ISPT Pty Ltd and Valuer General
[2007] WASAT 276
•19 OCTOBER 2007
ISPT PTY LTD and VALUER GENERAL [2007] WASAT 276
| STATE ADMINISTRATIVE TRIBUNAL | Citation No: | [2007] WASAT 276 | |
| VALUATION OF LAND ACT 1978 (WA) | |||
| Case No: | DR:310/2005 | 27, 28 & 29 MARCH 2007 | |
| Coram: | JUSTICE M L BARKER (PRESIDENT) MR R J PRIEST (SENIOR SESSIONAL MEMBER) | 19/10/07 | |
| 28 | Judgment Part: | 1 of 1 | |
| Result: | Review application allowed Valuer General's assessment of unimproved value of subject land replaced with assessment of $25 000 000 | ||
| B | |||
| PDF Version |
| Parties: | ISPT PTY LTD VALUER GENERAL |
Catchwords: | Valuation of land Site in retail precinct of Perth central business district "Unimproved value" Comparable sales approach Challenge to methodology and assumptions of Valuer General "Reduced scope" approach Hypothetical redevelopment approach Piecemeal approach |
Legislation: | City of Perth City Planning Scheme No 1 Valuation of Land Act 1978 (WA) |
Case References: | 15 Lorimer Street Pty Ltd v Secretary of the Department of Infrastructure (1997) 97 LGERA 239 AMP Life Ltd and Valuer General [2007] WASAT 257 Co-ordinated Resources Pty Ltd v ValuerGeneral (1983) 27 The Valuer 779 Weld Club Trustees and Valuer General [2007] WASAT 256 |
Orders | 1. The review application is allowed.,2. The decisions of the Valuer General to issue assessments for the subject land as at 1 August for the years 2000, 2001 and 2002 in the sum of $37,000,000 are set aside and replaced with the assessments respectively of $25,000,000. |
JURISDICTION : STATE ADMINISTRATIVE TRIBUNAL STREAM : DEVELOPMENT & RESOURCES ACT : VALUATION OF LAND ACT 1978 (WA) CITATION : ISPT PTY LTD and VALUER GENERAL [2007] WASAT 276 MEMBER : JUSTICE M L BARKER (PRESIDENT)
- MR R J PRIEST (SENIOR SESSIONAL MEMBER)
- Applicant
AND
VALUER GENERAL
Respondent
Catchwords:
Valuation of land - Site in retail precinct of Perth central business district "Unimproved value" Comparable sales approach Challenge to methodology and assumptions of Valuer General "Reduced scope" approach Hypothetical redevelopment approach Piecemeal approach
Legislation:
City of Perth City Planning Scheme No 1
Valuation of Land Act 1978 (WA)
(Page 2)
Result:
Review application allowed
Valuer General's assessment of unimproved value of subject land replaced with assessment of $25,000,000
Category: B
Representation:
Counsel:
Applicant : Mr MN Solomon
Respondent : Ms FB Seaward and Ms CA Ide
Solicitors:
Applicant : Gadens Lawyers
Respondent : State Solicitor's Office
Case(s) referred to in decision(s):
15 Lorimer Street Pty Ltd v Secretary of the Department of Infrastructure (1997) 97 LGERA 239
AMP Life Ltd and Valuer General [2007] WASAT 257
Co-ordinated Resources Pty Ltd v ValuerGeneral (1983) 27 The Valuer 779
Weld Club Trustees and Valuer General [2007] WASAT 256
(Page 3)
Summary of Tribunal's decision
1 The Valuer General assessed the unimproved land value of Myer Forrest Chase, Perth, at $37,000,000 on 1 August 2000, 1 August 2001 and 1 August 2002. The applicant, the registered proprietor of the land, objected to the valuations.
2 The Tribunal considered the competing methodologies of the expert valuers called by the parties and examined the comparable sales put forward by both valuers.
3 The Tribunal preferred the approach of the applicant's valuer, though it expressed concerns about that approach. The Tribunal overturned the assessments and substituted assessments of $25,000,000 at each of the relevant dates.
Issue
4 The issue for determination in these proceedings is the unimproved land values of the subject land, Myer Forrest Chase, under the Valuation of Land Act 1978 (WA) (VL Act) as at 1 August in each of the years 2000, 2001 and 2002.
5 The Valuer General's unimproved value assessments as at those dates are as follows:
• 1 August 2000 - $37,000,000;
• 1 August 2001 - $37,000,000; and
• 1 August 2002 - $37,000,000.
Facts
6 The subject land: Myer Forrest Chase, of which the applicant is the registered proprietor, is more particularly described as an estate in fee simple in portion of each of Perth Town Lots V5 to V10 (inclusive) and being Lot 54 on Diagram 77185 and being the whole of the land comprised in Certificates of Title Volume 2191 Folios 243 and 244.
7 The subject land is rectangular in shape and situated within the retail precinct of the Perth Central Business District (CBD) with frontages to the Murray Street Mall, Forrest Place and Wellington Street. It has an area of 8,810 square metres.
(Page 4)
Planning controls:
8 At material times the subject land was zoned "Shopping Zone (Central Area)" under the City of Perth City Planning Scheme No 1 (CPS 1).
Improvements
9 At the relevant dates of valuation the parties agree that the subject land was improved with a five level retail shopping complex with an existing gross lettable area of approximately 41,282 square metres. The development was completed in 1989.
10 It is also agreed there is an extensive subterranean service court located under Forrest Chase on the western boundary of the subject land which enables vehicle access to a loading dock facility at the basement level of the site.
Highest and best use
11 The parties and their valuers agree that the highest and best use of the subject land is the development for retail purposes in accordance with the provisions of CPS 1 and consistent with the current use of the land.
The comparable sales approach
12 The valuers also agree that the comparison of vacant land sales or near vacant land sales in the Perth CBD on the basis of an analysis of a rate per square metre of land area should be used to assess the value of the subject land.
13 While the valuers agree that the comparable sales approach should be adopted, they differ in the application of that agreed approach.
14 For example, Mr Grant Jackson, the valuer called by the applicant, says that he has relied upon the sale of vacant land or near vacant land sales to assess the unimproved value of the subject land. In his opinion there is sufficient sales evidence of vacant sites in the Perth CBD to provide a reliable indicator of value for the subject land.
