Netanya Noosa Pty Ltd v The Valuer-General
[1992] QLAC 12
•3 April 1992
|
BRISBANE.
3rd April, 1992.
Re: In the matter of an appeal from a
decision of the Land Court - AV91-80.
Netanya Noosa Pty Ltd
v.
The Valuer-General
JUDGMENT
Netanya Noosa Pty Ltd has appealed against the decision of the Land Court in affirming the Valuer-General's unimproved valuation, as at 31st March, 1990, of $8,750,000 of "Residential High Density" zoned land on the beachfront at Noosa Heads. The land is described as Lot 1 on R.P. No.214815, County of March, Parish of Weyba, and contains an area of 3498 square metres. It is situated towards the eastern extremity of Hastings Street, at the corner of Park Road, being to the east of the Tewantin Road junction and immediately to the east of the Noosa Heads Surf Lifesaving Club. The site is developed with what has been described as a prestige 47 suite hotel style building, incorporating conference facilities, restaurant and two Hastings Street frontage retail shops. There is no dispute that the development density of the site by Netanya Noosa represents the highest and best use of the land.
The background to this matter is that initially the Valuer-General valued the land at the relevant date, in the sum of $10,000,000. Upon objection, the valuation was reduced to $8,750,000 but dissatisfied with that decision the matter was brought on appeal to the Land Court where it was heard by the learned President, Mr D.J. Barry. Before him evidence was led by the appellant to a value of $6,000,000, as it also is before us.
It is common to the evidence of the parties both in the Court below and before us, that there was no sales evidence considered to be of assistance in establishing the unimproved value of this beachfront land as at the relevant date. The evidence of witnesses for the appellant company in the Court below, was that since the previous valuation as at 31st March, 1989, but more particularly since mid 1989, the real estate market had declined to, in the minds of some, a state of collapse. It was the opinion of a director of the appellant company, Mr D.P. O'Shea that a natural economic result of the pattern of interest rates which prevailed at that particular time should have been seen as a direct force on property values. Mr P. Toohey, a licensed real estate agent, director of the appellant company and a person with considerable experience in the real estate development field, gave evidence before the President to the effect that he knew from direct involvement that the real estate market "fell on its face" in 1989 and early 1990 and while the fall was "quite horrific" it may not have been generally recognised until some time later. The valuer engaged in this matter by the appellant company, Mr C.S. Mount, gave evidence in the Court below and was the only witness for the appellant company before us.
Mr Mount endeavoured to show that a market decline had occurred between the date of the previous annual valuation and the relevant date in this matter. He produced a series of graphs, based on all vacant land sales which had occurred both in the Noosa Heads locality then the combination of Noosa Heads and nearby localities in the annual period to 31st March, 1989, and then to 31st March, 1990. The first graph showed the volume of sales, the second the total area sold, the third the total value of sales, the fourth the average value per square metre indicated by the sales, then finally the fifth graph depicted the average price per property sold. In the absence of directly comparable sales evidence, it was Mr Mount's opinion that this statistical data confirmed his opinion that the overall market had declined during the period of study. It is clear that the volume of vacant land sales had declined, but while the graphs showed in most cases declining quantums over the period for the statistical bases selected, the data making up those bases was in itself variable, with regard to the classification and quality of land.
The statistical interpretations drew criticism from Counsel for the Valuer-General, who suggested the averaging process involved in the analyses offended sound valuation principles. Mr Mount's defence was that he saw the need to provide the available data of the overall vacant land market to indicate that there was indeed a declining local market and it was logical to expect that this extended to the particular market within which the subject property existed. We find it of little assistance to consider statistical data where the criteria providing the basis - i.e. the property involved in the two periods of study - is not in itself necessarily similar - quite apart from the dissimilarity with the property to be valued. Nevertheless, we understand Mr Mount's perception that there was need to, in some way, provide factual evidence to support the opinions expressed as to the declining market.
