1983] 50 LGRA 322DATES OF HEARING: 23, 24, 25, 26,27, 30 and 31 March 2009, 3 April 2009, 25, 26 and 29 May 2009, 16 June 2009, 23 July 2009, 17, 18 and 19 August 2009
DATE OF JUDGMENT:
18 December 2009LEGAL REPRESENTATIVES: APPLICANT
Mr D Miller (barrister)
Mr T To (barrister)
SOLICITOR
Gadens LawyersRESPONDENT
Mr T S Hale (SC)
Mr J B Maston (barrister)
SOLICITOR
Crown Solicitors Office
JUDGMENT:
THE LAND AND
ENVIRONMENT COURT
OF NEW SOUTH WALESMiller AC
18 December 2009
JUDGMENT30278 of 2007 CPT Custodian Pty Limited and GT Management Pty Ltd v Valuer General
31086 of 2007 CPT Custodian Pty Limited v Valuer General
30811 of 2008 CPT Custodian Pty Limited v Valuer General
1 These are appeals under s 37 of the Valuation of Land Act 1916 (the Act) in respect of land values assessed under s 6A (1) of the Act in respect of the property known as Centro Bankstown, 57 The Mall, Bankstown as at the base dates of 1 July 2005, 1 July 2006 and 1 July 2007.
2 Section 40 (2) of the Act states: "On an appeal, the appellant has the onus of proving the appellant's case."
3 Land value is defined in s 6A (1) of the Act in the following terms:
- "The land value of the 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 and not been made."
4 Land improvements are defined in s 2 of the Act and mean:
- (a) the clearing of land by the removal or thinning out a timber, scrub or other vegetable growths,
(b) the picking up and removal of stone,
(c) the improvement of soil fertility or the structure of soil,
(d) the restoration or improvement of land surface by excavation, filling, grading or levelling, not being works of irrigation or conservation,
(d1) without limiting paragraph (d), any excavation, filling, grading or levelling of land for the purpose of the erection of a building, structure or work, not being to the purpose of irrigation or conservation,
(e) the reclamation of land by draining or filling together with any retaining walls or other works are appurtenant to the reclamation, and
(f) underground drains.
Background
5 By judgment dated 18 September 2008 Biscoe J. noting, inter alia, that the three matters are closely related and concern the same property, directed that they be heard together.
6 In response to the objections the Valuer General reduced the land values, at each of the base dates, to $51 million. The respective applicants contended that the land values should have been $49.8 million as at 1 July 2005 and $40.4 million at the other two base dates.
7 Prior to the hearing the contended land values were amended to the following amounts:
- Date Applicant Valuer General
1 July 2005 $36 M. $89.97 M.
1 July 2006 $38.2 M. $91.79 M.
1 July 2007 $40.4 M. $95.67 M
The Subject Property
8 The subject property is an amalgamated site comprising six lots with a total area of 8.98 ha (89,870 square metres). It is located in close proximity to Bankstown Railway Station and forms the north eastern quadrant of the Bankstown Town Centre. The subject property is irregular in shape but can be likened to a rectangle , on an east/ west axis with a corner exercised at its north western extremity. It has an expansive frontage to the northern side of North Terrace, with other frontages to the western side of Lady Cutler Avenue, to the south side of Rickard Rd, to the eastern side of Jacobs Street, to the southern side of The Mall and to the eastern side of The Appian Way. The land falls generally from the Rickard Road frontage to the North Terrace frontage.
9 The subject property has been used for many years as the site of a major regional shopping centre, previously known as Bankstown Square Shopping Centre, but more recently as Centro Bankstown. At the three base dates the gross lettable area (GLA) of the shopping centre was approximately 66,500 square metres. On site car parking, primarily at grade and rooftop, for approximately 2870 cars was provided. In 2007 an extension of the shopping centre, with a gross lettable area of16,500 square metres and roof top car parking for 1030 cars, was opened on the eastern side of Lady Cutler Avenue extending from Rickard Rd to North Terrace and bounded, on the eastern side by Stacey Street. While this extension is also called Centro Bankstown, the land on which it stands is not the subject of this appeal.
10 The parties agreed that certain work carried out to the subject property met the definition of land improvements in the Act. However, agreement was not reached as to the value of those land improvements; the applicant maintaining that they had no value while the respondent, through Mr Watt, followed Mr Meredith's cost estimates that these works had a value of $7.150 million as at 1 July 2005.
11 At the three base dates the subject property was zoned 3 (a) Business -- CBD under Bankstown Local Environmental Plan 2001. The objectives of this zone are as follows:
- "To reinforce the status of Bankstown CBD as a Metropolitan regional centre.
To define the scale and type of development in Bankstown CBD.
To link the three key retail precincts -- Bankstown Square, the Compass Centre block and the Town Centre Plaza -- and ensure a broad range of consumer choice.
To establish a clear structure of land uses within Bankstown CBD to help focus the desired future character of the different activity precincts in the centre.
To permit a diversity of uses to reinforce the multiuse character of Bankstown CBD.
To ensure the scale and density of development complements the desired future character of each precinct and its location in the centre.
To define the parameters for retail activities within the centre.
To encourage the development of offices and other commercial activities in the CBD and promote the centre as a place for employment."
12 A wide range of land uses are permitted , with Council's consent , including business premises, entertainment facilities, entertainment establishments, hotels, residential flat buildings and shops.
13 Bankstown Development Control Plan 2005 applies to the subject property. The objectives of Part D4, as they relate to the Central Business District, are:
- "To establish a long-term vision for Bankstown Central Business District as a metropolitan regional centre and focal point for industry, commerce and the community in Bankstown.
To have the Bankstown Central Business District create a unique sense of place and stronger identity for the City of Bankstown.
To maximise the amount of active street frontages.
To maximise public safety and property security.
To create a safe road network with a pedestrian priority in the business core area.