15 Mr Lindsay Collins, the valuer called by the Valuer General, says he has referred to a "broad basket" of evidence in assessing the unimproved value of the subject land. In his opinion the only sales evidence of larger vacant or near vacant sites available at and relevant to the determination of the unimproved subject land at the relevant dates are two, namely, 166 Murray Street and the David Jones redevelopment site between Hay Street Mall and Murray Street Mall.
(Page 5)
- Accordingly, he has analysed other sales of improved land he considers relevant.
16 While Mr Collins and Mr Jackson agreed that the comparison of vacant land sales or near vacant land sales in the Perth CBD is the agreed approach adopted by both valuers, Mr Collins in fact refers to three valuation approaches in assessing the unimproved value of the subject land, in the following order:
• a hypothetical development approach;
• a piecemeal assessment of value; and
• the comparative sales approach.
17 The Tribunal notes that while Mr Collins in an earlier approach to valuation placed most weight on his assessment of unimproved value by reference to his improved sales analysis of the earlier sale of a 50% interest in the subject property, in his further statement (Exhibit 7) he proceeds to adopt what he calls the "reduced scope" approach in the carrying out of a hypothetical development scenario of the site, as well as in applying the piecemeal approach and in checking those approaches with the comparable sales approach.
18 Under the reduced scope approach, as explained by Mr Collins, he refers to the relative income generated by the various levels or parts of an improved property as a measure of the obsolescence of the improvements, so that the added value of the existing improvements can be appropriately assessed for the purpose of analysing the underlying value of improved sites. By adopting this approach Mr Collins considers he can more exactly allow for the depreciation of improvements rather than make a more imprecise or subjective assessment of depreciation. Mr Collins contends that the reduced scope approach, as he calls it, is supported by accepted valuation principles. We will return to a consideration of the reduced scope approach.
Applicant's approach to valuation
19 Mr Jackson, the valuer called by the applicant, says he has relied upon the sale of vacant land or near vacant land sales to assess the unimproved value of the subject site. In his opinion there is sufficient sales evidence of vacant sites in the Perth CBD to provide a reliable indicator of value for the subject property.
20 Mr Jackson relies upon the following sales:
(Page 6)
- • City Central site, 160 170 (166) Murray Street, Perth;
• Toys'R'Us/AXA site, 100 St Georges Terrace, Perth;
• Westralia Square site, 125 St Georges Terrace, Perth; and
• Raine Square site, 298 312 Murray Street, Perth.
21 Mr Collins also relies on the City Central site at 166 Murray Street as well as a number of other sales of improved sites, as noted above. He does not accept the Toys'R'Us/AXA site, the Westralia Square site or the Raine Square site constitute comparable sales.
22 In relation to the City Central site at 166 Murray Street, the valuers agree that the contract of sale as per the transfer was stamped 25 May 2000 and the transfer was subsequently lodged on 4 September 2000.
23 Mr Jackson's position is that the sale of 166 Murray Street constitutes the sale of vacant land next door to the subject land and that the most reliable method of valuation is to adopt the value reflected in that sale and adjust for the differences reflected in the subject land. He accepts that these differences are significant but says they are limited.
24 Mr Jackson says that the differences in the subject land compared with 166 Murray Street are:
• its superior location by reason of its exposure to Forrest Chase and the first floor walkways extending to the railway station (acknowledging that it was known at the relevant dates that the advantage of the railway station connection would be greatly diminished in future years); and
• an appropriate discount for the significantly larger subject site.
25 Taking these differences into account Mr Jackson contends that an appropriate adjustment is the addition of a total premium of 8%.
26 The applicant also says that the Valuer General has for many years acknowledged that an appropriate figure for the size discount for the subject land would be 30%. That being so, assuming that the subject site and 166 Murray Street are the same size, the applicant's effective premium is approximately 38%, which the applicant contends is an appropriate overall premium in the circumstances.
(Page 7)
27 Mr Jackson in his valuation report (Exhibit 11) says of the City Central site at 166 Murray Street that:
• it is a smaller site immediately adjoining the subject land;
• it sold within close proximity of the first date of valuation;
• it is an inside lot without the benefit of Forrest Place frontage;
• the Wellington Street frontage at street level has limited pedestrian flows, similar to the subject land; and
• an analysis of it can be utilised to assess the immediately adjoining component of the subject property.
28 In his assessment of value at [4.4] of Exhibit 11, Mr Jackson says assuming that the subject land was vacant, as required by the VL Act, he has been mindful of the fact the walkways at the first level would still exist. New development would be designed and constructed around them.
29 Mr Jackson says the most comparable sale is 166 Murray Street because the site immediately adjoins the subject property. He says the analysis of 166 Murray Street is that it has a value of $2,636 per square metre for a site of 3,737 square metres.
30 The subject land comprises an area of 8,810 square metres, over twice the size of 166 Murray Street. Mr Jackson says the sales evidence indicates a discount for size for larger sites, reflecting a lesser rate per square metre compared to smaller sites. As the subject land is significantly larger than the adjoining sale, he has made a downwards adjustment for size.
31 The sales evidence that Mr Jackson relies on produces the following table:
(Page 8)
Site | Sale date | Site area (square metres) | Value (per square metre) |
|
| 3,737 | $2,636 |
|
| 9,093 | $1,289 |
|
| 6,577 | $4,136 |
|
| 13,423 | $1,334 |
32 Mr Jackson says the subject land and the adjoining site both have frontages to the Murray Street Mall and Wellington Street. In addition the subject land has the benefit of the additional frontage to Forrest Place making it superior overall to the adjacent sale. As a result of the superior frontage an upwards adjustment to the rate per square metre compared to the adjoining sale is required.
33 Mr Jackson adopts an overall rate for the subject site of $2,850 per square metre for the site area, which reflects an overall premium of approximately 8% to the rate disclosed by the rate of the adjoining sale, which he says is reflective of the larger size of the subject site and its Forrest Chase frontage. In other words Mr Jackson has accorded a premium for the Forrest Chase frontage and location, but has also applied a discount on account of the larger size of the subject land, which is more than twice the size of the adjoining property.
