Cromlawn Pty Ltd v Chief Executive, Department of Lands
[1996] QLC 39
•29 March 1996
|
BRISBANE
29 MARCH 1996
Re: Appeals against annual valuations
Valuation of Land Act 1944
Shire of Emerald (AV95-309 and AV95-310)
Cromlawn Pty Ltd
v.
Chief Executive, Department of Lands
AND
The Proprietors "Clerana Centre" Building Units
v.
Chief Executive, Department of Lands
(Hearing at Emerald)
D E C I S I O N
These are two appeals against the unimproved valuations applied by the Chief Executive, Department of Lands, to certain lands in the Town of Emerald. With the agreement of the parties these matters were heard together.
Cromlawn Pty Ltd is the owner of land described as Lot 1 on Registered Plan 613135, Parish of Selma, containing an area of 1,061 m2. As at 1 January 1995 the respondent determined the unimproved value of that land at $192,000. Cromlawn Pty Ltd appealed to the Land Court advising that its estimate of the unimproved value as at that date is $80,000.
The Proprietors "Clerana Centre" Building Units are the owners of land described as Lot 1 to 5, Building Unit Plan 60144 on Lot 12 on Registered Plan 620391, Parish of Selma, containing an area of 2,105 m2. As at 1 January 1995 the respondent determined the unimproved value of that land at $520,000. The owners appealed against that valuation, advising that its estimate of the unimproved value is $240,000.
The Cromlawn land is situated at 7 Hospital Road, Emerald, approximately 0.5 km west of the Emerald Post Office. Hospital Road is a double-lane bitumen carriageway with kerbing and channelling and provides good access to the property. However, it is part of the Gregory Highway and there is no direct entry to the property for southbound traffic because of a centre median strip. Although the allotment is surveyed with rear access to John Street, the street is not formed and an open drain prevents such access.
Electricity, water and telephone services are connected to the property. It is zoned "Commercial" under the town planning scheme for the Shire of Emerald and is used as a retail tyre and mechanical workshop operated by Beaurepaires.
The property is a regular shaped inside allotment with a frontage of 20.117 metres to Hospital Road and a depth of approximately 52.7 metres. It is situated on the lower side of Hospital Road and falls below street level, with an east-west cross-fall.
The "Clerana Centre" land is situated at the corner of Clermont and Anakie Streets in the Central Business District of Emerald, about 0.2 km south-west of the Post Office. Both streets are full-width bitumen sealed roads with concrete kerbing and channelling. Bitumen sealed rear access is also provided by the one-way Harmer Lane off Ruby Street. Clermont Street is part of the Capricorn Highway, and provides good access and exposure.
Electricity, water and telephone services are connected to the property. It is zoned "Central Business" and is developed with a strata titled building with five registered building units, used as a commercial, retail and office complex, with the ANZ Bank as major tenant and eight other tenancies.
Valuation evidence was given on behalf of the appellants by registered valuer Mr GR Williams, of the valuation firm Turner Valuers and on behalf of the respondent by Mr DP Jones, a registered valuer employed by the Department of Lands.
The Approach to the Valuation Adopted by Mr Williams
Mr Williams led evidence to an unimproved valuation of $80,000 for the Cromlawn property and to an unimproved valuation of $240,000 for the "Clerana Centre". While Mr Jones had valued the properties in the traditional manner by direct comparison with sales of comparable land, Mr Williams was of the opinion that the recent sales of commercial land in Emerald were not an appropriate basis for the valuations. His attitude and approach were set out in his report as follows:"We consider that an unsustainable 'boom' has occurred in the market for vacant commercial land within the town. We believe that several 'tenant led' developments have led to an 'across the board' expectation of net rentals in the vicinity of $200/m2 net per annum. These 'tenant led' developments have included such high quality tenants as Commonwealth and State Government Departments and some of the major financial institutions who have reacted to a one off requirement for additional space within the town.
In a sustainable commercial property market a prudent developer will require a profit margin for entrepreneurial risk. While, one or two, 'tenant led' developments in the 1990-1992 period would have shown a reasonable profit margin, current 'tenant led' developments offer no such profit margin and will only return the developer a basic return on investment that could have been achieved by a straight purchase of an existing, tenanted, building.