To create a high-quality unified urban design, streetscape and centre image for the Bankstown Central Business District .
To encourage accessible multi-unit housing in the Bankstown Central Business District, especially as part of mixed use development."
14 Section 2 of the DCP sets out the following development standard for the Business Core Area in which the subject property is located:
- "A development on land within the business core area of the Bankstown Central must restrict the use of the first and second storeys to solely business, retail, community and other non-residential uses:
to maintain business and retail floor space in the business core area , and,
to maintain active street frontages in the business core area."
15 The subject property is located within The Bankstown Square Precinct.. The vision for this precinct is "A naturally lit regional shopping centre with greatly improved pedestrian links to adjacent precincts designed around comfortable and secure internal walls complementing the main street qualities of The Plaza"
16 "The objectives of the precinct are:
- a) To ensure there is flexibility for continual shopping centre upgrading, change and expansion. To shape a stronger and more functional centre, Bankstown Square needs to position itself to compete with but also complement The Plaza .
b) To encourage improvements to the urban design of Bankstown Square as part of its redevelopment, both internally and externally by:
- introducing natural light wherever possible;
redesigning the major pedestrian entries, foot paths and pedestrian ways around and into the Square and their links to adjacent precincts;
creating a visual terminus and entry at the eastern end of The Mall axis;
integrating carparks and access ways into the boulevard streetscape;
creating direct retail frontages to the south side of The Mall and to the Appian Way;
redesigning and upgrading the public transport terminal and bus stops;
redesigning signage and lighting associated with the Square.
- an entertainment sub precinct centred on Jacobs Street and The Mall.
car parking, mixed-use or commercial development in the Lady Cutler Avenue/Stacey Street block" .
17 The specific controls for the precinct are:
- A maximum height of 30 m.
Maximum floor space ratio of 3:1.
A minimum setback of 3 m to Rickard Road and North Terrace with zero setbacks for all other street frontages.
Residential flat buildings must consider the Residential Flat Design Code when determining setbacks.
Active retail street frontages are to be maintained to The Appian Way and The Mall .
18 Bankstown CBD has been identified in Government strategic planning documents over many years as a centre of sub regional significance. In December 2005 Bankstown's status as a major centre was identified in the City of Cities Metropolitan Strategy.
The Concept of Land Value under the Act.
19 Section 6A (1) requires the assumption "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" The decision of the Privy Council in Toohey’s Ltd v. Valuer General [1925] AC 439 clarified the meaning of this assumption: "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 nonexistent, but as if they had never existed".
20 The decision in Tooheys was approved by the High Court in Valuer General v. Fenton Nominees Pty Limited [1982] 150 CLR at 160.The decision in Tetzner v. Colonial Sugar Refining Co Ltd [1958] AC 50 was approved by the NSW Court of Appeal in Maurici v. Chief Commissioner of State Revenue [2001] 51 NSWLR 673 at 682 [29] stating that for the purposes of s 6A(1) " the subject land is to be valued as vacant, but located in the neighbourhood as it exists in the real world" which I understand to mean as the neighbourhood existed at the relevant base dates.
Expert Evidence
21 The court received extensive evidence from well-qualified and experienced experts in the following fields (respectively for the applicant and respondent); Mr Jackson and Mr Watt (real estate valuation), and Mr Duane and Mr Hack (economic analysis) . Mr Meredith also gave evidence as the parties jointly appointed quantity surveyor.
Highest and Best Use
22 At an early stage in the proceedings and after receiving evidence from Mr Duane and Mr Hack and reading the reports of Mr Jackson and Mr Watt I expressed a preliminary view that it seemed that the highest and best use of the subject property at the three base dates was as a site for a major regional shopping centre with a gross lettable area of 67,000 square metres. The parties accepted my preliminary view and the case proceeded on that basis.
23 It was common ground that a major regional shopping centre would have a GLA of between 50,000 and 85,000 square metres and would have contained a department store, one or more discount department stores and one or more supermarkets.
24 Messrs Duane and Hack agreed that the hypothetical purchaser of the subject property would be a sophisticated and an experienced shopping centre operator who would not entertain setting aside part of the site for residential development having regard to the cost penalties involved and, secondly, the severe limitations that would be imposed on the future expansion of the centre if that ever became a reality. In fact , they further agreed that in the next 20 to 25 years there was a possibility, even a probability, that the hypothetical major regional shopping centre could be expanded by up to 20,000 square metres GLA. Accordingly, I rejected the proposition submitted by the respondent, that the highest and best use of the subject property was redevelopment comprising both retail and residential uses.
25 Mr Hack described the subject property as being unique in the Sydney Metropolitan Area, assuming of course, it was vacant. Mr Duane expressed the view that the subject property, again assuming it was vacant, had a number of characteristics which made it unique, namely, its size, its proximity to a train station, the existing development around that train station and the sub regional shopping centre located on the eastern side of Lady Cutler Avenue. Construction of this centre commenced in May 2005 and was completed in 2007 so it was in the knowledge of the market at the base date of 1 July 2005 and subsequently.
Valuation Expert Evidence Tendered by the Applicant.
26 Having regard to s 40 (2) of the Act ,and for reasons which will become apparent, I will concentrate on the evidence of Mr Jackson.
27 In accordance with well-established valuation practice Mr Jackson adopted as his primary method of valuation comparison with sales of property which he considered to be comparable to the subject property. His secondary method was the hypothetical development method to determine a residual land value.
The Comparable Sales Method of Valuation.
28 It is widely accepted that this method of valuation is the most direct and reliable in determining the value of the property in question, see, for example, Redeam Pty Ltd v. South Australian Land Commission [1977] 40 LGRA 151 at 156.