34 His final calculation of the unimproved value assessment is as follows:
|
|
|
35 Mr Jackson says he also compared the rate applied by him to the subject land to the balance of the sales evidence he considered relevant. The overall rate per square metre applied is more than double the rate disclosed for the Raine Square site of $1,289 per square metre. That site has three street frontages to Murray, Wellington and William Streets but is situated in an inferior location, particularly for retail use. The site is
(Page 9)
- also larger than the subject property reflecting a downwards adjustment for size.
36 The Westralia Square site reflects $1,334 per square metre. Whilst a relatively significant component of the site is envisaged to be retail, it is considered an inferior retail location. In comparison to the subject land, the Westralia Square site is considered to be superior for commercial office development with its frontage to St Georges Terrace and Mounts Bay Road. In comparison to this sale, Mr Jackson says the rate per square metre adopted for the subject land is considered to be relatively generous.
37 As to his analysis of the Toys'R'Us/AXA site, Mr Jackson says that this reflects $4,136 per square metre. He considers this site is significantly superior compared to the subject land. The site will comprise a shopping centre at the lower levels with a commercial office tower to the St Georges Terrace frontage. In his view, the Hay Street Mall is the prime retail location within the Perth CBD and St Georges Terrace is the prime office location. The additional ability to develop prime office space on the Toys'R'Us/AXA site in his view makes that site superior to the subject property which is limited to retail development with potentially a secondary office component only.
38 Mr Jackson produced a table comparing his assessed unimproved value with assessments returned by the Valuer General for the sales evidence at each relevant date of valuation subject to these proceedings (see [4.5], Exhibit 11). The lowest value disclosed in the table was in respect of Raine Square for 1 August 2000 at $1,490 per square metre. The highest was for the Toys'R'Us/AXA site at 1 August 2000 and 1 August 2002 at $3,984 per square metre. Mr Jackson's assessed value for the subject land as noted is $2,850 per square metre, somewhere in the middle of those values but otherwise comparable to the City Central site ($2,622 per square metre) and the Westralia Square site as at 1 August 2000 at $2,871 per square metre, and as at 1 August 2001 and 1 August 2002 at $2,353 per square metre.
39 Mr Jackson said in evidence (see joint statement of valuers, Exhibit 15, at 5) that as a matter of valuation principle he believes that those sales that require the least level of adjustment will provide the most reliable indication of value. In that regard he placed most weight on the vacant land sale immediately adjoining the subject land. However, he also considered the other sales in formulating his assessment of value.
(Page 10)
40 By reason of Mr Jackson's preference for his comparison of the directly relevant sales as identified by him, he expressed a lack of preference for the respondent's hypothetical development exercise and the piecemeal approach which was primarily undertaken by Mr Collins. We will return to his criticisms of these approaches in this context below.
41 While Mr Jackson did not adopt the hypothetical development approach to valuation of the subject land, he did also analyse the sale of the 50% interest from December 2002, for $58,000,000 to ISPT Pty Ltd (attached to Exhibit 15). He did not suggest that the sale was irrelevant. To arrive at the added value of the existing new improvements he adopted the quantity surveyor's agreed replacement cost from which he deducted a depreciation allowance of 20%. He indicated the 20% reflected the physical depreciation, economic obsolescence and functional obsolescence of improvement. He did not provide detail as to how he had calculated the figure of 20%, because he could not point to any particular market sales evidence, but based his opinion on his experience as a valuer. Whilst Mr Jackson does not rely on his analysis due to the complexities of the sale, including a substantial lease component and improvements, his improved sales analysis suggests an unimproved value of $27,640,000 providing an analysis of $3,137 per square metre.
Valuer General's approach
42 Hypothetical development analysis: In the order in which they were presented by Mr Collins in his further valuation report (Exhibit 7) the hypothetical development analysis was the first valuation approach relied upon by him. Attachment LC G to this report sets out a hypothetical development analysis for the subject land. This was devised using the sale price of the half share in the improved property as at December 2002, showing a full market value of $137,626,714, less the value of portions considered by Mr Collins to be obsolescent, of $7,440,476, making a total value of $130,186,238 (incorrectly stated by Mr Collins as $130,176,238). On the basis of the static analysis shown by Mr Collins at LC G, he identified a net realisation and fair market value rounded off at $44,670,000, which equated to a dollar value for the land after development of $5,071 per square metre.
43 The piecemeal assessment of value: This is the second approach adopted by Mr Collins in his valuation report. He says this approach was adopted because the applicant had adopted a similar approach at the earlier objection stage of the current assessment procedure. He said that the method is based on notionally dividing the subject land into five lots so that the value of land could be apportioned depending on the particular characteristics of
(Page 11)
- each portion based on pedestrian flow and location which would affect the retail rental achieved. Mr Collins then applied a rate per square metre to each of the notional lots. The rate in each case was derived from comparable sales evidence identified by him.
44 Notional lot 1 was compared with the sale of 166 Murray Street. Mr Collins undertook a hypothetical development analysis of 166 Murray Street that disclosed a value of $2,634 per square metre (see Exhibit 7, attachment LC H).
45 Notional lot 2 was compared with 553 561 Wellington Street, 403 408 Wellington Street and 146 152 Barrack Street. He said all three constituted inferior locations to notional lot 2 and indicated a conservative estimate of the value of lot 2 to be $2,000 per square metre.
46 Notional lot 5 was compared with Plaza Arcade at 225 227 Murray Street. Again in relation to this sale, he undertook a hypothetical development analysis which suggested vacant land value at $5,500 per square metre (see attachment LC I). Mr Collins considered Plaza Arcade has some characteristics similar to notional lot 5 as both have good frontages to pedestrian malls although notional lot 5 in his opinion has exceptionally large Murray Street Mall frontage and frontage to Forrest Place.
47 Mr Collins also undertook a hypothetical development analysis in respect of Plaza Arcade from which he analysed an underlying land value of $4,598 per square metre (see LC J).
48 Mr Collins also undertook a hypothetical development analysis in respect of 223 Murray Street, a shopping premises in the Murray Street Mall, which suggested an underlying land value of $5,270 per square metre (LC K). He expressed the view that this site is a stronger, slightly more central mall location with better Forrest Place exposure than 225 227 Murray Street but inferior exposure to notional lot 5.
