Kent Street Pty Ltd & Ors v Department of Natural Resources and Mines
[2007] QLC 11
•2 March 2007
LAND COURT OF QUEENSLAND
CITATION: Kent Street Pty Ltd & Ors v Department of Natural Resources and Mines [2007] QLC 0011 PARTIES: Kent Street Pty Ltd as Trustees & Ors
(appellant)v. Chief Executive, Department of Natural Resources and Mines
(respondent)FILE NOS: AV2003/0795 DIVISION: Land Court of Queensland PROCEEDING: Appeal against annual valuation under the Valuation of Land Act 1944 DELIVERED ON: 2 March 2007 DELIVERED AT: Brisbane HEARD AT: Brisbane MEMBER: Mr RP Scott ORDER: The appeal is allowed and the unimproved value of Lot 13 on Registered Plan 866294 in the Parish of Gilston, County of Ward is determined at One Hundred and Twenty Eight Million and Two Hundred Thousand Dollars. ($128,200,000) CATCHWORDS: 1. Valuation – unimproved value – methods of valuation – calibration method – allocation method – limitations – over-reliance on mathematical methods criticised.
2. Valuation – unimproved value – highest and best use of subject property – approach if property contains extensive structures – whether such structures to be treated as improvements – appropriate test (QNI Metals case).
3. Valuation – unimproved value – application of s.3(2) proviso – not required if Court lacks confidence in improved value or value of improvements – nature of jurisdiction to determine value.
4. Valuation – unimproved value - value of improvements under s.3(2), s.5 – Quantity Surveyors – use of best available evidence – "as constructed" plans.
5. Statutory construction - Valuation of Land Act 1944 – s.33 – applies to original issued valuation – amended valuation following objection is not a "deemed correct" valuation.
6. Statutory construction - Valuation of Land Act 1944 – s.6(1) – whether a structure "appertains" to land and is therefore an "improvement".
7. Statutory construction – Valuation of Land Act 1944 – s.5(2) – a cost or expense of development not included unless it relates to an "improvement".
8. Valuation – unimproved value - value of improvement partly on the subject land – relevant to overall value of the asset.
9. Valuation – unimproved value - value of improvements under s.3(2), s.5 – depreciation – nature of – contrasted with accounting term – shopping centre – complex considerations.
10. Valuation – unimproved value – desire for relativity – concern if different approaches to valuation reveal markedly different values for similar properties.
APPEARANCES: Mr J E Gallagher QC, Mr D R Gore QC, Mr S L Doyle SC, Mr R N Traves SC Mr L Kelly SC, Mr T Trotter,
Mr J Horton - for the appellant.
Mr D B Fraser QC, Mr T W Quinn, Mr B Codd – for the respondent.SOLICITORS: Mr R Bowie and Mrs A McDonnell – Minter Ellison Lawyers for the appellant.
Mr J O'Rourke and Mrs L Hawkings-Guy Legal Services Department of Natural Resources, Mines and Water – for the respondent.
The appellant has appealed under s.45(1) of the Valuation of Land Act 1944 (Qld) (the Act) against a decision on objection made by the Chief Executive respondent. The appellant owns land upon which the Pacific Fair Shopping Centre (Pacific Fair) has been constructed. That is the subject land for the purpose of these proceedings.
The valuation of the subject land issued in the amount of $180,000,000; a substantial increase over that of $40,000,000 which applied as at 1 October 2001. Following objection the valuation was reduced to $90,000,000 for reasons stated as, "the valuation required calculation by a different methodology". That methodology was purported to rely on s.3(2) of the Act and paying regard to amendments which took effect on 2 June 2003 but which had retrospective effect with regard to the 2002 valuation. Evidence was then led before me from the respondent to a valuation of $160,000,000 or $127,400,000, then to $155,100,000 and finally to $255,000,000. In its Notice of Appeal the appellant provided an estimate of $40,000,000 as being the value of the land. The statutory valuation was carried out as at 1 October 2002 which is the relevant date for the purpose of this appeal.
This appeal was, with the consent of the parties, heard together with an appeal under the Act with respect to land developed as the Chermside Shopping Centre, a major regional shopping centre developed in the Brisbane City Council Local Government area. Evidence in each matter is evidence in the other. Whilst these reasons are concerned only with the Pacific Fair matter, I include such consideration of evidence associated with Chermside to the extent needed to dispose of the instant appeal. For convenience only I refer in these reasons to the owner of the Chermside land as an appellant or to both landowners as appellants.
Reasons in the Chermside matter have been published as PT Limited v Department of Natural Resources and Mines [2006] QLC 0068 on 20 October 2006 (Chermside decision or reasons). To a large extent similar issues were debated in each of these appeals and my treatment of those common issues appears in the Chermside decision. I will not, in the present matter, repeat what was said there but will simply refer to the Chermside reasons, as appropriate.
To some extent the grounds of appeal and the particulars provided by the appellant have been superseded by the nature of the case the respondent conducted. In that respect the respondent did not rely on or advance the presumed correctness of the valuation appealed against, that presumption arising from s.33 of the Act. I adopt the conclusion drawn in the Chermside decision at [6] that whilst a valuation which is statutorily deemed correct under s.33 subsists as such until proven to be incorrect, the real contest in circumstances where the Chief Executive elects to lead evidence to a different figure from that appealed against, will be between the valuations to which evidence is addressed by the parties. It is the outcome of that contest which will displace the valuation appealed against or theoretically lead to its affirmation either directly; or indirectly by virtue of the inadmissibility or lack of cogency of evidence led to support a different figure.[1] Nevertheless, the appellant remain confined to the grounds of appeal.[2]
[1]See Perpetual Trustee Co Ltd v Department of Natural Resources, Mines and Water [2006] QLC0017 at [24] and Van Amstel v Chief Executive Department of Lands (1997) 17 QLRC 27 at 41–46.
[2] s.45(3) and (4).
Section 33 provides:
"Status of valuation
Any and every valuation, or alteration of the valuation, of any land made, or purporting to be made, under this Act by the chief executive shall be deemed to be correct until proved otherwise upon objection or appeal or until altered or further altered."The position that obtains prior to any consideration of an objection or appeal is that it is the valuation initially made and issued by the Chief Executive that is deemed to be correct. The word "deemed" was considered at length by Windeyer J in Hunter Douglas Australia Pty Ltd v Perma Blinds.[3] At 67 his Honour said:
"There is no presumption, still less any rule, that wherever the word "deemed" appears in a statute it demonstrates a "fiction" or some abnormality of terminology. Sometimes it does. Often it does not. Much depends upon the context in which the word appears…"
It seems to me that in the context of s.33 a statutory fiction is created by deeming correct a valuation simply because it issued from the Chief Executive; however, whether that conclusion is right is not an issue, the essential point being that by force of s.33 the relevant valuation is said to be correct. The same result applies to an "altered" valuation which I understand to be one altered by the Chief Executive pursuant to s.28 and s.29. The word "altered" would not logically apply to a valuation changed as the result of an objection or appeal both of which are separately provided for in s.33.
[3] (1969-70) 122 CLR 49.
Section 33 does not provide a statutory presumption of correctness to a valuation changed as the result of an objection or appeal. In the language of the provision such valuations displace the deemed correct valuation by virtue of "proof" to that effect. The scheme of the Act is that a valuation produced following an objection may in turn be displaced by one following an appeal. A valuation following objection or appeal may be higher or lower than the original valuation.
The effect of the above analysis in the present matter is that it is the original valuation of $180,000,000 that was deemed to be correct under s.33. The valuation adopted by the Chief Executive following objection, in the amount of $90,000,000, is a value which, in the language of s.33, has been "proven" correct. It is that valuation which may on the evidence be displaced by a valuation proven to be correct on appeal. If, hypothetically, no suitable evidence was led to support a different valuation the value of $90,000,000 would remain undisturbed.