The main area of disputation and one crucial to the end result, was the Valuer-General's opinion, through his valuer, Mr G.E. Short, that with regard to the beachfront side of Hastings Street there had, at the relevant date, been no general decline in values. Mr Short accepted that in comparison with the level at 31st March, 1989, a decline in values had occurred on the southern side of Hastings Street, ranging from relatively minor (5%) on the smaller properties in a lower unimproved value category, up to 27.5%, but mainly around 20%, for the larger properties in the higher unimproved value category. While the evidence before us is unclear as to his precise knowledge of and reliance on, a July 1990 sale of a property referred to as "The Emerald" site (of 4760 square metres), at the time of writing his 31st March 1990 valuations of properties on the southern Hastings Street frontage, the sale, showing an analysed unimproved value about 20% less than the 31st March, 1989 valuation, closely supports Mr Short's adopted lower level of value for this southern frontage property.
Mr Short is adamant that a distinct and different market exists for the subject beachfront side of Hastings Street as opposed to the southern frontage. Up to the date of valuation, he says he had monitored the value of Hastings Street property over a period of eight years. Through his duties with the Valuer-General's Department, he had kept in regular communication with real estate agents and others with interests in Hastings Street property transactions and movements in value and he feels he had built up a particular expertise in this locality. It is his evidence that the 31st March 1989 valuation of the beachfront lands which involved a significant increase over the 1988 and earlier valuations, had, in the absence even then of comparable sales, relied on his interpretation of earlier sales and his perception of the market forces being exerted on the beachfront land. Similarly, as at the 31st March, 1990, the decision not to alter the beachfront level of values, but to reduce to varying degrees the southern frontage levels, was based on his perception of the market at that time. He says the consequent altered relativity which then occurred between beachfront and southern frontage valuations, was not inconsistent with what has occurred over the years when there had been sales evidence to support alteration of that relativity from time to time between the two street frontages. He has maintained the previously existing levels of value and relativity from property to property on the beachfront except notably for the valuation of the subject property which was reduced on objection by a factor of 12.5%. This reduction was intended to reflect his perception of the effect on the subject property caused by the westerly movement of the hub of the retail centre of Hastings Street. Mr Short agreed that while the beachfront section was unique and in an exclusive market category he had needed always to consider the totality of the existing market at the various dates of valuation. There had in fact, been a sale of a site on the beachfront, in May 1989, of property known as "Outrigger" but the circumstances surrounding this sale to an owner of property adjoining on both sides, and at a price far in excess of the existing applied level of value, were such that the evidence provided was considered (by all parties in this matter) to be unreliable in any interpretation of open market value.
Mr Mount agrees that property on the southern side of Hastings Street is not directly comparable with the northern beachfront side. He points out however, that there is a general similarity and mix of retail, commercial and associated residential unit development on both street frontages and it is his opinion that market forces seen to be affecting the southern frontage property should also be accepted as influencing the opposite side. It is his opinion that while it is correct for the Valuer-General to have applied different levels of value to the opposite street frontages, it was incorrect to alter the previously existing relativity by reducing the southern frontage values and leaving the beachfront levels as they were. He had understood the evidence in the lower Court to suggest that the larger sites on the southern side had been reduced by 27.5% and he believes the subject property, being one of the larger sites of higher capital value, should benefit from at least the same reduction, in addition to the original 12.5% which had been allowed for a reason unrelated to general valuation trends but instead for a specific consideration of a physical constraint. He agreed this should have been recognised, as it was, by the Valuer-General.