49 He also expressed the opinion that at the time of the sales of these two Murray Street shop premises, there was no sign of the new William Street/Murray Street train station development and so there was a weaker retail market at that time.
50 Mr Collins explained that he conducted a Harper depth curve analysis to compare lot value in relation to frontage and depth of each of the 223 and 225 227 Murray Street sales. The 223 Murray Street sale
(Page 12)
- indicated a $296,000 per metre frontage land value for a depth of 56.39 metres. This was supported by the 225 227 Murray Street valuation which had a similar depth. He said that notional lots 2 and 5 have a depth to Forrest Place of approximately 47.5 metres so he adopted 56.41 metres as the standard depth used in the Harper depth curve analysis and applied it directly to notional lots 2 and 5. He said this indicated a value of $9,840,000 for notional lot 5 or $7,766 per square metre. This did not include any allowance for the corner exposure of notional lot 5.
51 Mr Collins said a value of $7,766 per square metre supported the approximate value of $6,700 per square metre which was derived by applying the same relativities as used by the applicant in its objection, but working from the base rate for notional lot 2 substantiated by the comparable sales evidence that he had pointed to.
52 Notional lot 4 was compared with 223 and 225 227 Murray Street disclosing land value of $6,700,000 or $5,990 per square metre, supporting the $5,833 per square metre calculated by applying the same relativities used by the applicant in its earlier objection.
53 The value of notional lot 3 he said could be calculated by interpolation of the values of notional lots 2 and 4 disclosing a value of $4,166 per square metre.
54 Having determined the value of the notional lots Mr Collins then added the values together to arrive at a total value of $33,488,875 for the subject land. He then added 25% to that figure in order to have regard to the value of the upper floor walkway premises, the "marriage" value of the notional lots and the corner and walkway exposure which benefit the whole property to a significant extent as compared with the comparable sales relied on to determine the piecemeal values applied to notional lots.
55 Thus the total figure for the subject land using the piecemeal approach was $41,850,000 which Mr Collins said plainly supported the valuation assessment of the Valuer General of $37,000,000 at the relevant dates.
56 Comparable sales approach: Mr Collins then said he used comparable sales as a direct check on the two valuation approaches adopted to that point.
57 To do this, though, he primarily took the David Jones site as relevant. He considered the analysed land value of the David Jones site at $27,250,000 (Exhibit 7, [50]) was appropriate, despite his revised
(Page 13)
- hypothetical development which had regard to the quantity surveyor's latest figures (LC L) and which suggested a fair market value of only $16,340,000. His hypothetical development analysis at LC L suggested an underlying land value of $2,880 per square metre compared with the $4,802 per square metre suggested at Exhibit 7, [50]. Mr Collins expressed the view that the higher value had been accepted as the unimproved market value of the David Jones site since 2000.
58 Mr Collins said that, given the unresolved discrepancy between the hypothetical development analysis at LC L and the initial purchase analysis at LC 6 of his original statement (Exhibit 6), he would suggest the hypothetical approach:
• is very conservative;
• the quantity costings of Mr Bosworth may have included elements of demolition and shop fitout; and
• the assumed profit and risk factor is not appropriate in this instance given that the development was being undertaken for a secured tenant as would any development of the subject land.
59 Mr Collins suggested that the David Jones site is a smaller site with two mall frontages. The subject land has three frontages (two of which are considered prime) and the walkway exposure on three frontages. The David Jones site provides a check on the order of magnitude on the site value assessed for the subject land.
60 Mr Collins also had regard to a compensation settlement for the old Myer site which he considered generally supported his assessment of value of the subject land.
61 He considered Raine Square not to be a comparable site as it fell out of the primary retail malls and relative to the subject land had negligible passing pedestrian traffic. He considered a direct comparison of the site showed that it is not in keeping with the values obtained for properties within the Hay Street and Murray Street Malls.
"Reduced scope" approach
62 For the purposes of his hypothetical development analysis approach and the piecemeal assessment approach Mr Collins adopted hypothetical development calculations based on advice received from a quantity surveyor as well as advice from a time planner. He used the values
(Page 14)
- suggested by those calculations either as a primary means of valuing the subject land or as a means of producing the piecemeal assessment of value. He also used it to assess the David Jones comparable site value.
63 As part of this process he considered relevant sales by applying his reduced scope approach. The primary purpose, as explained by Mr Collins in evidence, of this approach is to find a more precise means of isolating the depreciation component in the value of any improvement on a site which is being used for the purpose of an improved value comparison.
64 The valuers, Mr Collins and Mr Jackson, agree that in the process of applying the comparable sales approach, it can be permissible to regard not only relevant sales of vacant land but also sales of improved land, especially where there are insufficient sales of vacant land to form a considered opinion as to the unimproved value of the subject site by comparison to them.
65 In this case, Mr Jackson considers that there are in fact a number of sales of vacant land and it is unnecessary to consider improved land sales. By contrast, Mr Collins says the only sales evidence of larger vacant or near vacant sites relevant to the termination of the subject land value at the dates of valuation are those at 166 Murray Street and the David Jones redevelopment site. He considers the other sales of relatively large sites referred to by Mr Jackson occurred significantly after the relevant dates and are sites with different potentialities and limited comparability to the subject land. Accordingly, Mr Collins contends that it is necessary to have regard to the sale of more comparable improved land, especially in the Hay Street and Murray Street Malls.
66 The valuers agree in substance that if one goes to the sale of any improved site it is necessary, in order to reveal the underlying unimproved land value, to ensure that:
• there is no element of value involved in the improved value other than the intrinsic value of the land and of the improvements.
• the improvements are appropriate to the highest and best use of the land; and
• any depreciation in the improvements due to physical or economic obsolescence through inadequacy, inefficiency,
- lack of utility or wear and tear is, as far as possible, substantiated and quantified.
67 Mr Collins refers to the first edition of the well known valuation text 'Rost and Collins'. The Tribunal has had regard to the second edition, RO Rost and HG Collins, Land Valuation and Compensation in Australia (Leichhardt, NSW, 1978), at 108 109:
"If an improvement is well designed, soundly constructed, suitable for its purpose, and contributes adequately to the highest and best use of the land, the value which it adds to the land should equal its fair replacement cost at the time of valuation less any loss in value due to physical depreciation. An improvement which does not conform with these requirements, or one which is either inadequate or excessive will not make the best use of the land, consequently the value which it adds to the land may not be even distantly related to cost."