The grounds of appeal were expressed comprehensively and were further explained by particulars. No point was taken by the respondent that evidence led and submissions made by the appellant went beyond the grounds of appeal. I therefore see no need to record the detailed grounds of appeal in these reasons.
The Subject Land
This land comprises Lot 13 on Registered Plan 866294 in the Parish of Gilston, County of Ward, Title Reference 50025781. The land is located at 2 Hooker Boulevard, Broadbeach.
The subject land has an area of 16.64 ha and lies within the Gold Coast City Council (GCCC) local government area. The registered owners are Kent Street Pty Ltd as Trustee, AMP Pacific Fair Pty Ltd as Trustee and Westfield Management Limited as responsible entity. The co-owners are collectively the appellant.
The Pacific Fair Shopping Centre which occupies the subject land, is identified as a "super regional shopping centre". It was opened in August 1977 and has been enlarged in stages. Together with numerous reconfigurations, there were major redevelopments in 1982,1992,1997,1998 and 2002. The prospect for further redevelopment was under consideration at the relevant date.
As at the relevant date in 2002, reconfiguration of the centre was approaching completion. On completion the centre would have a gross lettable area of 102,980 m² (not including storage space) with 277 specialty shops and major tenants comprising a four-level Myer Department Store, Target and Kmart Discount Department Stores, Coles Supermarket, Birch Carroll and Coyle 12 screen cinema complex, Toys "R" Us and Best & Less. Parking was provided for 5,435 vehicles.
The centre incorporates outdoor shopping malls with a main two-level "L" shaped enclosed building. The design integrates an outdoor mall with enclosed arcades. The outdoor mall provides a village style streetscape with buildings finished to a modern standard. The enclosed malls and specialty shops are air-conditioned. There is an emphasis in the design and layout on tourist and entertainment facilities.
The Pacific Fair land lies in a prominent location at Broadbeach Waters, 3 km south of Surfers Paradise on the Gold Coast and approximately 75 km south of the City of Brisbane. It is situated on the southern alignment of Hooker Boulevard and bounded by Sunshine Boulevard to the west and Melody Street to the south. Little Tallebudgera Creek, to the east, separates the subject land from the Gold Coast Highway. Hooker Boulevard is a major thoroughfare connecting the Gold Coast Highway with the Pacific Highway. Sunshine Boulevard is a four-lane suburban collector route accessing residential areas to the south.
The subject land lies within a highly developed and mature residential catchment. Generally, canal type housing surrounds the land with low and high-rise residential accommodation between the Gold Coast Highway to the beachfront. There is commercial development located along the Gold Coast Highway, but not on the land to the immediate east of Tallebudgera Creek where it flows adjacent to the subject property. The shopping centre therefore enjoys good visibility.
In its original state the subject land was low-lying coastal forest country. It was filled as part of the development of a larger area, sand fill being dredged from Little Tallebudgera Creek for this purpose.
As at 1 October 2002 a relevant draft Integrated Planning Act (Qld) 1997 (IPA) planning scheme had not been formally adopted or approved by the State Government. The transitional provisions of the former Albert Shire planning scheme were the applicable provisions.
Under the former 1995 Albert scheme, the Pacific Fair land was identified as a "major business centre". The centre was contained within the "General Commercial" zone of the scheme. The use of the land for the shopping centre fell clearly within the intent of the "General Commercial" zone. Development upon the subject land under the Albert scheme would have been code assessable.
The subject land currently falls under the provisions of the Gold Coast planning scheme's Broadbeach Local Area Plan (LAP). This LAP contains nine precincts of which the subject land is Precinct 4. The LAP encourages development on the land which will allow the centre to take on a town centre role. The LAP clearly recognises the centre in terms of tourism and employment generation, describing it as having a major tourism function arising out of its range of facilities and the aesthetic nature of its layout.
The level of assessment required for development and/or use of the site for "shopping centre development" is "code assessable". The LAP says that one of its aims is to promote continued expansion of the retail, entertainment and service operations at Pacific Fair. The LAP also encourages further diversification of uses on the land with a clear focus on "promotion of intensive tourism uses".
Westfield
Prior to a recent merger which resulted in the creation of the Westfield Group, the three entities which merged to form that group existed separately. That is Westfield Holdings, Westfield Trust and Westfield America Trust were at the relevant date independently owned and dealt with each other on a commercial arms length basis. Westfield Holdings conducted three major business activities: property development and construction, property and funds management and property investment. I note that there was no evidence of any Westfield Trust owned shopping centre being managed by other than Westfield. Except where precision is called for I will refer to Westfield, generically.
Evidence and Witnesses
With the consent of the parties I inspected the subject property and Chermside, and the various sales properties referred to in the valuation evidence. These inspections assisted my understanding of the evidence.
Witnesses called by the appellant were:
Stewart John Alexander White Asset General Manager for Queensland and Northern New South Wales for Westfield Limited
Andrew David Robertson Senior Development Manager for Westfield Limited Shane Stacey Thompson Development Executive, Development and Asset Management for Westfield Limited.
John Colin Hill Director Resources Co-ordination Partnership Pty Ltd Construction Programmer
Robert Hubbard Partner in Price Waterhouse Cooper's Advisory Services Certified Practicing Accountant
Kenneth Robert McGowan Director or WT, Partnership Quantity Surveyors and Construction Cost Consultants
Simon Vickers Rumbold Director of Urbis JHD Pty Ltd– Retail Economist
Michael Joseph Slater Registered Valuer Dr James Roger DE Lisle PH.D. – Runstad Professor of Real Estate, University of Washington, Director Runstad Centre for Real Estate Studies.
Christopher Gerrard Buckley Director Buckley Vann Town Planning Consultants.
Ronald Albert Higham Partner, Valuations and Strategy Price Waterhouse Coopers Adjunct Professor of Finance & Valuation, School of Business, University of Queensland Chartered Accountant Eamonn Martin Cunningham Vice President Global Risk Management for Westfield Limited James Gerard Long Manager – project Planning at AMP Capital Investors Limited.
John Rangi Ernest Campbell Manager Environment Infrastructure & Approvals at Weathered Howe, Civil Structural, Event, Environment, Infrastructure and Approvals Engineers, Member of the Gold Coast Regional Environment Industry Group
Philip James Dixon Principal Managing Director Geotechnical Engineer Soil Surveys Engineering Pty Ltd.
Michael Edward Gilligan Associate Ryder Hunt, Quantity Surveyor
Rodney Louis Brett Registered Valuer Graeme Wakefield Centre Manager of Westfield Chermside Shopping Centre from 24-12-96 to late July 2001.
Richard Kenneth Godfrey Director and Consulting Engineer MPN Consulting Pty Ltd
Andrew Robert Pryor Financial Controller Management Finance Operations Westfield Limited
Russell Reid Bowie Partner Minter Ellison Lawyers
Witnesses called by the respondent were:
Professor Kerry Dean Vandell Ph.D; Tiefenthaler Chair in Real Estate and Urban Land Economics Director, Centre for Urban land Economics Research University of Wisconsin – Madison
William Owen Managing Director Core Economics
Member – Planning Institute of Australia, Retail EconomistBrett Andrew Plant Director Strategic Financial Services
PKF Chartered Accountants and Business AdvisersRichard Berry Rowles Construction Programmer, Project Planner Managing Director Rowles Time Management
Shane Raymond Stirling Montgomery Registered Valuer
Malcolm Davidson Gold Coast Manager The Rawlinsons Group Pty Ltd, Quantity Surveyor
Mark Everett William Denman Registered Valuer John Brian O'Rourke Principal Legal Officer Legal Services
Department of Natural Resources, Mines and Water
Some Relevant Statutory Provisions
The role of the respondent in valuing the subject land and of the Court on appeal is to determine the "unimproved value" of the land. The meaning of that term is dealt with in s.3(1) and (2) of the Act:
"3Meaning of "unimproved value"
(1)For the purposes of this Act -
unimproved value of land means -
(a) in relation to unimproved land - 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; and
(b) in relation to improved land -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, at the time as at which the value is required to be ascertained for the purposes of this Act, the improvements did not exist.