Before the President, evidence for the appellant company was given by the two previously mentioned directors and valuer and also Mr A.J. Taylor, a quantity surveyor. Mr Taylor had estimated the replacement cost of the improvements, including professional fees, excluding holding costs, as at the relevant date, in the sum of approximately $12,700,000. The actual cost of construction of Netanya Noosa had been calculated by the appellant company's accounting manager, then indexed (based on Consumer Price Index increases) to the relevant date resulting in the sum of approximately $11,700,000. Evidence was also introduced as to an architect's estimate of a cost of construction of approximately $9,800,000 exclusive of professional fees. In the Land Court, it was the case of the appellant company that, as there was no comparable sales evidence, the value of the land could be tested by consideration of the feasibility of its redevelopment as at the relevant date. Mr Mount had produced three exercises which indicated the residual land value which would result if certain criteria were adopted in the traditional notional development exercise. Mr Toohey, with his experience in such matters provided his approval to such an analysis because it is an interpretation of what he says happens in the real world of property development.
Firstly Mr Mount showed that for the land to be worth the Valuer-General's valuation of $8,750,000, the gross realisation from the on-completion strata titled sale of all components - i.e. 47 individual units, restaurant, shops and management rights - would need to be $25,820,000 and development costs limited to $9,818,300 before the various holding costs, if a developer was prepared to accept a profit of 20%. His evidence is that in the first place such gross realisation was not achievable. The second exercise adopted a gross realisation of $19,390,000, development costs of $6,580,000 before holding costs and developer's profit of 20%, to show a residual land value of $7,300,000. The third exercise adopted what Mr Mount saw as a more achievable gross realisation of $18,735,000, a development cost of $7,520,000 before holding costs, a developers profit of 20% and a residual land value of $6,000,000, which is his adopted valuation.
The President did not find that the exercises carried out by Mr Mount were of any assistance. He said "There are too many variables." The President then referred to the historical criticism of the notional development exercise in that variance of the adopted criteria results in entirely different residual land value calculations. Indeed, Mr Mount's evidence below was that if, in the third exercise, the gross realisation was adopted as realistic but the developer's profit increased above his "conservative" allowance of 20% and the "development cost" increased to either the architect's or quantity surveyor's estimates then a much lower land value would result. This in his opinion would not have been realistic.
What in effect the exercises do show was that the development at the relevant date would not have been viable. It does not necessarily show the price a prudent purchaser, aware of the vagaries of the market, might be prepared to pay even in a depressed market, for prime real estate which has in the past, attracted premium values.
When Mr Mount came before us, his evidence was reduced to the calculation of a residual land value on what appeared to be a reproduction of the third exercise in his original approach. This time however, there was the subtle difference in that the "Development Cost" item was now described as "Depreciated Replacement Cost". He explained that this cost was based on calculations which produced a value for the improvements after a depreciation allowance which equated 31% of the replacement cost as estimated by the architect, this time with the professional fees included. We see the exercise as presented to us as being, rather than a notional development, an analysis of a notional entrepreneurial exercise in which the property as already constructed, is subdivided into strata titles then sold off in the various component parts. If this is so, there then seems to be insufficient attention given to the selling period envisaged in order that the entrepreneur's holding costs might be properly considered. The usual uncertainties within the methodology remain, such as the ability for the gross realisation to be achieved and the sufficiency of the profit allowance relative to the risk involved, in establishing the "one-line" or bulk capital value. The remaining calculations pertain to a somewhat theoretical exercise of analysing the "added value of the improvements". The potential exists for variation of significance particularly if holding costs were related to the period required to sell the various titles under the conditions as described. Mr Mount is confident that his assessment of gross realisation is realistic and is adamant that all other calculations are based on conservative criteria. The conservative approach to deductions from the improved capital value, in itself, indicates the possibility of a higher residual land value calculation than might otherwise result. On his own evidence a lower land value would, all things considered, be unrealistic for a site such as is Netanya Noosa, recognised as being prime real estate.