29 In Leichhardt Municipal Council v. Seatainer Terminals Pty Limited [1981] 48 LGRA 409 in the NSW Court of Appeal judgment, Moffitt P made these observations concerning the comparable sales method of valuation at 414:
- “ The process of judicial decision is founded on reasoning based on facts which includes experience” and later on that page “The difficulty arises where the only sales available for consideration are of sites which differ in major and critical ways from the subject sites and there is no sales or other relevant experience to bridge the difference. If the difference can be seen by some process of reasoning to be within some conservative limits it may be that some acceptable compromise judgement can be made. If however the difference calls for an addition in respect of which experience tells nothing of what may be the upper limit, the situation is as before so the addition may be X, 2X or 5X and the ultimate determination similarly arbitrary.”
30 At 415, the same Judge, when considering the degree of comparability of sales to the land to be valued said:
- “However, it be termed, justification for its use must depend upon the property sold having some features in common with the sites to be valued, upon its being appropriate by some a rational process to use that sale as a basis for the making of adjustments to allow for the differences between the sites and in this way derive the value of the subject sites.”
31 Hemmings J. in Pamalco Pty Limited v. The Minister (No 3) [1991] 71 LGRA 441 at 454 said, when referring to cases where there is a paucity of reliable comparable sales ,
- “ Mathematical precision is impossible and inappropriate to such matters of judgment. In such circumstances the court could and should make one adjustment to comparable sale prices which seek to take into account all relevant matters; compare Bergman v. Holroyd Municipal Council [1988] 66 LGRA 68.”
What is a Comparable Sale?
32 A comparable sale is one which actually assists in the valuation of the property in question. If a particular sale does not satisfy the tests so succinctly set forth by Isaacs J. in the landmark judgment, Spencer v. The Commonwealth [1907] 5 CLR 418 @ 441 the sale price may not reflect market value.
33 The second phase is to determine the degree of comparability or, expressed in another way, how much reliance can be placed on the application of an analysis of the sale for a comparison with the property being valued.
34 There are three broad groups. The sale may be directly comparable, requiring few or minor adjustments for comparison with the property being valued, or it may have some elements of comparability , requiring more or larger adjustments. This second group of sales can be categorised as somewhat comparable.
35 Comparable sales in the third category will possess some comparable features but require so many or such large adjustments for comparison with the property being valued that little reliance or weight can be placed on the results of the analysis. This last group can be fairly described as having limited comparability.
36 In reviewing Mr Jackson's comparables the degree of comparability becomes a major issue.
Mr Jackson's Comparable Sales.
37 Mr Jackson identified two regional shopping centre land sales and two sales of sub regional shopping centre sites. He also included in his written evidence the sale of three parcels of land identified as neighbourhood shopping centres sites and the sale of a parcel in Bankstown which he described as a "freestanding supermarket land sale" but on the basis that this sale was provided from information only.
- Sale No 1 .
Block 25, section 52, Belconnen, ACT.
38 The land in this transaction, which took place in November 2007, had an area of 38,661 square metres but the precise title references were not clarified although nothing turns on this point. This property was not inspected by the court although Mr Watt was well acquainted with it. The most significant feature of the land, besides its area, is the fact that it immediately adjoins the Westfield Belconnen regional shopping centre, opened in 1978, which had a GLA of 74,565 square metres. The land is owned by the Commonwealth of Australia which is represented by the ACT Planning and Land Authority. For a number of years the land was utilised as an open air public car park for 887 cars (managed by Westfield) returning some $450,000 net income per annum to the Land Development Authority. No doubt some of the customers of the shopping centre parked their cars on this land.
39 While I have described this transaction as a sale (and was treated as such by the valuers) it was in fact a Project Development Agreement, dated 2 November 2007, which subject to conditions being fulfilled will lead, eventually, to the grant of a long-term lease to Westfield and a development consent to expand the Belconnen shopping centre by 27,094 square metres of gross floor area. The project development agreement required the payment of $13.5 million, completion of responsibilities under that agreement involving infrastructure works (public transport facility and Benjamin Way upgrade works) at an agreed cost of $3.5 million -- a total of $17 million. In addition, Westfield was required to provide a $2 million bank guarantee as security against an obligation to develop an commercial office tower on an adjacent parcel of land (known as Block 4) within eight years of the holding lease commencement. While this requirement must be treated as a liability, it could, if necessary, be transferred to another party within the eight year timeframe. I am satisfied that this liability need not be taken into account for determining the price paid under the transaction.
40 There was disagreement, however, between the valuers as to whether the purchase price, for analysis purposes, was $17 million or $12.2 million the latter figure resulting from the deduction of $4.8 million from the former figure being the capitalised value of the net income from the car park. The reason for the disagreement was that Mr Jackson maintained Westfield purchased an income producing car parking operation, with a value of $4.8 million, and had the opportunity of continuing that operation. However, in my opinion, it would be unusual for a shopping centre operator to charge customers , from the time of arrival, for parking within what would become, part of the shopping centre car park . The valuers subsequently agreed that free parking for some time -- up to three hours -- would not be unreasonable. Accordingly, while some income from car parking could be derived, under such an arrangement, the quantum will be greatly diminished . Having regard to the way in which the car park will most likely be used as part of the shopping centre I have concluded that that the total price paid for the lease and the applicable development rights was $17 million.
41 Based on $17 million the transaction shows $448 per square metre of land area. However, Mr Jackson's analysis was based on $12.2 million which showed $325 per square metre. He notes that Bankstown was originally opened in 1966 (compared with Belconnen in 1978) , that Belconnen is a similar sized shopping centre to Bankstown, Belconnen is dominant in its catchment area in Canberra with a well-established population which is more affluent when compared to Bankstown.
42 Based on his analysed price of $325 per square metre Mr Jackson made adjustments to reflect the special value of the adjoining owner (-5%) and timing (-10%) -- a total of -15% to arrive at a figure of $276 per square metre indicating a land value for the subject property of $24,828,000 as at 1 July 2005.
43 The adjustments made as at 1 July 2006 were -5% on account of the adjoining owner influence and timing (-5%) -- a total of -10% reducing the analysed figure to $293 per square metre indicating a land value for the subject property of $26,288,000.