(2) However, the unimproved value shall in no case be less than the sum that would be obtained by deducting the value of improvements from the improved value at the time as at which the value is required to be ascertained for the purposes of this Act."
These provisions remained unchanged by amendments made to the Act by the Valuation of Land Amendment Act 2003 (Act No. 35 of 2003), though were to some extent affected by those amendments.[4] The parties agree that for the purpose of striking the unimproved value of the subject land it should be treated as "improved land" and that, therefore, s.3(1)(a) has no application in this matter. The statutory methods provided in s.3(1)(b) and s.3(2) are therefore relevant, though I should say that each is not a valuation method as such. The 2003 amendments provided for the recognition of "intangible improvements" and, in s.35A, for a landholder to apply to the Chief Executive for intangible improvements to be taken into account in a valuation. Section 35A also provides for the landholder to supply certain information. This provision has relevance to the issue of the value of improvements under s.3(2) discussed below.[5]
[4] Discussed in Chermside decision.
[5] at [126] and following.
Shopping Centres
The evidence was that a major regional shopping centre is one which typically has a department store as one of its tenants together with one or more full line discount department stores and supermarkets and around 150 speciality shops. Chermside falls into that category. A super regional shopping centre is one usually with two department store tenants, a similar number of discount department stores and supermarkets to that of a major regional centre and around 250 speciality shops. Pacific Fair is so classified. In Australia, there are two department store chains only, that is Myer and David Jones. Where a shopping centre has secured a department store as a tenant it is said to be an "anchor" tenant. A department store is also described as a "major", a term which also applies to discount department stores, such as Target and Kmart and supermarkets such as Coles, Bi–Lo and Woolworths. At the next level come the mini–majors which are national chain speciality shops such as Harvey Norman, Toys "R" Us, Lincraft, Just Jeans, Mathers and Witchery.
The Valuations
The respondent and the appellants provided valuations under s.3(1)(b) and s.3(2) of the Act for both properties. For Chermside, Mr Slater prepared the valuation for the appellant under s.3(1)(b) whilst Mr Denman wrote the valuation relied on by the respondent. For the appellant in Pacific Fair, Mr Brett provided the valuation under that provision whilst Mr Montgomery prepared the corresponding valuation for the respondent. Each of the four valuers employed the comparison with sales method.
Mr Slater and Mr Brett estimated improved values for Chermside and Pacific Fair respectively. Mr Higham carried out two exercises which, having regard to evidence of construction cost estimates provided by Mr McGowan for Chermside and Mr Gilligan for Pacific Fair, reduced those improved values to unimproved figures in a manner said by the appellants to be consistent with s.3(2). The overall s.3(2) exercises for the respondent were prepared by Mr Denman for Chermside and Mr Montgomery for Pacific Fair, taking into account construction cost estimates provided by Mr Davidson.
Prior to trial there were exchanges of valuation reports. Response reports were generated and rejoinders followed. As a result, the figures which appeared in the original valuations were in some cases adjusted, some on a number of occasions. I will not deal with those adjustments in detail but will simply focus on the final figures. I will deal first of all with the Pacific Fair valuations under s.3(1)(b).
Mr Montgomery said that the highest and best use of the subject land was for super regional shopping centre purposes with "real potential for further expansion, particularly of a residential nature". Mr Brett said that he recognised the highest and best use as a regional shopping centre with potential for further development. He said that development of tourist accommodation, for residential usage or for diversification might be undertaken if it added value. For the purposes of the present discussion I will focus on the shopping centre usage. In that respect both Mr Slater and Mr Denman considered that the highest and best use of the Chermside land was for a large or regional shopping centre.
The respondent's valuation of the subject under s.3(1)(b) proceeded on the basis that it was "improvements" only that had to be notionally removed from the land, leaving whatever value remained in the land for the fact that the highest and best use of the land had, by the valuation date, reached fruition by the development, tenanting and operation of the shopping centre. That position relied, in particular, on a suggested meaning of the words "… assuming that, at the time as at which the value is required to be ascertained for the purposes of this Act, the improvements did not exist" in s.3(1)(b). Particular emphasis was placed on the words "did not exist".
The appellant's position was, however, that that same phrase required an assumption that, subject to one exception, no shopping centre had ever been developed and occupied on the land. In short, a hypothetical purchaser of the land treated as unimproved would need to make appropriate allowance for profit and risk associated with the need to secure major tenants, including an anchor, for the shopping centre to be developed. That one exception was that the improvements on the land could be taken into account in determining the highest and best use of the land, as could the fact that a shopping centre had successfully operated on the land.
That issue was considered in detail in the Chermside decision[6] and for the purposes of the present matter I adopt the conclusions drawn there. In particular:
·a parcel of land does not have the highest and best use of a major regional or super regional shopping centre unless it has secured major tenants including an anchor.[7]
·for the purposes of s.3(1)(b) of the Act it can be said where land has been successfully developed as a major or super regional shopping centre and is tenanted as such at the relevant date, that tenancy agreements could be readily achieved.[8]
·it follows that a sale comparison property, which has attracted agreements for lease (AFL's) from major tenants for a shopping centre to be developed on the land, is a suitable basis for comparison without there being any need for allowances to be made for the existence of the AFL's.[9]
[6] at [43] – [202].
[7] See Chermside decision [57].
[8] See Chermside decision [177] – [182].
[9] See Chermside decision [282] and [299]-[305].
Mr Brett's Valuation Under s.3(1)(b)
Mr Brett placed a site improved value on the Pacific Fair land of $59,900,000 or $360 per m², then deducted the estimated cost of site improvements needed to bring the land to a building ready state. In a similar manner to Mr Slater in the Chermside matter[10] he calculated the unimproved value of the subject land at $21,000,000 on the basis of a delay in obtaining a Development Approval (DA) and $24,900,000 if there was no such delay. It was concluded in the Chermside decision that there was no requirement under s.3(1)(b) to proceed on the assumption that a DA needs to be obtained.[11] That conclusion holds equally in the present matter.
[10] See Chermside decision [230].
[11] See Chermside decision [231] – [242].
In his valuation Mr Brett referred to the same four sales relied upon by Mr Slater in the Chermside matter; namely the Telstra sale[12], Coonan Street[13], North Lakes[14] and Robina Town Centre.[15] He selected the Telstra sale as being the most useful. He analysed that sale to a slightly different value from Mr Slater - $278 per m² site improved overall – and allocated $378 per m² to the retail component. There were similarly small differences in his treatment of the other sales; none worth dwelling on. Consideration of Mr Brett's four sales provided in the Chermside decision[16] applies similarly to his reliance on these transactions. The conclusion drawn there was that none of these sales comprises a suitable basis for valuing land with a highest and best use as a regional shopping centre. None of Mr Brett's evidence would cause me to alter that conclusion with respect to the statutory valuation at Pacific Fair, that evidence being already considered in the Chermside matter.
[12] See Chermside decision [244] – [274].
[13] See Chermside decision [275] – [279].
[14] See Chermside decision [280] – [283].
[15]See Chermside decision [284] – [285].
[16] See Chermside decision [244] – [285].