As was the President, we are asked to consider the suitability of the notional development exercise (or adaption thereto) in arriving at the unimproved value of the land. Our attention is drawn to various comments in the judgment of the Land Appeal Court in Merivale Motel Investments Pty Limited v. The Brisbane Exposition and South Bank Redevelopment Authority 10 QLCR (1984-85) 268 and the decision of Mr W.F.G. Smith, the President of the Land Court (as he then was) in Thomas Nominees Pty Ltd v. The Valuer-General 11 QLCR (1986-87) 283. The notional development exercise involves well recognised valuation methodology which by its very nature requires the consideration of variable criteria, no doubt many of which are tested by input into the draft calculations before final adoption of the end result by the practitioner. It is also recognised as a check against the potential viability of a development, subject always to the variables and the land component. It is market evidence itself which in the end result must indicate the acceptability of that major variable - the allowance to be made for profit and risk of realisation - in the analytic exercise. If the exercise cannot be tested by reference to a real market it is of no more assistance in establishing market value than the deliberations of a professional valuer seeking to interpret the land value component in the absence of directly comparable sales evidence. Where it is of some assistance in the absence of sales is to test the effect of the variables on the end result. In this particular case, we accept this was one of the purposes of the exercise, but all it has achieved is to demonstrate that if other than conservative criteria were fed into the calculation, the result would be so low as to be an unacceptable interpretation of land value, even to the appellant company's valuer.
We are left with the impression after reading the record of proceedings in the Land Court and then hearing the evidence before us that no realistic notional development exercise would have produced a residual land value which would equate the amount which the hypothetical prudent purchaser would need to pay to conclude a sale from a hypothetical prudent vendor both meeting the criteria so often quoted from the judgment of their Honours in Spencer v. The Commonwealth HC (1907) 5CLR 418.
Here, Mr Short is convinced that the land possessed the value he has found, although essentially based on the 1989 level of value which in itself had no comparable sales evidence foundation. He has no evidence to prove his opinion although he says it has been reached after consideration of the overall market and an expert feel for the specific market. He is aware that in recent times a smaller beachfront Hastings Street property had been auctioned and passed in after a bid, said to be genuine, in excess of his 1990 valuation. He agrees that this information is of no evidentiary weight but it is of comfort to him in his overall conclusions relative to this unique well held strip of prime real estate.
Mr Mount is equally convinced that at the relevant date there had been a market decline in Noosa Heads, just as in many other localities, even for the prime real estate and he sees it as being unrealistic to expect the beachfront to hold the 1989 level of value under such conditions.
When we consider the opinions of the valuers, we see that it is recognised by both that the subject site has worsened to some degree through its position relative to the westerly movement of retail activity in Hastings Street. We see that Mr Short quite realistically is not so brittle in his opinions as not to consider all of the evidence, and he is not influenced by the accepted downward trend in values on the southern Hastings Street frontage. Where the retail element of the northern side of Hastings Street remains strong in comparison to the southern side - and the "hub" - he would convince us that as at the relevant date there was insufficient evidence to support any interference to his adopted levels. We have however, had the benefit of further examination of Mr Short, in terms of matters affecting the subject land and his overall considerations than did the President in the Land Court. Dealing with the question of relativity of values on the beachfront side of Hastings Street, we have some concern as to the collective impact of the recognised weakening position of the subject land (caused by the westerly movement of the hub of the retail activity in Hastings Street), and then the large size of the site and the resultant bracket of unimproved value within which it inevitably falls. We are inclined to the view that a less confident approach than has been taken by Mr Short might have been warranted when a weakening market was becoming apparent for properties with the combined characteristics of lesser location and large size. We are, however, unable to be convinced by the arguments put forward on behalf of the appellant company as to the level of value which it urges should be found.
As this valuation has a revenue gathering function we will give the benefit of doubt which exists and allow the appeal. The determination of the Land Court is set aside, and we determine the unimproved value of the land as at 31st March, 1990, in the sum of $8,000,000.
(W.C. Lee) J.
Judge of the Supreme Court.(C.H. Carter)
Member of the Land Court.(R.E. Wenck)
Member of the Land Court.
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