44 A similar exercise was undertaken as at 1 July 2007. In this case an adjustment of -5% is only allowed on account of the adjoining owner influence reducing the analysed figure to $309 per square metre indicating a land value for the subject property of $27,749,000.
45 Mr Jackson made reference in his analysis to the difference between the Moving Annual Turnover ( MAT) between Belconnen and the existing shopping centre on the subject land. MAT is the total sales of a shopping centre for a 12 month period calculated on a monthly rolling basis. The guidelines, issued in September 2006 by the Shopping Centre Council of Australia , states that "As a general rule the MAT of the shopping centre is to include trade from all tenants where the manager is provided with such sales data." MAT for shopping centres and also for specialties shops within shopping centres are published from time to time in the Shopping Centre News . While such information is very useful for comparing the trading performance of shopping centres I have come to the conclusion that the use of such information for the determination of land value would result in misleading conclusions. I note that Nott C, of the Land and Environment Court of NSW, came to the same conclusion in the unreported judgment of MLC Properties Pty Limited and Australian Prime Property Fund Custodian Pty Limited V. Chief Commissioner of State Revenue [1999]
46 Belconnen is not located in the Sydney Metropolitan Area . No evidence was put before the court as to the relative commercial land values prevailing in Sydney and Canberra which must , at least, be considered. Mr Jackson assumes that no adjustment on this point is required. For these reasons, I have come to the conclusion that the analysis of this transaction is clearly within the third class of comparable sales and is of such limited comparability, I have given it no weight.
Sale No 2.
Craigieburn Town Centre, Craigieburn, Victoria.
47 This property which, has an area of 64.92 ha, was sold in March 2008 for $73.5 million.
48 Upon subdivision the property will comprise 16.837 ha of land for residential development, designed to accommodate 390 lots, 14 ha of recreational land and 25.933 ha (net of roads) of land for retail development. At the time of sale that portion of the land set aside for retail development had planning approval for 55,000 square metres GLA of retail floor space which included both "shop" and "restricted retail" use. In addition it also had and "as of right" approval for 20,000 square metres of "office" use.
49 Mr Jackson describes this property, which was not known to Mr Watt, in the following terms:
- "The site is a greenfield site in a rapidly developing locality in outer northern Metropolitan Melbourne. The area is the subject of significant residential development and rapidly expanding residential population. The site will require servicing however the cost will be able to be offset to an extent with the residential development which will support the retail development.
50 Competition is limited with Craigieburn currently comprising a neighbourhood shopping centre. The nearest the centre of substance is Roxburgh Park sub regional shopping centre approximately 4 to 5 km to the south. The nearest regional shopping centre is Epping Plaza which is situated approximately 10 km away.
51 The planning scheme applicable already has designated the site as a major retail and commercial centre allowing greater certainty in the development process.
52 In comparison, Bankstown is a more established suburban location was a great existing population albeit subject to limited growth and greater competition"
53 The sale shows an overall rate of $113 per square metre. Mr Jackson explains that "I have analysed the sale to reflect $227 per square metre for the net retail/commercial component (26 ha) and $172 per square metre for the gross retail/commercial component (34 ha)."
54 For comparison with Bankstown Mr Jackson adopts a size adjustment of plus 25% to reflect the smaller size of the subject property, a locational adjustment of plus 30% to reflect that Bankstown is in a mature well established metropolitan locality , a further plus 30% for status and potential and a time adjustment of minus 12.5% on the basis that the property market was improving form 1 July 2005 to the date of sale in March 2008 resulting in a total upward adjustment of 72.5% indicating a rate of $392 per square metre for the subject property or $36,191,000.
55 The property was not inspected by the court, is located in Melbourne and based on its location, the size of and the number of adjustments needed this sale can only be regarded as having such limited comparability to the subject property that I can place no weight on Mr Jackson's analysis.
Sub regional shopping centre land sales.
Sale No. 3
22 Sentry Drive, Stanhope Gardens.
56 This property, which has an area of 26,400 square metres was sold in May 2006 for $6,283,882 which reflects $238 per square metre but adjusted to $247 per square metre.
57 This latter figure is adjusted by minus 15% to reflect the substantially smaller land area of this property, plus 30% to reflect the superior location of the subject property, a further plus 20% as the site is inferior to the subject property and minus 5% to reflect the fact that the market was improving from 1 July 2005 to the date of sale. Total adjustments, in favour of the subject property, thus become 30% indicating a land value for the subject property of $321 per square metre or $28,854,000 as at 1 July 2005.
58 The sale had its origins in an option agreement dated 23 January 2002 with the price nominated in that agreement being escalated in accordance with movement in the Consumer Price Index until settlement. Accordingly, the sale price did not necessarily reflect the market value of this property at the date of sale in May 2006.
59 While this property is located within the Sydney Metropolitan area, it is only 30% of the size of the subject property, does not possess any of any of the agreed unique qualities of the subject property and cannot be developed, even in conjunction with the adjoining property already owned by Mirvac, if both were vacant, as a major regional shopping centre. In addition the sale price was not negotiated at the time the sale actually occurred. I place no weight on Mr Jackson's analysis at all three base dates.
Sale No 4.
Corner, Jersey and Hyatt roads Plumpton
60 This is the only property which both Mr Jackson and Mr Watt treated as a comparable sale. It comprises two partly serviced lots.
61 Lot 101 fronts Jersey Road and has an area of 2.345 ha. Lot 102, with an area of 3.018 ha has a very narrow frontage to Hyatt Rd and is separated from lot 101 by an open drainage swale. Lot 101 is zoned 3 (a) general business and lot 102 for residential purposes under Blacktown LEP 1988.
62 The property was sold in March 2005 for $16.5 million . Lot 101 adjoins Plumpton Marketplace sub regional shopping centre said to have a GLA of 17,000 square metres.