68 Rost and Collins address the issue of depreciation under various headings including "depreciation of improvements", "physical deterioration", "functional obsolescence", "economic obsolescence", "loss of value sometimes revealed by sales" and "arbitrary assessments of accrued depreciation". Mr Collins particularly points to the topic of functional obsolescence and economic obsolescence and refers to the following passage at 111 112:
"Functional obsolescence: This exists in respect of older type buildings which are no longer fully functional in accordance with current requirements. Causes may include inconvenience of interior layout, outdated and inefficient lifts, fixtures and fittings, or other shortcomings.
Functional obsolescence and physical deterioration have been subdivided by some writers into curable and incurable elements. Curable physical deficiencies are those which can be remedied at a cost to bring the element under consideration to parity with the element in the new substitute. Incurable physical deficiencies are those which cannot be restored, or those where the utility of restoration would not justify the cost of restoration. Curable functional obsolescence is that which can be alleviated or modernised so as to restore the functional adequacy. The
(Page 16)
- cure must be economically feasible as well as physically practicable.
Economic obsolescence: A lessening of economic utility may be caused by extrinsic circumstances beyond the control of an owner … buildings which are either inadequate or excessive or of unsuitable design for current requirements will also suffer from economic obsolescence. Their notional replacement cost less depreciation would therefore have no meaning, because they would not be replaced by comparable buildings. If the deficiencies could be corrected at economic costs, however, they would have value in the market."
69 Mr Collins has formed the view that given the high cost of construction in the Perth CBD, in order to maximise the return relative to the construction costs it is generally necessary to minimise the extent of basement and upper floor construction given its high cost (which is equivalent to ground floor construction costs) and its low rental and the relatively high risk associated with this cash flow (as compared with ground floor rental rates). This applies specifically to the retail malls and the smaller stand-alone sites.
70 Thus Mr Collins has formed the view that the capitalised value of basement and upper floor areas generally does not warrant the replacement of such areas (i.e. cost of replacement extends value of replacement). He says that redevelopment of the site to maximise return from the improvements in most instances would only entail replacement of the ground floor, the high income generating portion of the property. However, he recognises that this principle does not necessarily apply to larger lots with throughlot access and throughlot linkages at basement, ground and upper floors - such as 166 Murray Street, the subject land and Carillon City Arcade, where upper and basement levels can and do generate significant rental returns.
71 Taking the primary approach and applying it to his valuation, Mr Collins instructed Mr Trevor van Aurich (a time planner) and Mr Thomas Connor (a quantity surveyor) to consider a reduced scope gross building area in addition to their assessments of the improvements that actually existed on sites in question. He did this in order to have their opinion on what he considered a purchaser would think were the appropriate improvements to hypothetically construct on a site categorised as a "city investment property" to provide an economic return on capital investment.
(Page 17)
72 Mr Collins explained that the reduced scope approach reflects the income stream at the date of sale and the improvements necessary to generate a majority of that income and the value attached to those portions of that property. It inherently reflects the depreciation reflected in the sale. From that one can work out the underlying land value by taking away from the sale price the replacement cost of the improvement as at the sale date required to generate the relevant income to support the expected investment return - which he identified as an 8% return on investment.
73 The reduced scope approach was adopted by Mr Collins expressly to avoid what he considered to be the uncertainty involved in the forming of a professional judgment in relation to depreciation.
74 Thus, in Mr Collins' view, replication of the actual site improvements in many instances would reflect overcapitalisation of the property. For example, in relation to the subject land, Mr Collins formed the view that full replacement of the department store portion of the improvements would reflect over-capitalisation of the property. This is discussed separately later, but he formed this view because he considered the more recent redevelopment of the David Jones site provided the optimal development scenario for the subject land.
75 Applying his reduced scope approach and having regard to the advice he received from the time planner and the quantity surveyor he expressed the view that the obsolete portions of relevant sales are as follows:
• Forrest Chase - half of the second floor and the whole of the third floor;
• Plaza Arcade - the basement and all the upper floor including the defunct cinema; and
• 225 - 227 Murray Street - the basement and the first floor.
76 The applicant and Mr Jackson criticise the adoption of this purportedly more scientific, less subjective method of dealing with depreciation. They say that in truth the reduced scope approach involves far more subjective and uninformed judgments than a professional assessment of a rate for depreciation. This makes it not only unreliable but unnecessary.
(Page 18)
77 As to the instruction a valuer finds in Rost and Collins, the applicant points out that the commentary referred to is primarily concerned with arriving at a value of the improvements themselves, not the underlying land value. For this reason it is of limited assistance.
78 The applicant says the normal cautions associated with hypothetical development analysis, which the Tribunal will come to, are plainly heightened by introducing the further subjective assumptions implicit in the reduced scope method.
79 The applicant says that the reduced scope approach is novel (by Mr Collins' own admission), unorthodox and unsupported by the literature and practice. Thus it is incumbent on Mr Collins to demonstrate that it is in some way preferable to the traditional and orthodox method of performing a professional judgment concerning depreciation. The applicant says that the respondent has failed to demonstrate that it is preferable.
80 The applicant points to one primary difficulty in the analysis, being the formation of the judgment by the valuer - in this case Mr Collins - that a basement level or second floor level of the typical "city investment property" has no value. Mr Jackson accepts that in its most simple and extreme form, the reduced scope approach is comprehensible and even acceptable. However, that relates to a situation where part of the building truly has absolutely no value or dormant value. In that instance in undertaking a hypothetical development analysis, it would be appropriate to ignore the cost of rebuilding that which has no value. This is plainly on the basis that it makes no contribution to the highest and best use of the subject site.
81 However, Mr Jackson says the reduced scope approach takes no account of the dormant value of the building. The applicant says this is well illustrated by the evidence brought on behalf of the Valuer General and Mr Connor the quantity surveyor. In relation to the Plaza Arcade site, Mr Connor described the theatre section as "derelict" but accepted in evidence that it had some value because the shell it provided would reduce the cost of a retail development on that floor [T: 27.03.07, 22]. Similarly Mr William Bosworth, the quantity surveyor called by the applicant, was able to give evidence that such a development is indeed planned [T: 27.03.07, 21].