There is no need for me to discuss these sales further except to say that in the case of the Telstra sale Mr Brett repeated Mr Slater's error in dealing with the issue of the highest and best use of the sale in comparison with the subject property. He treated the subject land as if it was a site suited to regional shopping centre development, but lacking "the same certainty of success" enjoyed by the Telstra sale land given its suggested potential to become part of a Chermside shopping centre extension. The significance of this point in his valuation can be demonstrated by reference to his conclusion that on a site improved basis Pacific Fair had a value of $360 per m² and "arguably less" in comparison with his analysed Telstra retail component of $378 per m². I conclude, consistent what was said in the Chermside decision that, putting aside other potential, the highest and best use of the subject land is that of a super regional shopping centre. The Telstra land does not have that highest and best use and does not provide a like with like comparison with the subject property. As much was concluded in the Chermside reasons.[17] I adopt those conclusions for the purpose of the present matter.
[17] See Chermside decision [244] – [273].
Mr Brett said that his valuation shows a 50% increase over the 1992 valuation determined by the Court in reliance largely on the Grand Plaza discussed below.[18] All I can really take from that point is that the sale is one of some antiquity whose value must lie at the lower end of the range exhibited by the other sales evidence. I should refer also to the comment by the Land Appeal Court in AMP Society v Chief Executive, Department of Lands[19] where it was dealing with the 1992 valuation, "If anything, we think (the valuation of the Pacific Fair land) could be on the conservative side."
[18] See [41] herein.
[19] (1995) 15 QLCR 344 at 350.
Mr Montgomery's valuation under s.3(1)(b)
Mr Montgomery utilised three approaches: the site sales method, the allocation method, and the bottom-up method. In his site sales method he utilised the same sales included in Mr Denman's valuation in the Chermside matter and employed somewhat similar methodology. Similarly to Mr Brett, Mr Montgomery first settled on a site improved value then deducted the estimated cost of site improvements to reveal an unimproved value. His site improved value was $160,000,000. The sales relied upon by Mr Montgomery included properties described in the Chermside decision, namely: the Chermside sale,[20] Burwood,[21] Helensvale,[22] Morayfield,[23] Beenleigh Market Place,[24] Grand Plaza,[25] and North Lakes.[26] What was said in the Chermside decision with respect to theses sales properties applies equally to Mr Montgomery's reliance on them in the valuation of the Pacific Fair land under s.3(1)(b). He selected the Chermside and Burwood sales as his main bases. It was concluded in the Chermside decision that the Chermside sale was the most suitable basis for comparison and that whilst Burwood provided a suitable "like with like" comparison it was a less reliable transaction for valuation purposes. The other sales were not treated as suitable bases for direct comparison with a property having a highest and best use as a major regional shopping centre. That finding also applies to a super regional shopping centre. I now turn to add some additional points relevant to the Pacific Fair land and to deal with the comparison process.
[20]See Chermside decision [341] – [378] and [408] – [410].
[21] See Chermside decision [288] – [318] and [428] – [430].
[22] See Chermside decision [382] – [393].
[23] See Chermside decision [400] – [401].
[24] See Chermside decision [402] – [403].
[25] See Chermside decision [404] – [405].
[26] See Chermside decision [280] – [283].
Mr Montgomery utilised the calibration method as his major tool of comparison. That method involves a mathematical comparison between a basis and a subject property taking into account gross lettable area (GLA), improved value, value per m² of GLA, unimproved value and the proportionate value per m² of GLA. It does not take into account such matters as locational and development cost differences. The calibration method was discussed in detail in the Chermside decision[27] where it was not endorsed as a main or sole method of comparison. It was concluded that the method might be useful as an adjunct to a method using block to block comparison with suitable sales evidence. I adopt those reasons here. The need for such comparison can be demonstrated by the fact that in his calibration exercise Mr Montgomery produced an indicative site value range for Pacific Fair between $83,000,000 and $185,000,000. That is the product of the mathematical approach uninfluenced by material differences which would lead to a different result in a block-to-block comparison.
[27] See Chermside decision [319] – [329].
Mr Montgomery said that the primary comparison he drew between Pacific Fair and his sales related to the improved values per m² of lettable area not the mathematical use of the factor which resulted from his calibration approach. Nevertheless, I could find nothing in his written reports nor in his oral evidence in which he employed that indicator of value in a block to block comparison. All that I have in his site sales method is a calibration schedule and a statement in the case of the Burwood and Chermside sales that each is "overall inferior to the subject as a site".
Apart from that, in his calibration schedule he produced a value range which remained unchanged in his summary of valuation figures produced by his three valuation methods. It is quite apparent, therefore, that he has adopted the value range indicated by his calibration method without the influence of a separate block to block comparison whether utilising the improved values per m² of lettable area or other points of comparison. Over-reliance on mathematical methods has been comprehensively criticised in the cases.[28]
[28]Moreton Club v Commonwealth (1948) 77 CLR 253 at 259; Commonwealth v Milledge (1953) 90 CLR 157 at 162; Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd (1981) 146 CLR 336 at 381.
I can briefly dispose of Mr Montgomery's allocation method which was similar to that provided by Mr Denman in the Chermside matter and discussed in that decision.[29] That method is one of estimating land value by analysing sales of improved properties to establish a typical ratio of land value to total property value. The method was described in the Chermside decision as providing a rule of thumb only and it was demonstrated[30] there as being a coarse method. It was not accepted in that decision as a suitable method to employ in such cases as the present. The unimproved value of land expressed as a percentage of improved value in the case of each of Mr Montgomery's sales was extracted from his calibration table data. The value range produced by that allocation method is, not surprisingly, little different from the range produced from his calibration exercise apart from adjustments resulting from the adoption of rounded percentage figures. The value range thus calculated adds no weight to that resulting from the calibration approach.
[29] See Chermside decision [394] – [398].
[30] See Chermside decision [376].
Mr Montgomery expressed an understanding that the allocation method was widely used in the United States. That understanding was based on untested hearsay advice to him from Professor Vandell – advice which, on the face of the record, is contrary to the published material. A reading of the American publication, "The Appraisal of Real Estate" 12th ed (published by the Appraisal Institute 2001) which was available to him, would have revealed to Mr Montgomery that this method is "not used often for commercial properties because of the wide ranges of parcel size and intensity of use".[31] I now turn to consider Mr Montgomery's "bottom up" method.
[31] At pp. 340-341.
In his description of the highest and best use of the Pacific Fair land Mr Montgomery acknowledged its present use as a super regional shopping centre as being its highest and best use but then said that there was "real potential for further expansion, particularly of a residential nature". I understand this to mean that the retail component of Pacific Fair had potential to expand further and that expansion by the addition of a residential component was feasible and of value. That understanding, taken from the above quotation, was modified as the case progressed. I come to the details of this method below but must first deal with a question of law raised by the appellant.
The appellant submitted that consideration could be given to such highest and best uses as residential or mixed use only if the cost of demolishing existing buildings and of terminating leases was taken into consideration. That submission relied on the decision of the Land Appeal Court in Chief Executive Department of Natural Resources and Mines v QNI Metals Pty Ltd.[32] The Chermside reasons include an analysis of QNI Metals.[33] For the purposes of the present matter I adopt the following from those reasons:
·in valuing land under s.3(1)(b) of the Act the first task is to identify whether the land is unimproved or improved land.[34]
·the land is improved land if the works of man (structures) appurtenant to the land add value to it for its current use and its value as such is greater than the price a hypothetical prudent purchaser would pay for the land for a different use, together with any costs of demolition of the structures.[35]
·if land is improved land the improvements on it must be notionally removed before a statutory value is placed on the land.[36]
·once the improvements have been notionally removed the land is to be valued for its highest and best use as unimproved land.[37]
[32] [2002] QLAC 71.
[33] at [116] – [143].
[34] See Chermside decision [118] – [119].