63 Mr Jackson analyses the commercially zoned portion of the property at $282 per square metre while Mr Watt analyses this area at $362 per square metre. The reason for the substantial difference is the value assigned to the residentially zoned land fronting Hyatt Rd. Mr Watt considers this land, to have a value for low to medium density development, in its unserviced state, of approximately $180 per square metre while the Mr Jackson assigns a value of $350 per square metre. In reaching their divergent conclusions both valuers rely upon their analysis of comparable sales of residential land.
64 Mr Jackson compares the property sold by making a positive adjustment in favour of the subject property of 30% for location, 20% for status and potential, 1.5% for timing and a negative adjustment of 10% for size resulting in a net adjustment, in favour of the subject property, of 42% indicating a land value for the subject property of $399 per square metre or $35,889,000 as at 1 July 2005. On the other hand, Mr Watt makes a 100% adjustment to his analysed figure for property features and potential to arrive at a land value for the subject property of $725 per square metre or $65,156,000 at the same base date.
65 This property is substantially different to the subject property. . The subsequently reconfigured lot 101, following relocation of the drainage swale, can be developed with some 13,000 square metres of GLA of retail development. It does not possess any of the features which enable the subject property to be called unique. The number and scale of adjustments required is reflected in the conclusions of the respective valuers. Mr Jackson considers the subject property, to have a value $117 per square metre above his analysed value while Mr Watt considers the subject property to have a value of $362 per square metre above his analysed value.
66 My conclusion is that the sale of this property is of minimal assistance in assigning a value to the subject property.
Sale No 5.
438 -- 462 Chapel Rd and 43 Kitchener Parade, Bankstown.
67 This property is proximate to the subject property being located some 250 m west of the northwestern corner of the subject property. It can be regarded as an island block with frontages to Rickard Road , Chapel Rd North, French Rd and Kitchener Parade ( which terminates in a cul-de-sac close to Rickard Road). The site can be regarded as rectangular in shape with an area of 13,961 square metres.
68 The property was purchased by Aldi Foods Pty Limited in July 2006 for $14.726 million. The land is zoned 3(a) Business -- CBD under Bankstown LEP 2001 -- the same zoning as the subject property.
69 On the 21 June 2001 Aldi Foods entered into a ground lease covering approximately 60% of the total area subsequently purchased and constructed on the leased area a freestanding supermarket building undertaking, as part of that process, remediation of that part of the property . At the time of the sale in 2006 the unexpired term of the lease was five years but the lease contained options which gave Aldi Foods the right to a total of 20 years further tenure.
70 The evidence was that Aldi Foods were only interested in purchasing the leased part of the property but the owner was adamant that a partial sale would not be considered. Aldi Foods believe that they paid a premium to purchase the property and subsequent efforts to sell at least portion of the residue appears to confirm that belief. It is well-known in the marketplace that Aldi Foods have a strong preference to purchase sites on which company owned supermarkets are operated. Besides the supermarket building there were a number of other buildings, previously used for motor trading and services, on the land but neither valuer made an adjustment to reflect demolition costs.
71 The sale price shows $1058 per square metre. Mr Jackson states "The sale is provided for information purposes only given its relatively close location to the subject property. Given the circumstances of the sale and Aldi's interest in the site no reliance has been placed upon it. Similar to the smaller neighbourhood shopping centre sites, little weight would be placed on the sale given the size of land holding if the sale circumstances were not influenced by the circumstances which existed". Mr Jackson concludes that this property does not represent a comparable sale.
72 On the other hand, Mr Watt adjusts the sale for market for movement from date of sale to 1 July 2005 by making a negative adjustment of 5% resulting in an analysed value of $1005 per square metre. Mr Watt considers that his analysed value sets a floor for similarly zoned land in Bankstown. He agrees that it is in an inferior position and has inferior retail potential.
73 While this property is less than 16% of the area of the subject property, its location in Bankstown and its similar zoning dictates that it cannot be dismissed from view and must be regarded as being somewhat comparable to the subject property.
Application of Sales Numbered 1 to 5.
74 None of these sales are directly comparable to the subject property. The only sale which I regard as being somewhat comparable is sale number 5 -- the purchase by Aldi Foods -- but that sale, by itself, does not provide a sound basis on which a value can be assigned to the subject property.
75 As the case progressed I had increasing reservations about relying upon comparable sales as the primary method of valuation. During the hearing on 18 August (transcript P84) I made this statement "The underlying problem is that the comparable sales approach which the parties have put forward quite properly as the primary method is a difficult one to convincingly analyse, in other words analyse with confidence that you've got the right answers because all the sales have peculiarities. It's not like valuing properties where there’s a string of properties (comparable sales). So the hypothetical check method, and I've said this before in my opinion, becomes even more important, not to the point of necessarily supplanting the comparable sales method but ultimately it may be that one can't rationally make sufficient use of the comparable sales and may have to rely primarily on the hypothetical (method)...."
76 This is a recognized method of valuation almost exclusively used to determine the value of land where there is an absence of comparable sales and where the land is either vacant or not developed to its highest and best use. It was described by Sugerman J. in A. G. Robertson Ltd V. Valuer General [1952] 18LGR 261 at 262 as:
- "One erects a hypothetical building upon the subject land, capitalises the anticipated net return there from, and subtracts the estimated building cost from the capitalisation, the balance being treated as the unimproved value . "
77 In undertaking this exercise it is appropriate to allow for profit and risk.
78 In Gwynvill Properties Pty limited v. Commissioner for Main Roads [1983] 50 LGRA 322 Cripps J. said:
- "The hypothetical development method is normally suspect because it depends on a number of assumptions and a number of estimates.... It has been said that because many estimates and assumptions must be made the hypothetical development method ought not to be used where some use can be made of a comparable sale."