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Tribunal's findings
82 Having considered the submissions of the parties, in this particular case the Tribunal considers the correct and preferable approach to the valuation of the subject land is the direct comparable sales approach adopted by Mr Jackson, the valuer called by the applicant. The Tribunal is not attracted to the other approaches contended for by the Valuer General, in reliance on the valuation evidence given by Mr Collins, the valuer called by the Valuer General.
83 The Tribunal's view is that where there are sales of vacant land that are comparable to the subject site, prime consideration must be given to that evidence. If there are only a few sales of vacant land of such status, then it is appropriate to have regard to the underlying value of comparable improved land as evidenced by sales. In this case, Mr Jackson points to a number of vacant land sales, although Mr Collins contests the relevance of those which have frontages to St Georges Terrace and highest and best land uses of both retail shopping and office development, as well as the sale of Raine Square.
84 We think in the circumstances it is not unreasonable to have regard, as Mr Jackson has done, to the basket of sales to which he refers, but particularly to the sale of 166 Murray Street, which both valuers recognise as relevant. We think the properties with St Georges Terrace frontages and having mixed office/shopping uses are of marginal relevance. Of them the Toys'R'Us/AXA site is probably the most relevant. We also agree Raine Square is a secondary sale, not readily comparable at relevant dates.
85 We think it is also reasonable to have regard to sales of small shopping premises in the Hay Street and Murray Street Malls as Mr Collins does, but again only in passing. Primary reliance cannot be placed on those particular sales as they are of small retail sites and are not truly comparable to the subject land. We also think the compensation paid for the old Myer site is not directly related to the open market and must be viewed with caution.
86 The main reason Mr Collins puts forward these small retail site sales of improved land is to develop his piecemeal approach to valuation. In the event, we do not consider the piecemeal approach is the appropriate approach to adopt. The main reason Mr Collins puts forward the piecemeal approach, at least in his valuation as initially formulated and revised, is that the applicant, at the objection stage of the review process, had submitted a piecemeal valuation to the Valuer General for
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- consideration. However, at the hearing of these proceedings, the applicant did not rely on a piecemeal valuation.
87 Indeed the primary approach to valuation initially contended for by Mr Collins was a hypothetical development of the subject land.
88 We do not think that either the hypothetical development approach or the piecemeal valuation approach should be adopted where, as here, there are relevant sales of vacant land or improved sales to compare with the value of the subject site.
89 In dealing with the hypothetical development approach, relied upon by Mr Collins, we consider it is not the correct and preferable approach to the valuation of the subject land for a range of reasons well known to valuers and dealt with in the authorities over a good period of time. As Cripps J said in the New South Wales Land and Environment Court in Co-ordinated Resources Pty Ltd v ValuerGeneral (1983) 27 The Valuer 779 at 780;
"Although this is a recognised method of valuation, its use, otherwise than for the purpose of valuing land suitable for subdivision which has to be valued in its unsubdivided state, has always been regarded as suspect. If the estimate of assumed improvement costs, gross rentals and outgoings are not accurate, the whole exercise leads to an unreliable result. A small difference in the rate of capitalisation from that assumed has significant consequences."
90 To a similar effect Byrne J in the Supreme Court of Victoria in 15 Lorimer Street Pty Ltd v Secretary of the Department of Infrastructure (1997) 97 LGERA 239 at 252 observed:
"The weakness of the Turner approach is that it applies an apparently scientific formula to a great number of subjectively established variables. The operation of the formula is such that small variations to these variables can have a great impact upon the result: see Turner v Minister of Public Construction [(1956) 95 CLR 245] (at 268) per Dixon CJ. This has caused valuation judges of great eminence and experience to warn against a too ready reliance upon this approach."
91 In this case the unreliability of the method, even from the Valuer General's point of view, was demonstrated by the hypothetical development scenario conducted by Mr Collins in respect of the David
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- Jones site. His initial analysed land value (Exhibit 7, [50]) was $27,250,000 suggesting a dollar rate per square metre of $4,802. However, following the provision of revised figures from the quantity surveyor as to the costs of construction, his revised hypothetical development suggested a market value of only $16,340,000, being a dollar rate per square metre of only $2,880. As noted earlier, Mr Collins was obliged to support the earlier unrevised dollar rate and suggest reasons why there was a discrepancy between the two. As to the reasons for the discrepancy put by Mr Collins, the Tribunal has to say they are entirely speculative and unconvincing.
92 In all the circumstances, the breakdown of the hypothetical scenario in the case of the David Jones site simply goes to demonstrate its unreliability as a valuation approach in respect of a large central city retail property in respect of which there are comparable sales of vacant land and other sales of improved sites.
93 We also note the force of the argument of the applicant that there is certain circularity in Mr Collins' hypothetical development analysis in any event. The applicant says that it is apparent from [9] of Mr Collins' further statement (Exhibit 7) and in the explanation given in the hearing (T: 27.03.07, 46), that Mr Collins takes the view that in order to derive the value of vacant land from a hypothetical development analysis of improved land, one needs a range of sales, including a sale of vacant land itself.
94 The particular hypothetical development undertaken by Mr Collins in respect of the subject land as a retail department store also involves Mr Collins applying what he has called his "reduced scope" method. That has been outlined above. In the case of the subject land, Mr Collins has in effect decided, by reference to what he considers to be an optimal department store development on the David Jones site, what level of development on the site is appropriate. We consider there is great difficulty in an expert valuer making assumptions about the extent to which physical development on a site like the subject one would be limited in pursuit of the highest and best use in relation to a major department store redevelopment.
95 Mr Collins' reduced scope method has also been utilised in relation to a number of improved land sales, particularly for the application of the piecemeal approach to the subject land. Again, as the applicant contends, the adoption of the reduced scope approach in the conduct of hypothetical development scenarios involves an approach that contains a number of
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- subjective assumptions. These are well demonstrated by the table produced by the applicant as part of its final submissions. The table shows how significantly different results can be produced depending upon differences in construction costs. As the applicant also points out, if other factors such as timeframes, professional fees and the profit return expected are altered, so are the predicted outcomes. The applicant particularly relies upon its tables demonstrating the significant differences that come about from adopting different costs and the reduced scope approach. The Tribunal accepts the reasons for caution that are demonstrated by differing costs scenarios.