[35] See Chermside decision [123] – [125]
[36] See Chermside decision [132] – [133]
[37] See Chermside decision [133] – [134]
The appellant also made reference to Caltex Oil (Australia) Pty Ltd v Department of Lands[38] in support of its contentions concerning QNI Metals. It was held in the Chermside decision[39] that Caltex Oil was not inconsistent with the QNI Metals decision, but that if it were, the Court was bound to follow QNI Metals. I adopt that reasoning in the present matter and find myself to be similarly bound. In the present matter the subject land is improved land, there being no evidence that a hypothetical prudent purchaser would pay a price, including costs of demolition of structures, greater than the improved value of the land. In accordance with s.3(1)(b) I am therefore required to proceed to value the land on the assumption that the improvements "did not exist" as at the date of valuation. That is, I reject the appellant's submission discussed at [48] herein.
[38] (1996) 16 QLCR 435.
[39] See Chermside decision [138] – [142].
Mr Montgomery's bottom up valuation relied on comparison with three sales of properties which he said were "to be used for mixed-use purposes, similar to that which is permissible for the subject under the Town Plan". He said in his primary valuation report that the method "establishes a sales comparison based floor level of value". The reference to a "floor level" I understand to mean that the value of the subject land as unimproved must at least be at this level, though could be higher.
He said later in evidence that the residential potential of the subject land would result in "an increment to the base level of value for a super regional shopping centre site which did not have that additional feature". That I understand to be a different point from his "floor value" proposition though it is one with which Mr Brett appeared to concur. Having said that, I cannot find where Mr Brett has addressed that potential in his valuation. He had said that his $59,900,000 site value was arrived using what he described as "retail sales". I was referred to no sales in his valuation evidence said to have any residential potential.
Nevertheless his $59,900,000 figure was described in submissions as being a "bottom-up" valuation. I understand the use of the phrase there to mean that the valuation is based on a shopping centre use as the primary highest and best use with some potential for residential usage.
Mr Brett approached his valuation on the basis that for a residential use to be effected at the relevant date, structures would need to be demolished and leases terminated for the reasons I have discussed earlier. Any potential that he thought may have existed for residential use in the subject land would therefore have confronted those substantial obstacles. He also saw the shopping centre as requiring the whole of the site in the foreseeable future therefore leaving little opportunity for residential development. For these reasons it is not difficult to understand why, assuming there was any residential potential included in Mr Brett's valuation figure, it would have been very slight. This is not to say that such potential as there might have been following a correct application of QNI Metals would have been greater than that identified by Mr Brett. Apart from what I have recorded at [47] Mr Montgomery saw the land as unimproved, therefore as a blank canvas in terms of its potential for shopping centre and residential development.
Mr Montgomery's consideration of the subject land as having any residential potential appears to have arisen from the Draft Planning Scheme which had been on display and had proceeded to the closure of objections stage by 22 May 2002. That scheme included a Broadbeach LAP which encompassed the subject land which was located in precinct 4. Mr Montgomery summarised the planning effect on the subject land as being:
" … to promote the continued expansion of the centre and encourage further diversification of uses on the site, including tourist accommodation and permanent residential uses such as in residential tower form. After hours uses are also encouraged, reflecting a true town centre profile."
Mr Buckley added that the overall intent of the precinct included the continuation of the retail entertainment and service operations at Pacific Fair.
Mr Montgomery went on:
"The subject land falls under the Land Use theme of a Major Activity Centre. A Major Activity Centre is defined as the spatial location of a major commercial node which provides employment opportunities, goods, facilities and services. The subject is further categorised to lie within an area defined as a Regional Centre."
Mr Montgomery summarised the residential site potential as follows:
Development Control Interim Plan (As approved) Draft Plan New Plan Plot Ratio: Net of carparking 0.75 Basic plot 2:1
Maximum of 4:1Basic plot 4:1
Maximum of 6.5:1Height 4 storeys 15 storeys 15 storeys Residential density: No existing use. One bedroom per 25 sq.m of net site area (up to 400 bedrooms per hectare) which is equivalent to the old Residential 'D' zone (High density) = 6656 bedrooms or 3328 equivalent 2 bed units. One bedroom per 25 sq.m of net site area (up to 400 bedrooms per hectare) which is equivalent to the old Residential 'D' zone (high density) = 6656 bedrooms or 3328 equivalent 2 bed units. Site Coverage: Not calculated. Up to 90% Up to 95%
Notwithstanding his reliance on this summary and his method of valuation, which I come to below, Mr Montgomery expressed the view that the highest and best use of the subject land was as a super regional shopping centre but with real potential for the inclusion of a residential component. I conclude that there was, therefore, no real issue between the parties that any residential use would have been additional to the dominant shopping centre use.
Mr Buckley's evidence was that mixed residential/retail/commercial use developments of which he was aware, experienced a level of conflict between the various different use occupants. He said that mixed uses seem to work better in smaller projects. Mr Owen gave evidence which supported the contention that a mixed use for the subject land was tenable. Nevertheless Mr Buckley's evidence indicates that such residential potential as there may be would be a qualified potential.
Mr Montgomery referred to three sales in valuing the identified residential potential: The Sundale Site, Dolphin Arcade and Swell. Each was purchased for a mixed development. His overall comparison may be presented thus:
Property Size Potential Density (beds) Site Cover Plot Ratio $ASV
$/m2
$/bedroomSUBJECT 'DRAFT PLAN' 16.64 ha Mixed Max, 1:25m2 Max. 90% Max. 4:1 'Sundale' 5.762 ha Mixed 1:27m2 40% Max. 4:1 $56,278,000
$977/m2
$26,672/bedroom'Dolphin Arcade Site' 7240m2 Mixed 1:11m2 86% 6.5:1 $29,183,700
$4,030/m2
$44,760/bedroom'Swell' 1.423ha Mixed 1:36m2 63% 2.15:1 $19,170,000
$1,374/m2
$48,287/bedroom
Mr Montgomery concluded that the "floor" site value of the subject property was $160,000,000 based on $975 per m² of land or $24,000 per bedroom based on 6656 bedrooms. He said, without providing detailed points of comparison, that the Dolphin Arcade and Swell sites were inferior to the subject as sites, but superior on a rate per m² basis primarily due to size. Having regard to the value he placed on the subject property in this method it appears that Sundale was his main basis. That property was purchased with an approved Master Plan in place with intended development of one 40 level tower, two 30 level towers, one 18 level tower including 2110 bedrooms, 4,000 m² of commercial space and 4,000 m² of retail space as well as some low rise residential and three park areas. In his analysis of the sale Mr Montgomery did not attempt to apply the purchase price to the various intended uses as one might in a summation approach. His analysis of $26,672 per bedroom for 2110 bedrooms calculates to the purchase price, as does the figure of $977 per m².
Evidence and argument was directed towards the proposition that the subject land would not be approved for a fully residential use or a complete mixed use with retail. That evidence appears to have been adduced in response to Mr Montgomery's valuation in which he purported to value the whole of the site as if it could be put to a residential or mixed use. Neither side submitted that the subject land could be devoted to residential use, exclusively.
The difficulty I have is how to employ Mr Montgomery's sales evidence in taking residential potential into account. A value cannot, I think, be estimated for Pacific Fair's residential potential in addition to its shopping centre value in the manner described by Mr Montgomery. There was acceptance by the relevant experts that the subject land is not suited to residential development as a single use. Striking a figure on that basis therefore appears unhelpful. That is, it would not be a value but a mere calculation. When Mr Brett's evidence is considered in the context of my understanding of the correct application of QNI Metals, it follows that there appears to be some residential value apart from the shopping centre value for the subject land. I am not comfortable, however, in determining an additional value for that aspect in the absence of suitable evidence to guide me. Mr Brett's opinion was that such potential as there was, a deferred potential even, as I understand him, putting aside his misapplication of QNI Metals on my understanding of that case.