79 Both valuers used this method as part of their consideration of the land value of the subject property. Notwithstanding the fact that both of them made a deduction from the capitalised value on completion of the hypothetical development for sales commission, legal expenses and advertising I have come to the conclusion that in the circumstances of the subject property it would be developed by the sophisticated and experienced shopping centre operator, to whom reference has already been made, with the intention of retaining the completed development rather than the usual circumstances of a developer who would be undertaking the project solely for the purpose of selling the new building on or shortly after completion.
80 In Mr Jackson's example he increased the net realisation by adding "rental income during the 12 month hold" being the net income expected to be derived in the 12 months following completion of the development. Notably, Mr Jackson assumed that the new development would be fully let (except for a 1% vacancy allowance) on completion and that the 12 month period was required to sell and settle the sale of the property. Submissions were made as to whether or not the inclusion of such an amount was appropriate.
81 The object of the method is to determine the value of the land, (generally referred to as the residual land value), on completion of the hypothetical development exercise and during the process allowance can be made for whether or not the new development would or would not be not fully let on completion with an appropriate adjustment, if any, being made. The question is -- What would be the value of the new development on completion? -- not when the sale of same could be settled. That is clear from the Robertson judgment.
82 On appendices A, B and C to this judgment I have set out hypothetical valuations as at the three base dates. However, some commentary is required.
Tenancy Mix and Total Turnover for the New Centre.
83 Considerable evidence was given by Messrs Duane and Hack as to the catchment area for the hypothetical major regional shopping centre, the retail spend within that catchment area, the demographics thereof leading, ultimately, to the estimated total turnover for the new centre and the mix of retail and non retail facilities that should be provided therein. Mr Duane estimated that the turnover would be $340 million as at 1 July 2006. Mr Hack concluded that a conservative estimate is $420 million with a potential turnover of around $470-$480 million. The retail mix proposed by each expert is different although there are many similarities. The major differences are in respect of Mini- Majors where Mr Duane allows 6000 square metres and Mr Hack 3000 square metres, specialties where Mr Duane allows 22,000 square metres and Mr Hack 26,000 square metres and service specialties where Mr Duane allows 3500 square metres and Mr Hack 2000 square metres but totalling, as earlier agreed, 67,000 square metres GLA. I have adopted the applicants, what I consider to be a more conservative tenancy mix.
Gross Rental.
84 Once again, I have also adopted the applicants more conservative gross rental estimates. The difference in gross income is substantial, Mr Watt estimating gross income as at 1 July 2005 at $44,875,000 and Mr Jackson $39,579,658.
Estimated Annual Outgoings.
85 The divergence of opinion between the two valuers is material. Again I have adopted the more conservative estimate of Mr Jackson at $10,394,752 per annum as at 1 July 2005 compared with Mr Watt’s estimate of $10,720,000.
Net Income.
86 The consequence of the decisions which I have made concerning tenancy mix, gross rental and outgoings results in my acceptance of Mr Jackson's annual net income of $28.898 million as at 1 July 2005 compared with Mr Watt’s estimate of $33.462 million.
Capitalisation rate.
87 In Ex A 13 Mr Jackson notes "In deriving an appropriate capitalisation rate for the property as outlined above, I have had regard to the following sales of investment grade properties within Sydney and also the wider Australian metropolitan retail market given the limited availability of sales at or around the valuation date". The sales referred to are as follows:
- Westfield Belconnen, Canberra, AC T. A regional shopping centre. 50% interest sold in December 2003 at a yield of 6.75%.
- Whitford City, Perth, W.A. A regional shopping centre. 50% interest sold in August 2004 at a yield a 7%.
- Forest Hill Chase, Forest Hills, Victoria. A sub regional shopping centre. Sold in January 2005 at a yield a 7.15%.
- Greensborough Plaza, Greensborough, Victoria. A regional shopping centre. 50% interest sold in May 2005 at a yield of 7%.
- Tuggeranong Hyperdome, Canberra, AC T.. A regional shopping centre. 50% sold, as if complete, in December 2005 at a yield of 6.02%.
- Westfield Parramatta, Parramatta, NSW . A super regional shopping centre. A 50% interest sold in June 2007 at a yield of 5.03%.
- Chatswood Chase Shopping Centre, Chatswood, NSW . A regional shopping centre. 50% interest sold in June 2007 at a yield of 5.23% Karrinyup Shopping Centre, Perth, W.A.. A regional shopping centre. 25% interest sold in January 2008 at the yield of 5.25%.
88 In each case I have followed Mr Jackson’s description of these properties even though, it would appear to me that some, such as Westfield Belconnen, Tuggeranong Hyperdome, Chatswood Chase and Karrinyup, could be classed as major regional shopping centres. Each of these properties have a department-store as a tenant.
89 No evidence was forthcoming as to whether the purchaser of less than 100% of these properties obtained management rights, development rights and leasing rights which rights, taken together, in regard to Penrith Plaza (a sale introduced by Mr Watt) were said by Mr Jackson to be worth "many millions of dollars".
90 Only two of the sales are located within the Sydney Metropolitan Area, namely, Westfield Parramatta and Chatswood Chase. For this reason, substantial weight must be given to the yields analysed in these transactions which, in each case, only involved a 50% interest.
91 Anecdotal evidence, by way of market commentaries prepared by a number of leading real estate companies; show yields for regional centres in the Sydney Metropolitan Area ranging from 5.5% to 7%. In one case a reference is made to a reduction in yield in 2007 by 0.25%.
92 Further anecdotal evidence was provided by Mr Watt. In Ex R 5, he described the shopping centre on the subject property as "the existing partly obsolete centre." He goes on to state "As reported by Centro the existing centre.... was valued by UrbisJHD .... at a cap rate (yield) of 6.25% .... as at 30 June 2005". Also included in this Exhibit was an extract from the Centro Properties Group Annual Report for 2006 which showed that the shopping centre on the subject property and that constructed on the eastern side of Lady Cutler Avenue, and having a total GLA of 82,206 square metres, had been valued using a capitalisation rate of 6%. That statement would appear to conflict with the evidence that the extension east of Lady Cutler Avenue was not completed until May 2007.