We find, to our amazement, that this irrational market behaviour has also overlapped into a new speculative building market.
We believe that an oversupply situation will occur within the next 12 month period. A substantial, softening of commercial rents will occur and the market for vacant commercial land in Emerald will collapse.
To calculate the sustainable long term value of the subject sites we have undertaken the following hypothetical development exercises to show the investment calculations of a prudent commercial developer."
As support for his opinion that there was an unsustainable boom in land values in Emerald at the date of valuation, Mr Williams included an analysis of some of the commercial sales to demonstrate the yields investors expect. He also scheduled recent rentals received for various properties. He believed that developments built for specific pre-committed tenants had resulted in an across-the-board expectation of returns that could not be met. Therefore, he believed that the sales should not be used as a basis of valuation.
Mr Williams' philosophy is summed up in the following extract from the transcript:"My own opinion is that it's unfortunate that valuers rely basically on what they consider to be directly comparable sales evidence at the time. I feel that to be a professional you must really look behind the bare figures and see what's really driving the market and see what the real true long-term sustainable value of something really is."
He went on to say that valuers should look beyond the sales at other market indicators such as rents, yields and profit margins for entrepreneurial risks. That philosophy led him to undertake hypothetical development exercises in respect of both properties.
Mr Williams' hypothetical development valuation of the Cromlawn site was based on an average net rental of $150 per m2 per annum for a net lettable area of 756 m2, a realisation of $113,400 per annum. This he capitalised at 11% to arrive at a rounded improved valuation of $1,000,000. He then deducted selling costs and allowed a profit and risk of 20%, arriving at a figure of $800,000. From that he deducted the development costs plus interest of $710,500, less holding costs for nine months at 12% and the value of clearing, to arrive at a rounded unimproved value of $80,000, or $75 per m2.
Mr Williams' hypothetical development valuation of the "Clerana Centre" site commenced with a rental return of $231,400, from which he deducted outgoings of $30,000, to arrive at a net return of $201,400, which he capitalised at 11% to arrive at an improved value of $1,830,000. He deducted selling costs and allowed a profit and risk factor of 20%, to arrive at $1,464,000. From that figure he deducted development costs and interest amounting to $1,190,474, holding costs for one year at 12% of $29,306 and clearing and associated works of $4,000, to arrive at an unimproved value of $240,220, or $116 per m2.
Mr Williams pointed out that the "Clerana Centre" site was purchased by its current owners in June 1989 at a price which, if adjusted for the demolition of an old shop was, as vacant land, equal to $180,000, or $86 per m2. Therefore, the respondent's unimproved value of $520,000, or $247 per m2, represents an increase of 189% over a 5½ year period. In that period, however, there had been very little increase in rentals.
That reinforced Mr Williams' view that the current market for land demonstrated a general over-confidence because of the tenant led developments which had occurred in the town. He thought that the current sales were speculative and that their development would result in an over-supply of commercial space in Emerald in the next 12 months. He felt that recent sales showed a softening in the market and that vacant land prices would soon fall.
Mr Williams contended that the boom in vacant land prices should not be reflected in the unimproved values. Instead, it would be prudent for any purchaser to take the long-term view and not rely on the boom prices being paid. That should be taken into account in assessing the unimproved value under the Valuation of Land Act. He thought that the hypothetical development approaches for both subject lands better reflected their unimproved values.
The Hypothetical Development Method of Valuation
The use of the hypothetical development method of valuation has been subject of severe criticism by the Land Appeal Court on a number of occasions. (See, for example, Merivale Motel Investments Pty Ltd v. The Brisbane Exposition and Southbank Redevelopment Authority (1984-85) 10 QLCR 268 at 281). Those cases were usually in respect of the assessment of compensation for the compulsory acquisition of land. As for the use of the method to ascertain the unimproved value of land for the purposes of the Valuation of Land Act 1944, the reasons for rejecting that method of valuation were explained by the learned then President of the Land Court, Mr WFG Smith, in Thomas Nominees Pty Ltd v. Valuer-General (1986-87) 11 QLCR 283 at p.287:"In addition to the criticisms made by the Land Appeal Court it seems to me that when ascertaining unimproved value for the purposes of the Valuation of Land Act, the hypothetical development method does not give sufficient flexibility to permit the reflection comparatively of appropriate differences between parcels as regards to their respective situations, access, topography, sizes, inherent physical features (poor drainage, etc), other advantages and disadvantages and the environment of their communities. It may be a good test by which to determine the maximum amount that should be paid for land as the basic commodity to sustain a particular development. It appears to be primarily concerned with the generality of ascertaining what amount may be viably expended on the land content of a proposal and is not primarily designed for ascertaining the specific value of a particular piece of land by giving due weight to its various inherent features and the quality of the environment of its community. It is a method where progression to the end result (land value) is more a matter of mathematical progression than the application of a professional valuer's expert judgment as to the weight to be given to inherent component factors relevant to the unimproved value of a specific parcel of land.