I am aware what was said about such an evidential vacuum was addressed in Brisbane City Council v Valuer General:[40]
"Even if it had been shown in the case stated that there was no direct evidence as to the value of the submerged land in terms of money it would not have followed that the decision of the Land Appeal Court was erroneous in law. Since it would be unsatisfactory to decide this appeal simply because the case stated did not contain sufficient material, it may be assumed for the purposes of argument that the reasons for judgment did set out all the relevant evidence. Clearly the Land Appeal Court was entitled to hold that the submerged land had some value for the purpose of water supply and recreation."
[40] (1978) 140 CLR 41 at 58-59.
I am, however, in a position of having suitable evidence as a basis to value the subject land, there simply being inadequate evidence to value residential potential in the land and no clear indication as to the extent of that potential. I do not understand the High Court to have been saying that in such a case a Court must place a figure on such an aspect. It is a potential which the respondent contended for – it was for the respondent to adduce suitable evidence.
In the final wash Mr Montgomery's site value of $160,000,000 from which he deducted $20,000,000 for site works to produce his unimproved value under s.3(1)(b) is not well explained, being apparently over reliant on the calibration and allocation methods at the expense of comparison with sales and being apparently influenced by his suggested bottom up value. I therefore turn to consider the comparison between Pacific Fair and Chermside.
In his evidence Mr Brett provided his opinion as to the application of both the Burwood and Chermside sales to Pacific Fair. That evidence is particularly pertinent in the case of the Chermside sale as not only did Mr Brett specifically refer to Mr Slater's site improved valuation of that property at $350 per m², but he said that the relativity of values between the two subject properties was a relevant consideration and one which was of influence in his valuation. I accept that that is appropriate. His comparison with Burwood is of less assistance however, as it was rather confined.
In the comparison which Mr Brett supplied he compared Chermside and Pacific Fair on the basis of income. His evidence was that the overall net income per m² GLA was similar in each case ($404 per m² for Chermside and $395 per m² for Pacific Fair); that the rents from major tenants of $198 per m² gross for Chermside and $196 per m² for Pacific Fair were similar; and that the Moving Annual Turnover at Pacific Fair was 4.8% higher than at Chermside. He said that on these parameters there is little difference between the two subject properties. His initial site improved value of $360 per m² compared with Mr Slater's $350 per m² for Chermside, indicates the measure of difference he thought appropriate on a land area basis. That is about 2.85%, although there does appear to be an element of rounding in the figures. Mr Montgomery's opinion was that Pacific Fair is superior to Chermside on a value per m² basis. That relationship existed in the valuation reports initially tendered in which, on an overall basis, Mr Denman's site improved value for Chermside was $783 per m² whilst Mr Montgomery's valuation for Pacific Fair on that basis was $960 per m². The relativity between those values changed as Mr Denman altered his original valuation for Chermside to $1,025 per m².
Given the conclusions I have drawn on the sales evidence and Mr Montgomery's valuation method, I will rely on the value relationship between Chermside and Pacific Fair in striking a valuation figure for the latter property on a site improved basis. I stress that this not proceeding by way of relativities as discussed at [226] herein – a method of last resort in cases such as this. The value of the Chermside land has already been determined in the Chermside decision. The process I am adopting is that of comparing the Chermside land, at its determined value, with the subject property. The evidence leads me to the view that, in this respect, Mr Brett's opinion should guide me in terms of the measure of relativity whilst the rank ordering of value in that respect is agreed with by Mr Montgomery. The relativity of values was something to which Mr Brett's specifically put his mind and which he supported with some points of comparison.
In the Chermside decision[41] it was concluded that site improvements for the purpose of comparison with Burwood should be added to the unimproved value in an amount of $20,988,000. I adopt that figure for the purpose of the present reasons. The unimproved valuation was determined in the Chermside decision at $112,000,000. The site improved value for the purpose of comparison with Pacific Fair, also treated on the site improved basis, is therefore $132,988,000. That equates to $965 per m² of land area. Mr Brett's differential places Pacific Fair at about 2.85% higher than Chermside on a land area basis. If I apply that directly to the Chermside site value of $965 per m², the figure becomes $992.50 per m² which would calculate to an overall value of Pacific Fair of $165,152,000. I will round that down to $165,000,000 given my earlier observation that the 2.85% figure was apparently the product of some rounded figures. The site improved value of Pacific Fair is therefore $165,000,000. I should also mention that this figure takes into account the existence of the traffic flyover and that part of the bridge over little Tallebudgera creek not located on the subject land. Those features are outside the subject land but benefit it. They are discussed below.[42]I recognise that that figure is higher than Mr Montgomery's site value figure of $160,000,000, however I am not bound by that figure as representing some sort of ceiling. Whilst I have expressed reservations as to the clarity of Mr Montgomery's description of his method, I take some small comfort in my conclusion of site value by the fact that I have settled on a figure in proximity to his estimate and that this came about by use of Mr Brett's comparison evidence. I will now direct my mind to the site improvements which needs to be deducted from this figure.
[41] See Chermside decision [427].
[42] At [136] to [146].
Pacific Fair Site Improvements
The important items of difference between the parties with respect to site improvements for this property are:
·escalation
·site filling
·deep piled foundations
·revetment wall
·site clearing, acid sulphate soils, proof rolling
·margins and adjustments.
In the use of sales evidence all that is being done in a site improved comparison is bringing the properties to a similar state for the purpose of comparison on the date of valuation assuming the site improvements were in place. On that basis there is no need to consider the prospect of escalation of construction costs after the relevant date. The escalation issue which falls for consideration below relates to prices of works settled some time before 1 October 2002.
Fill Volume – Pacific Fair
The Pacific Fair land needed to be filled to allow its development, the parties largely adopting the same finished level but disagreeing as to the quantity of fill needed and the source of fill. Various quantity estimates were made by the respective experts for the parties, with Mr Gilligan settling on 460,000m3 and Mr Davidson 420,000 m3. The primary difficulty in estimation arose from the unavailability of natural ground level data, before filling. Incomplete bore log data had to be relied upon.
The 40,000 m³ difference between the two estimates includes a volume of 24,960 m3 which relates to an estimated 150 mm of top soil which the respondent contends was not historically stripped from the land. I accept that on the evidence this factual conclusion is supported. The figure of 150 mm is taken from the evidence of Mr Dixon that the depth could be 100 to 200 mm. Mr Dixon also said that as at October 2002 the stripped material would not be suitable for reuse as structural fill, though half of it might be if blended with other material. The parties proceeded on the basis that none could be reused.
The respondent submitted that the allowance for stripped top soil should not be made as there is no such improvement on the land. I do not accept that submission. The exercise presently under consideration is that of estimating the site works needed to bring the land to a building-ready state for the purpose of sales comparison. It is not an exercise in valuing the improvements in situe which is required under s.3(2) and is therefore not an issue that arises in the context of the present discussion. A development of the land as at 1 October 2002 would have required the stripping of top soil and the consequent replacement of that with suitable fill material.
The effect of the above conclusion is to narrow the gap between the fill quantity estimates to 15,040 m3. That gap is further narrowed by deducting about 3,000 m3 from Mr Gilligan's figure to cater for lower finished levels of the pedestrian concourse and a water feature. I will round the difference down to 12,000 m³ on the basis that Mr Gilligan's figure has become 457,000 m³.[43]
[43] i.e. 460,000 m³ - 3,000 m³.