93 Doing the best I can against the background of limited information on this critical factor, I find that I am forced to disagree with Mr Jackson's capitalisation rate as at 1 July 2005 of 7%. I have come to the conclusion that an appropriate capitalisation rate at that date, having regard to the tenancy mix, the rents assigned and the 20% profit and risk allowance would be 6% which, in accordance with my understanding of market movement in capitalisation rates, and as adjusted by Mr Jackson, I have reduced to 5.75% as at 1 July 2006 and 5.5% as at 1 July 2007.
Construction cost.
94 I have set out on Appendix D. my calculated construction costs based on Ex A 48, Scenario B 4, Valuer General's brief, being part of Mr Meredith's report. I selected this particular brief as the shopping centre will comprise two levels and will utilise more on roof and at grade car parking compared with the applicants brief for a larger multi-deck car park adjacent to North Terrace. The total cost is less than the applicant’s alternative. Mr Meredith advised that a "realistic" timeframe to prepare plans for development approval, obtain that approval, prepare construction documentation, and to procure the construction certificate would be 88 weeks (extended from his initial estimate of 52 weeks) followed by a construction phase of 130 weeks. The work involved under this scenario excludes bulk excavation and site benching and therefore utilises, as much as Mr Meredith considers possible, the existing land improvements.
Interest
95 Appendix E details my calculation of interest on construction costs using a rate of 8% per annum. In each case I have adopted Mr Jackson's leasing costs including incentives and finance charges at the respective base dates.
96 For the sake of transparency I have adopted Mr Watts approach (Ex R 5) to the calculation of other costs which need to be taken into account. Appendix F details the information which leads to the adoption of 48.438% which, as 148.438% represents the difference between the Gross Realisation and the Total Costs as set out on Appendices A,B and C.
97 These are shown on appendices A, B and C and are summarised hereunder:
- Land value as at 1 July 2005 $67,820,000
Rate per square metre $754
Land value as at 1 July 2006 $75,370,000
Rate per square metre $839
Land value as at 1 July 2007 $87,558,000
Rate per square metre $974
Comparison with the Aldi Foods Sale.
98 As already noted this transaction took place in July 2006 and corresponds with the base date in that year. The sale related to land which was only 16% of the area of the subject property. It can be regarded as an island block but it is in a materially inferior position. It does not possess any of the features which have led the economic experts to conclude that the subject property can be regarded as being unique in the Sydney Metropolitan area. It is for these reasons that I had earlier concluded that the sale could only be regarded as being somewhat comparable.
99 To compare it with the subject property allowance needs to be made for all of the features which I have just referred to and in doing so I am conscious of the fact that Aldi Foods most likely paid a premium. However, the hypothetical " bona-fide seller" , referred to in s 6A(1) of the Act , would expect that the subject property would be of particular attraction to the current owner of the shopping development on the land east of Lady Cutler Avenue and, for that reason, would anticipate obtaining a premium for the subject property.
100 I concur with the views of the Hemmings J in Pamalco that to make a comparison with mathematical precision is not possible by separately assigning an adjustment to every feature which distinguishes one property from the other. However, taking all matters into account I consider that the subject property, on a square metre basis, would have a land value, as at 1 July 2006 20% less than the rate of $1058 per square metre disclosed by the Aldi Foods sale, namely, $846 per square metre.
101 In my opinion this comparison provides the best possible check against the hypothetical development method conclusion, at that date. It is not materially different ($846 compared with $839 per square metre). The residual land values disclosed by the hypothetical method at the other two base dates do not appear to be inconsistent.
Conclusion.
102 The court is not persuaded that the Valuer General's assessment of the land value of subject property at the base dates of 1 July 2005, 1 July 2006 and 1 July 2007, each in the sum of $51 million, are wrong.
103 The Orders of the Court.
- 1. The appeals are dismissed.
2. The documents produced on subpoena by Landcom, on a confidential basis, are to be returned to the respondent for transmission to Landcom in a sealed envelope.