Where there are no sales available for comparative purposes, the method of hypothetical development may assume greater importance as a guide to unimproved value but I strongly doubt, as a general rule, that it should be preferred to evidence of comparable sales in matters arising under the Valuation of Land Act."
I respectfully agree with the learned former President's remarks. Therefore, I cannot accept the unimproved valuations based on the hypothetical development method which have been advanced by Mr Williams.
Mr Williams' Alternative Valuations
However, Mr Williams did advance alternative valuations if sales must be accepted as a basis of valuation. He conceded that there had been numerous commercial sales in Emerald from 1994 onwards and that they indicated a "boom market". However, he contended that such prices were not sustainable and that when the purchasers' expectations were not realised, the market for commercial property would fall.
Mr Williams examined sales of five commercial properties which occurred in late 1994 and early 1995, which showed unimproved values of between $426 per m2 for a centrally located 235 m2 allotment, to $195 per m2 for a well-exposed 1,639 m2 parcel. He concluded that there was a direct correlation between size and the rate per m2.
Mr Williams admits that on the basis of direct comparison with sales, he does not argue with the respondent's valuation of the Cromlawn property at $192,000, or $181 per m2.
However, in respect of the "Clerana Centre" land, Mr Williams has concluded that for the larger area of 2,105 m2 the appropriate rate would be $200 per m2 , or $421,000.
Mr Jones' Valuations
Mr Jones adopted the traditional method of valuing the subject lands by comparing them with sales of comparable land.
The Cromlawn Land
In arriving at the unimproved value for the Cromlawn site, Mr Jones referred to four sales, three (including the sale of the subject land) situated on Hospital Road (Gregory Highway), in the main highway commercial strip and one in Brief Street, on the fringe of that commercial strip. Those properties sold between November 1993 and November 1994 and showed rates per m2 ranging from $145 to $221. From those sales Mr Jones adopted $181 per m2, arriving at an unimproved value for the Cromlawn site of $192,000. The sale of the subject land showed $221 per m2, but there was an existing tenant at the time of auction. Mr Jones said it was the sale of a site that would suit redevelopment to a retail showroom or similar complex. It was sold over 12 months prior to the date of valuation and was, he said, the first of the higher level sales. He admitted that the sale had not been fully analysed.
Mr Jones' valuation of the "Clerana Centre"
Mr Jones described the "Clerana Centre" land as having frontages of 40.883 metres to Clermont Street and 48.3 metres to Anakie Street. The depth from Clermont Street varies from 48.3 metres on the eastern side to 56.336 metres on the western boundary. The land is on the western side of Anakie Street and is at street level, with a very slight cross-fall towards the western boundary. It is in the main central business area of Emerald.
In valuing the "Clerana Centre" site, Mr Jones adopted as a principal method of valuation the rate per metre frontage approach. His calculations are as follows:
40.883 metres (Clermont St) @ $11000/m = $449,713
Plus extra depth
7% for 52.318m average depth on $449,713 = $31,480
(Using 40.234m standard depth (132'))
Plus Rear Access (Harmer Lane)
2½% on $481,193 = $12.030
Plus Corner (Anakie Street)
15% on 40.883 @ $11,000/m = $33,000
TOTAL $526,223
ADOPT $520,000
Mr Jones checked that valuation on an area basis, valuing the 2,105 m2 at $247 per m2 to equal $519,935, rounded to $520,000.