The remaining difference between the two experts appears to be largely associated with the western car park area. Mr Gilligan assumed an horizontal natural ground level in that area whilst Mr Davidson assumed the natural level to be rising east to west away from Tallebudgera Creek. Such data as was available indicated that, contrary to the assumption made by Mr Davidson, the natural ground level fell from east to west. Mr Davidson conceded as much, though thought it unusual. The relevant consequence of that is that fill estimates will be greater than estimated by Mr Davidson. On the available evidence I cannot refine the difference between the two witnesses further. I therefore adopt the figure of 457,000 m³.
In his original report Mr Gilligan had, on instruction from the appellant, proceeded on the basis of a fill figure of 533,000 m³ as was adopted in the 1994 Land Appeal Court decision.[44] He appears to have not independently considered the volume of fill that might be needed until his rejoinder report. In submissions he was criticised for placing "blind reliance" on the 1994 figure in circumstances where his firm had been providing quantity surveying services to Pacific Fair for most of its life and where he had some direct involvement in project work on the site. In cross examination Mr Gilligan admitted that he had overlooked the removal of fill material after 1994 for the purpose of construction of three basements. It was not put to him that that oversight was other than innocent. The submission for the respondent that it was more than that ought not to have been made. I disregard it.
[44] (1995) 15 QLCR 344 at 346.
Fill Source – Pacific Fair
The fill placed on the subject land when it was originally developed had been dredged from alluvial deposits in the nearby waterways and pumped onto the land. The respondent proposed that method as the basis for the estimation of cost and time delay for effecting the required fill. The appellant proposed that fill would need to be trucked to the site from an outside source. Its position was that there was little prospect of the dredging method being permitted. The legal position seems to me to be quite clear and that is that the estimated amount reasonably involved in obtaining fill is to be based on the source available at the relevant date for valuation; that is 1 October 2002.[45]
[45]Landell Pty Ltd and Lakes Investment Pty Ltd v Department of Natural Resources and Mines (2002) 23 QLCR 268 at [36].
Notwithstanding a reference in its submissions which I understand to be consistent with my appreciation of the relevant effect of Landell and Lakes, the respondent submitted that the assumption of a DA being in place at the relevant date carries with it an assumption that filling of the site with alluvial material sourced for the waterways is approved. The submission was to the effect that if s.3(4) applies such that it is to be assumed that a DA is in place, it must correspondingly be assumed that the right to dredge alluvial fill is also in place. Such a permission is one for an operational work under s.1.3.5 IPA. I need not deal with the merits of this submission as I see myself bound by the Land Appeal Court decision in Landell and Lakes at [36] and that is:
"(b) The added value which a reasonable purchaser would ascribe to the improvements constituted by the fill at least to RL 3.5 may be established at the relevant date by reference to what the purchaser would incur to acquire the fill, that is, the costs of acquiring the fill from the most readily available source at a reasonable price."
Mr Brett said that purchasers of major regional shopping centres typically employ a ten-year horizon, directing their minds to the opportunities and threats during that timeframe. That does not suggest that there would not be some decline in the improvements value expected during that period, but it is counter to the suggestion that some arbitrary period such as 40 or 50 years is appropriate.
Mr Brett was critical of Mr Montgomery's straight line approach as failing to recognise, amongst other things, the expansion of the shopping centre over time with the effect of increasing the economic value of the shopping centre overall. That proposition appears to be supported by evidence from Mr Long that expansion of a shopping centre can have a synergistic effect on the economic worth of existing structures. That raises an interesting point not addressed by the parties. If one was able to say that the positive effect of expansion was needed to enliven the worth of the existing improvements there seem to be two pieces of reasoning available. One piece would say that if the addition of new improvements raised the value of the existing improvements they must have a declined value. The other says that if the value of the existing improvements can be enlarged by the addition of other improvements and not by expenditure on the existing improvements, those improvements merely had an unmet potential. I prefer the second approach as it seems to me that the value of improvements needs to be considered in the context of the land they sit on and the potential of that land. That is, they have not necessarily declined in value, but their value is suboptimal to their potential.
The respondent argued that the preservation of rental income of aging improvements is an unsound basis for estimating depreciation because it disregards the potential of a "renewed" offer be it in the form of redevelopment or refurbishment. And it is the availability of that potential and the level of impact that it would have, that is directly relevant to the level of economic obsolescence in the existing improvements, it is argued. I have just addressed one aspect of that proposition. The phrase "renewal of the offer" was used to indicate a newer, more attractive shopping centre in place of the previous one. It is, apart from that, a phrase of elastic meaning as it could refer to a refurbished shopping centre, a new shopping centre or an expansion of the existing shopping centre combined with refurbishment. What needs to be borne in mind is that the improvements being valued are those in existence as at the date of valuation. The fact that additional and newer shopping space is open to development at that date is not, by itself, an indication that the present improvements have declined in value. It indicates that the site has potential to support a larger GLA and, possibly, a shopping centre of higher status. The mere fact of an expansion of a shopping centre as a so-called "renewal of offer" is not evidence of a reduction in value of existing improvements.
It is often the case in shopping centre expansions that part, or rarely all, of the existing structures are demolished. Demolition occurred in the case of Chermside and Burwood and was intended as part of Mr Long's suggested redevelopment/expansion of Pacific Fair. In placing a value on the existing improvements the fact of demolition is relevant only if that would have been the option taken because of the decline in value of those improvements by virtue of their physical or economic obsolescence; or physical deterioration. The mere fact of their demolition to facilitate the construction or design/layout of the expanded shopping centre is not, in my view, relevant to their value. In such circumstances the demolition and reconfiguration is relevant to the expanded shopping centre and simply demonstrates that the owner was willing to sacrifice the demolished improvements to the benefit of the expanded facility. Their value may be treated as an element of the cost of the new facility. The valuer noted in the JLL valuation the proposal for redevelopment, but made no express reference to that prospect in his adoption of a capitalisation rate to reflect a view as to a decline in the value of the improvements.
Mr Montgomery recorded increases in improved values of the subject property each year between 1999 and 2003. The appellant suggested that it would be anomalous if during those same years the value of improvements would proportionately decrease. I do not accept that reasoning as being valid as in the life of a shopping centre, though not necessarily spread evenly, the improvements will decline in value as a proportion of the improved value. If that did not occur there would be no need for shopping centre redevelopments, though I recognise that such redevelopments occur for different reasons, as I have said.
Mr Rumbold and Mr Owen acknowledged the rapid evolution of shopping centre design and the competitive pressures that apply to such assets. Having said that, I think it to be a matter of relevance that no example was cited to me of a shopping centre redeveloping only to renew the existing offer. In all of the examples referred to, the redevelopment involved expansion. Whilst innovation in shopping centre design and layout may occur rapidly, that does not lead to a conclusion that the subject shopping centre necessarily suffers incurable physical or economic obsolescence. There is no suggestion of that in Mr Dillon's valuation.
Mr Owen calculated the average period between major refurbishments or expansions for Pacific Fair was 6.25 years. Mr Rumbold agreed that refurbishment for major shopping centres took place every 5 – 10 years sometimes in conjunction with expansion or tenancy changes. I was not referred to evidence from which I could garner some measurable appreciation of what is "major" nor the extent to which such works were associated with expansion. Expansion, I would think, would depend largely on the opportunities the site offered. That is, the mere fact that expansion has taken place and will probably take place in the future does not point to value loss in the structures. The evidence was that new major regional shopping centres are generally not developed in one line, but move from a lower level development as, say, a sub-regional shopping centre up through the various classes. Refurbishment takes place as part of that progression. Burwood shopping centre is, however, an example of a major regional shopping centre which was totally demolished, but rebuilt as a larger, newer shopping centre. It is the only Australian example of that occurring according to Mr Rumbold. The example of the office building provided at [188] above, whilst common to the commercial building market, is therefore uncommon in the case of regional shopping centres.