___________________
E. Craig Miller
Acting Commissioner of the Court
ljr
Estimated Gross Market Income as at 1 July 2005 Department Store 15,000m2 @ $200/m2 $3,000,000 Two Discount Department Stores 13,000m2 @ $220/m2 $2,860,000 Three Supermarkets (Coles, Franklins, IGA) 7,500m2 @ $320/m2 $2,400,000 Four Mini Majors 6,000m2 @ $255/m2 $1,532,158 Specialty Retail 22,000m2 @ $1,125/m2 $24,750,000 Non Retail Areas 3,500m2 @ $1,125/m2 $3,937,500 Total 67,000m2 $38,479,658 Casual Mall Leasing $1,100,000 Total Gross Income $39,579,658 Deduct Vacancy Allowance 1.0% $286,875 Deduct Estimated Outgoings $10,394,752 Adopted Net Income excluding GST $28,898,030 Capitalised @ 6% $478,163,000
Hypothetical Development – B4 1 July 2005 Gross Realisation – Value as if complete $481,633,000 Less Profit & Risk Factor 20% $80,272,000 Funds Available for Development $401,361,000 Less Construction Costs including DA Costs $249,217,000 Interest Costs - Construction $25,232,000 Leasing Costs including Incentives $25,967,000 Finance Charges $275,000 Total Costs $300,691,000 Residual Land Value
$100,670,000 equals 148.438%
Residual Land Value -- 100% $67,820,000
Residual Land Value equivalent to $754 per square metre
Estimated Gross Market Income as at 1 July 2006 Department Store 15,000m2 @ $200/m2 $3,000,000 Two Discount Department Stores 13,000m2 @ $225/m2 $2,925,000 Three Supermarkets (Coles, Franklins, IGA) 7,500m2 @ $320/m2 $2,400,000 Four Mini Majors 6,000m2 @ $262/m2 $1,573,584 Specialty Retail 22,000m2 @ $1,150/m2 $25,300,000 Non Retail Areas 3,500m2 @ $1,150/m2 $4,025,000 Total 67,000m2 $39,223,584 Casual Mall Leasing $1,100,000 Total Gross Income $40,323,584 Deduct Vacancy Allowance 1.0% $293,250 Deduct Estimated Outgoings $10,937,176 Adopted Net Income excluding GST $29,093,158 Capitalised @ 5.75% $505,968,000
Hypothetical Development – B4 1 July 2006 Gross Realisation – Value as if complete $505,968,000 Less Profit & Risk Factor 20% $84,328,000 Funds Available for Development $421,640,000 Less Construction Costs including DA Costs $257,418,000 Interest Costs – Construction $26,013,000 Leasing Costs including Incentives $26,057,000 Finance Charges $275,000 Total Costs $309,763,000 Residual Land Value $111,877,000
equals 148.438%
Residual Land Value -- 100% $75,370,000
Residual Land Value equivalent to $839 per square metre
Estimated Gross Market Income as at 1 July 2007 Department Store 15,000m2 @ $200/m2 $3,000,000 Two Discount Department Stores 13,000m2 @ $225/m2 $2,925,000 Three Supermarkets (Coles, Franklins, IGA) 7,500m2 @ $320/m2 $2,400,000 Four Mini Majors 6,000m2 @ $265/m2 $1,590,129 Specialty Retail 22,000m2 @ $1,175/m2 $25,850,000 Non Retail Areas 3,500m2 @ $1,175/m2 $4,112,500 Total 67,000m2 $39,877,629 Casual Mall Leasing $1,100,000 Total Gross Income $40,977,629 Deduct Vacancy Allowance 1.0% $299,625 Deduct Estimated Outgoings $10,937,176 Adopted Net Income excluding GST $29,740,828 Capitalised @ 5.50% $540,742,000
Hypothetical Development – B4 1 July 2007 Gross Realisation – Value as if complete $540,742,000 Less Profit & Risk Factor 20% $90,124,000 Funds Available for Development $450,618,000 Less Construction Costs including DA Costs $267,382,000 Interest Costs - Construction $27,012,000 Leasing Costs including Incentives $25,980,000 Finance Charges $275,000 Total Costs $320,649,000 Residual Land Value $129,969,000
$129,969,000 equals 148.438%
Residual Land Value -- 100% $87,558,000
Residual Land Value equivalent to $974 per square metre
Recalculated Construction Costs.
Reference Exhibit A48, Scenario B4, Respondents Design Brief.
Scenario B4 excludes the cost of bulk excavation and site benching and assumes that , at the relevant dates , development approval is not in place and that approval , construction certificate and construction documentation would be completed within a realistic 88 weeks (extended from the initial estimate of 52 weeks) followed by the construction phase of 130 weeks.
Construction cost Less Car park cost savings Professional fees at 8% Cost escalation 4.2% for 88 weeks (1.69 years) - 7.098% Cost escalation at 4.2% per annum during construction on a reducing cash flow basis as calculated by Mr Meredith for 130 weeks -- 5 .78% Design and construction contingency at 5% Construction Costs Council fees for DA approval Water and electricity upgrade costs to authorities Other authority fees and contributions as estimated by Mr Meredith Total Construction Costs As at 1 July 2006. Construction cost Less car park savings Professional fees at 8% Cost escalation 4.2% per annum for 88 weeks (1.69 years) -7.098% Cost escalation at 4.2% per annum during construction on a reducing cash flow basis as calculated by Mr Meredith for 130 weeks -- 5 .78% Design and construction contingency at 5% Construction Costs Council fees for DA approval Water and electricity upgrade costs to the authorities Other authority, fees and contributions as estimated by Mr Meredith Total Construction Costs As at 1 July 2007 Construction cost Less car park savings Professional fees and 8% Cost escalation at 4.2% per annum for 88 weeks (1.69 years) -- 7.098% Cost escalation at 4.2% per annum during construction on a reducing cash flow basis as calculated by Mr Meredith for 130 weeks -- 5.78% Design and construction contingency at 5% Total Construction Costs Council fees for DA approval Water and electricity upgrade costs to authorities Other authority fees and contributions as estimated by Mr Meredith Total Construction Costs
Calculation of Interest on Construction Costs
Interest Rate Adopted 8% per annum
Base Date 1 July 2005 Construction Cost $247,945,000 50% for 130 weeks -- 2.5 years Council Fees for DA Approval $250,000 218 weeks (88 plus 130) -- 4.192 years Water/Electricity Upgrade Costs and Authority Fees and Contributions $1,472,000 156 weeks (26 plus 130) -- 3 years Total Base Date 1 July 2006 Construction Cost $255,653,000 50% for 130 weeks -- 2.5 years Council Fees for DA Approval $250,000 218 weeks (88 plus 130) -- 4 .192 years Water/Electricity Upgrade Costs and Authority Fees and Contributions $1,515,000 156 weeks (26 plus 130) -- 3 years Total Base Date 1 July 2007 Construction Cost $265,597,000 50% for 130 weeks -- 2.5 years Council Fees for DA Approval $250,000 218 weeks (88 plus 130) -- 4.192 years Water/Electricity Upgrade Costs and Authority Fees and Contributions $1,535,000 156 weeks (26 plus 130) -- 3 years Total
Calculation of Holding Charges -- Percentage Basis
Reference Exhibit R 5 -- Annexure 9
Interest on Land Purchase 218 weeks (130 plus 88) -- 4 .192 years Interest Rate -- 8% per annum Land Tax 1.7% per annum -- 4 .19 and two years Rates .5% per annum -- 4.192 years Stamp Duty on purchase Legal Fees on purchase Total
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