96 The reason Mr Collins proposes the use of his reduced scope method, is not primarily because he considers it a preferred means of identifying the underlying land value of the improved property, but because he believes it has the advantage of eliminating the subjective judgment that needs to be formed as to the depreciated value of improvements on improved land.
97 In any event, the Tribunal agrees with the criticisms made of the reduced scope approach advanced on behalf of the applicant. The traditional valuation approach of assessing the underlying value of an improved land sale requires the value of the improvements to be deducted. Questions of obsolescence, of one kind or another, must be taken into account. Depreciated value of improvements that are relevant must be considered. Mr Collins contends that the beauty of his approach is that no separate estimate of depreciation is required in such cases, because it is taken into account by his approach. The trouble is though that in adopting a reduced scope approach there remain too many uncertainties of the kind pointed to by the applicant and traditionally accepted in relation to the conduct of a hypothetical development scenario.
98 In the Tribunal's view there is little to recommend the adoption of Mr Collins' attempt at scientific approach to the depreciation issue in a case like this when that alternative approach is itself complex, uncertain, subjective and reliant on a formula that can produce different outcomes depending on the inputs used. In those circumstances we see little reason to set aside the orthodox method of professional judgment in relation to the valuation of an improved land sale.
99 We also consider that one of the real difficulties with Mr Collins' reduced scope approach is that it takes no account of the dormant value of the building. We accept that in this case this is well illustrated by the evidence brought on behalf of the Valuer General through Mr Connor, the
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- quantity surveyor. He described the theatre section of the Plaza Arcade as "derelict" and accepted that it had some value because the shell it provided would reduce the cost of the retail development on that floor. Mr Bosworth, the quantity surveyor called by the applicant, gave evidence that such a development is indeed planned. Mr Collins simply assumed it was valueless.
100 Therefore while, as Mr Jackson acknowledged, there may be some special circumstances where the theoretical underpinning of the reduced scope approach may be helpful and applicable, we do not consider the valuation of the subject land to be one of them.
101 The required valuation principle when assessing the underlying value of an improved land sale, is to ignore the value of improvements of the site, as well as other obsolescent features. The orthodox approach is to form some subjective, albeit data-based, judgment about the value of the improvements and the obsolescent parts. Mr Collins' reduced scope approach, if taken too far, involves the valuer making their own subjective assessment about what a developer would redevelop on a vacant land site, together with their own assessment of the likely rental structure, then analysing a new sale price based on those assumptions.
102 When it comes to Mr Collins' reduced scope, hypothetical development scenario for the subject land, he takes the David Jones lease as his benchmark. In the case of comparing the Myer lease and the David Jones lease for his purposes, Mr Collins assumes that Myer and David Jones would pay exactly the same rent reflecting the same business model. Mr Collins also assumes certain things about the trading success (diminished) of Myer on the upper floors of the existing building.
103 We have difficulties in seeing, in circumstances like these, how a valuer can make the sort of assumptions about the comparative business models of the two department stores along the lines that Mr Collins has here. There are simply too many assumptions made by Mr Collins that are not easily verified and have not been verified by the evidence. There is perhaps a simplistic attraction to the approach, but at least in this case it is not borne out by the evidence.
104 The result is that, in relation to the reduced scope analysis of the subject land, Mr Collins' analysis of the unimproved value of the site proceeds from his analysis of an improved sale, but even then not by reference to an actual sale but by reference to a different sale figure the product of a subjective analysis.
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105 As theoretically interesting as the approach undertaken by Mr Collins is, there is considerable force, in our view, in the criticism made by the applicant that once a complex and subjective analysis is used to determine a land value from something other than an actual sale price it introduces an entirely new layer of uncertainty and assumption.
106 The result of our concern with the use of Mr Collins' reduced scope approach is that we do not have confidence in its reliability as an indicator of the true dollar rate value of the unimproved subject land. This means that the hypothetical development scenario primarily relied upon by Mr Collins is not an approach that we would confidently adopt. Nor are the reduced scope analyses of a number of other sales that Mr Collins relies upon in order to apply his piecemeal approach to valuation. Each of these two primary approaches adopted by Mr Collins therefore fails for the same reasons. The Tribunal does not consider that the formulistic approaches to valuation so adopted by Mr Collins are correct and preferable in these particular circumstances.
107 Nor ultimately does the Tribunal find any help from Mr Collins' analysis of the David Jones site. As noted above, the revised hypothetical development scenario produced a quite different dollar rate from the initially conducted scenario and was much lower. Nonetheless Mr Collins sought to uphold the higher dollar rate value. As we have said, we find the reasons put forward for the discrepancy speculative and unconvincing.
108 There is also the question of whether the sale of the David Jones site is one that is really comparable. We do not in the end think that it is. The evidence plainly suggests that the circumstances in which the David Jones redevelopment went ahead were unusual. As the applicant correctly submits, Mr Collins was at pains not to resile from his assertion that no premium had been paid to the Breckler family for the purchase of the Savoy Hotel site. Yet Mr Collins conceded that David Jones was in need of the site, it was next door to the land it had already acquired and the Breckler family made it clear that they were going to hold firm on the price that they wanted and did so for years. We agree that the purchase of the whole site plainly involved some complexity and a premium paid to an adjoining owner. The proposition that an analysis of this improved sale in order to derive unimproved value is preferable and more comparable to a vacant land sale next door to the subject land, is difficult to accept. In our view, the fact that commercial interests were prepared to proceed with the redevelopment proposal for the David Jones/Savoy site nonetheless, is irrelevant to the valuation principle at stake. It is not a sale
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- that we can confidently act upon as disclosing a reliable underlying land value.
109 We have said earlier that we do not consider the piecemeal approach to assessment should be adopted here. The piecemeal assessment of unimproved value can no doubt be an acceptable method of determination. In this case, however, since the value of five notional vacant lots is required to be established, the degree of risk of error as to the outcomes is high, given the nature of the analysis of the sales evidence. The analysed improved sales evidence depends upon the application of Mr Collins' reduced scope method. We have expressed our concerns as to its utilisation. In any event, Mr Collins then calculates the value for each of the five notional lots, adds those five values and contends that it is a way of seeing the unimproved value of the subject land. In effect what he is saying is that a purchaser would buy the total site of 8,800 square metres and subdivide the land into five lots which would then sell in the market for the value figures adopted. Nowhere does he indicate any allowance for the cost of subdivision, nor a profit margin for the "purchaser" of the subject site. Ordinarily a purchaser would not buy land, subdivide it, and merely expect to recoup the purchase price paid.