I have no explicit evidence as to there being incurable physical deficiencies which contributed to the reduction in value of the improvements, but would expect there to be some given the age of the structures. In Mr Denman's explanation which was reflected in Mr Montgomery's approach, he said that whilst age is the parameter employed, the driver of the depreciation rate is relative performance. Yet no evidence was led suggesting the relative decline in economic performance of either subject property against an assumed optimal shopping centre on the subject lands. I will not otherwise direct my mind to the age of the structures as, in some way, pointing to some arbitrary method of depreciation.
Mr Montgomery said that a higher rental could be achieved if the improvements at Pacific Fair were new, yet referred to no evidence in support of that proposition nor with respect to the measure of difference that might arguably apply. Such evidence as was apparently relied upon by the respondent for that proposition related to expansion associated with refurbishment. Indeed, there was evidence from Mr Brett to the effect that even the relatively aged part of the external/Rue Montmartre area of the shopping centre (which Mr Long said warranted some refurbishment) attracted rent of a similar level to that in the internal air-conditioned arcade area; and that there was no discernable capital expenditure requirement difference between the older and newer parts of Pacific Fair. Whilst that evidence does not directly address Mr Montgomery's point, it implies that he is wrong. I will add to that the observation that Mr Montgomery's point was that a newer shopping centre would attract higher rents – he did not say that physical or economic obsolescence would be the cause of that differential, simply the newness factor.
I would expect that the capitalisation rate would reflect the prospect of the termination in use of the improvements or any part, but there was no evidence presented of any differential between the relevant shopping centres to indicate that improvements might have depreciated more rapidly in one case than in another. In the case of Burwood the capitalisation rate reflects this phenomenon once the redevelopment option is starkly obvious. That does not mean that there is not depreciation by way of the physical or economic obsolescence of the improvements, but simply that it is not clearly demonstrated.
Pacific Fair opened in 1977, but has undergone a number of expansions during the 25 years leading from that date to 1 October 2002. It had at 1 October 2002, a GLA of about 103,000 m² and a land area of 16.64 hectares. It therefore had scope for expansion. In addition, there was evidence that the shopping centre was open to modification/expansion without disruption of the integrity of the overall shopping centre and its operation. That evidence comprises an internal memorandum in September 2002 seeking approval to the expenditure of funds to allow completion of a concept design depicting a major extension and refurbishment. The preferred option involved a cinema expansion and the development of an entertainment and lifestyle precinct; relocation of a hardware store; relocation of Kmart and a redevelopment of most of the open-air precinct. There would be approximately 10,000 m² GLA increase with the above proposal, 7,000 m² of this in speciality shops. Areas designated for demolition total 10,808m², whilst 3,352m² was identified for reconfiguration. The open-air precinct had not been refurbished for some years and was an important part of the shopping centre. The proposal to develop the concept was approved but later shelved in 2003 following a change in ownership interests.
The expansion and refurbishment idea was prompted to some extent by the opportunity presented by the expiration and holding over of some leases. The bulk of those have since been renewed thus removing the opportunity that existed in 2002. Nevertheless Mr Long maintained support for the concept work to be carried out.
It was estimated in the 2002 memorandum that anticipated expenditure of $116,000,000 in the project under consideration would increase the value of the shopping centre by $134,000,000 or more depending on any synergistic effects. That evidence usefully points to the obvious proposition that cost and value are not coterminous and, in the present topic, to the point that the demolition of part of the existing improvements would probably lead to an increase in value. That does not suggest therefore that the structures earmarked for demolition had declined in value more rapidly than the average, but that their demolition was convenient to the expansion project.
The clearest point that arises out of this evidence is that the open-air area identified as Rue Montmartre seems to need refurbishment. Given that there is a high tourist visitation to Pacific Fair I would think that the need for this refurbishment would be a matter of some importance, though compensated to some extent by the open-air nature of the shopping experience. The idea of extending the shopping centre, though still supported by Mr Long, appears to be one whose time has not yet come in the minds of the present co-owners. The renewal of the leases referred to above also supports that conclusion. On my reading of the JLL valuation, such renewals would have been foreseen at 1 October 2002. Nevertheless, the potential for expansion and refurbishment promotes the view that the bulk of the existing structures retain a substantial value. It would be quite different if as, in the case of Burwood, they would need to be completely demolished to facilitate renewal.
Having regard to the existing lease terms to majors weighted by the area occupied by each, the remaining lease periods calculate to a 50% expired period for that class of tenant as at 1 October 2002. Kmart is included in that calculation on the basis of its lease being expired, though the evidence points to a fresh lease being in prospect at the relevant date. The previous Kmart lease had been for 25 years and that lease expired in August 2002. That all points to a very high residual value in the structural improvements, especially given that the lease terms for majors extended up to 40 years in the case of Myer.
It is difficult to think that there would have been no decline in the value of the improvements through their life, but it seems to me that any such decline is contingent on the emergence of evidence of internal decline and/or external threat in the manner discussed above. External influences, including threat, were not mentioned by the parties. As to internal decline – observation of that would depend on evidence, for example, in the form of a contrast between the value of the existing improvements and some alternative renewed offer. That is, the existing shopping centre needs to be contrasted with a suggested new offer. None has been forthcoming in the evidence though, as I have said, Mr Montgomery made some assertions in that respect. Such evidence as there was in the form of Mr Long's proposed redevelopment/expansion can be characterised differently, apart from his suggested need for the refurbishment of the outdoor/Rue Montmartre precinct.
Mr Montgomery depreciated lessor's contribution to tenant fitout on the basis of the life of the leases unexpired as at 1 October 2002. There is an assumption implicit in that approach that the value of the fitout is confined to the lease term. It is generally the case that following stabilisation the majority of leases are usually renewed thus extending the life of fitout beyond the relevant lease period. This is apparent given that the lessor's contributions to fitout includes shop fronts and such services as lights and fire sprinklers. Mr Higham said that the contribution of fitout should, as with the overall construction costs, be treated as part of the initial capital required to create the shopping centre. On that basis, the capital allowance should form the basis of depreciation of the value of those improvements. I accept that the depreciation of the value of such improvements is adequately reflected in the capital allowance insofar as curable elements are concerned.
In the end I find that the appellant's evidence concerning depreciation in value of improvements falls short in addressing curable elements only. It did not address the incurable though the appellant would, I suggest, have had the expertise within its camp to do that. The respondent has failed to lead evidence which provides any support for its straight line method – a method that it both criticises and embraces. Any attempt by me to devise a depreciation rate or amount based on the evidence I have before me would be a guess not a "practicable test" as was described in AMP Henderson Global[104]
[104] See [186] herein.
The result is that I reject the exercises which the parties purported to carry out under s.3(2). I therefore adopt the s.3(1)(b) valuation concluded by me as representing the value of the subject land for the purposes of the Act. That is a value proven correct on appeal. It therefore displaces the valuation of $90,000,000 appealed against.
Relativity
The appellant was provided by the respondent with a schedule depicting the unimproved values for a number of shopping centre properties along with other information. Mr Brett considered this material and rank ordered the revealed values reflecting both the site value per m² of lettable areas and the value per m² of land area. He said that he was unable to discern a pattern of relativity in the applied site values. My own understanding of this evidence leads me to the same conclusion. It seems that differences in relativity of one property to the other in the supplied material resulted from different levels of information being available to the Chief Executive and different valuation approaches being adopted. In the circumstances I am therefore left to the evidence placed before me. I can find no assistance in the relativity properties referred to.
Order:The appeal is allowed and the unimproved value of Lot 13 on Registered Plan 866294 in the Parish of Gilston, County of Ward is determined at One Hundred and Twenty Eight Million and Two Hundred Thousand Dollars. ($128,200,000)
RP SCOTT
MEMBER OF THE LAND COURT
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