Mr Jones' basis for those valuations consisted of five sales of commercial land, situated in Clermont Street, Anakie Street and Ruby Street, near the centre of town. Although Mr Jones valued the subject land on a rate per metre frontage basis, it is more convenient to make comparisons on an area basis. I adopt this approach because Mr Williams has done so and Mr Jones has said that either method may be used. I leave open the question of whether the frontage method of valuation should be adopted for the valuation of commercial land in Emerald. That matter can be dealt with on another occasion.
The five sales ranged in area from 235 m2 to 2,757 m2 and sold between March and September 1994. If the 235 m2 allotment (Sale 2) and the highly improved 1,007 m2 adjoining owner sale (Sale 5) are excluded, the remaining sales show rates per m2 of $286, $261 and $222.
However, each of the three sales included some improvements, although they were regarded by Mr Jones as redevelopment sites. The question arises as to the appropriate added value of improvements. To add to the difficulty of analysis, two of the sales were made on the basis of pre-committed tenants. Although there was no specific evidence in relation to that aspect of those sales, the fact that the purchasers had tenants pre-committed could add some strength to Mr Williams' argument that the market (or those sale prices at least) was tenant driven. Those sales may be high.
It also emerged that the third sale was a contaminated site. That raises the question as to whether the purchaser knew of the contamination and the possible cost of remediation.
Mr Jones tended to agree with Mr Williams that the values shown by the sales may not be sustainable in the long term. However, there were so many commercial sales that he felt duty bound to use those sales as evidence of the increase in values. He thought that the sales he had used were appropriate, but he conceded that it was difficult to find vacant or lightly improved sales in a built-up central business area.
Mr Jones felt that the sales were not out of line with vacant fringe sales. He was of the opinion that the demand in Emerald had been the result of the increase in population from irrigation and mining development. However, he conceded that the sales had not been matched by a corresponding increase in rents. He reasoned that during the period in question, investors seemed to be willing to accept lower returns and look forward to longer-term growth and capital gains.
Mr Jones conceded that there were several vacant shops in Emerald at the date of hearing and that the market had softened in the last three months for larger properties. However, he stressed that was not the case at the date of valuation in January 1995.
Conclusions
Under the provisions of the Valuation of Land Act, the unimproved values of each of the subject lands must be ascertained at the sum which 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 did not exist. This can only be done by reference to sales of comparable land in the area.
In these cases there were many comparable sales which indicated substantial increases in the valuation of commercial land since the previous date of valuation. Whether that market level continues to be sustainable will not be known until some time in the future. Certainly the level had been maintained from the date of valuation to the date of hearing, although both valuers agreed that the market had softened in the last few months. However, the fact remains that the unimproved values of the subject lands must be derived from the sales that occurred at or near the date of valuation.
I have considered Mr Williams' arguments for a valuation for the "Clerana Centre" of $200 per m2. I find that the evidence does not support a rate per m2 of that order. Having regard to the circumstances surrounding the sales used by Mr Jones, the most appropriate sale would seem to be his Sale No. 1, which analysed to show $286 per m2 and to which he applied $223 per m2. The "Clerana Centre" site is undoubtedly superior to that land as it has the advantages of being on a corner and having a larger frontage to Clermont Street.
However, Sale No. 1 did have a pre-committed tenant and may be somewhat high.
Mr Jones claimed that in using his sales as a basis for the valuation he allowed for any premium that may have been paid because a tenant was pre-committed to occupy any development on a site. He said that he did so by not applying the analysed unimproved value in full. He explained that was the reason for applying only 83% of the analysed unimproved value of Sale 1. However, in my opinion, that does not fully answer the criticism, as there are many other reasons for not fully applying a sale.
Taking these matters into consideration and having regard to the whole of the evidence, I have come to the conclusion that an appropriate unimproved valuation for the "Clerana Centre" as at 1 January 1995 is $230 per m2, or $484,000.
Orders
Therefore, in respect of the appeal by Cromlawn Pty Ltd, the appeal is dismissed and the unimproved value determined by the Chief Executive of One Hundred and Ninety-two Thousand Dollars ($192,000) is affirmed.
In respect of the appeal by The Proprietors "Clerana Centre" Building Units, the appeal is allowed, the valuation of the Chief Executive is set aside and the unimproved value of the subject land is determined at Four Hundred and Eighty-four Thousand Dollars ($484,000).
JJ TRICKETT
PRESIDENT OF THE LAND COURT
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