110 Accordingly, while the piecemeal approach to valuation has its appropriate applications, we do not think it is a reliable means of assessing the value here, and we do not think that the particular application of that method by Mr Collins produces a reliable result. In any event, he mainly uses the approach to suggest that his primary approach, the hypothetical development scenario, is within valuation bounds.
111 In the event, we find the approach to valuation undertaken by Mr Jackson for the applicant to be the correct and preferable approach. We should however clarify exactly what we mean in saying this. In the reasons for decision of the Tribunal, AMP Life Ltd and Valuer General [2007] WASAT 257 and Weld Club Trustees and Valuer General [2007] WASAT 256, we have drawn attention to the desirability of a valuer, when applying the direct comparable sales approach, exposing their reasoning as far as possible. In those other decisions we were reluctant to adopt the professional judgment of Mr Jackson because he had failed to do this. By contrast, we found that Mr Collins had endeavoured to explain as fully as he could the influences that the particular attributes or detriments of a subject site played in the application of the direct
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- comparable sales approach. In those other cases we were influenced by the reasoning of Mr Collins.
112 In this case, however, Mr Collins has eschewed the adoption of the direct comparable sales approach and has adopted the valuation approaches we find unreliable as true indicators of value. We are left primarily with the approach taken by Mr Jackson, but are also left in the position where we have not had outlined to us in any great detail the extent of the influences for location and other attributes that Mr Jackson has applied. We know of course from his evidence that he has accepted that there are a number of attributes that influence upwards the going rate of the subject land when compared, for example, to the unimproved land sale at 166 Murray Street. In the event, Mr Jackson has applied an 8% premium overall. The applicant points out that that 8% premium should be viewed against the need to apply a considerable discount for size, given that the subject land of Myer Forrest Chase is considerably larger than 166 Murray Street. Indeed, the evidence adduced through Mr Collins for the Valuer General is that historically the Valuer General has been prepared to apply a 30% discount for size.
113 The result in effect is that the only sales evidence agreed by the valuers is that relating to 166 Murray Street. The property was relevantly unimproved and adjoined the subject land to the east. All agree it is inferior by comparisons with the subject land for the reasons earlier explained. Mr Collins analyses that sale as showing an unimproved value of $2,634 per square metre in arriving at his unimproved land value for the subject land at $4,200 per square metre (or on his alternative calculation $5,071 per square metre) which shows a 59% (or 92%) adjustment. Mr Jackson analyses that sale as showing an unimproved value of $2,636 per square metre in arriving at his unimproved land value of the subject land at $2,850 per square metre showing an 8% adjustment. We cannot help but think, utilising the "taste test" suggested by counsel for the applicant, that the difference in unimproved value adopted by Mr Jackson at 8% is perhaps conservative, while that suggested by Mr Collins - 59% (or 92%) is excessive.
114 The reason we suspect Mr Jackson's value is conservative is as follows. While Mr Jackson does not rely on his hypothetical development analysis of the subject site by reference to the 50% sale, it tends to suggest a higher unimproved value of the subject land. As we have also explained, Mr Jackson, in his preferred valuation approach, has taken the unimproved land value of 166 Murray Street of $2,636 per square metre and adjusted it upwards by 8%, to $2,850 per square metre. However, he
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- has not explained in his evidence anything of the details that have resulted in this adjustment. We have already indicated how we think that it is important for a valuer to provide as much detail as possible to explain how a judgment has been formed. If one were to take the unimproved value of 166 Murray Street at $2,634 per square metre, and then make the following adjustments for corner influence, position and size, then we think the following calculation emerges:
| |
| $2,634 |
| |
| |
| $1,185 |
$3,819 | |
| $764 |
$3,055 |
115 The $3,055 per square metre would represent a 16% adjustment on the base rate. This compares with Mr Jackson's analysed unimproved value of the 50% sale of $3,137 per square metre for the subject site. This might suggest that Mr Jackson's analysed unimproved value of the 50% sale is closer to the mark in this case and that his 8% adjustment on the sale of 166 Murray Street is conservative. Overall this tends to suggest that an upward adjustment in the range of 16% 19% is potentially indicated producing a value for the subject land in the region of $27,000,000. However, while we suspect Mr Jackson's valuation is conservative the Tribunal considers it must act on the evidence before it and not speculate about the value of the subject land in the absence of evidence.
116 Accordingly, taking into account our considered views of the approaches adopted by Mr Collins, on the evidence before the Tribunal, we conclude that the assessment of value provided to the Tribunal by Mr Jackson is to be preferred in this case.
117 Taking into account the historical evidence concerning a 30% discount for size, and taking into account also the fact that the Tribunal gains little guidance, if any, from the hypothetical development and
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- reduced scope approaches undertaken by Mr Collins in this case, we are prepared to accept the valuation evidence of Mr Jackson even though we suspect it is on the conservative side.
118 We should add also that we do not consider we can or should rely on the hypothetical development calculations produced by Mr Jackson (attached to Exhibit 15). They were mainly produced by him to challenge Mr Collins' similar exercise and to demonstrate the uncertainties inherent in the approach. We have accepted there are too many uncertainties arising from the adoption of that approach in a case like this.
Conclusion and Order
119 For these reasons the Tribunal would adopt the valuation assessment contended for by the applicant of $25,000,000 at the relevant dates. The following order would then seem appropriate:
1. The review application is allowed.
2. The decisions of the Valuer General to issue assessments for the subject land as at 1 August for the years 2000, 2001 and 2002 in the sum of $37,000,000 are set aside and replaced with the assessments respectively of $25,000,000.
120 The Tribunal will invite the solicitors for the parties to submit a Minute of Proposed Orders to give effect to this decision.
I certify that this and the preceding [120] paragraphs comprise the reasons for decision of the State Administrative Tribunal.
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JUSTICE M L BARKER, PRESIDENT
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