Perpetual Trustee Co Ltd v Valuer General
[2001] NSWLEC 108
•08/03/2001
Reported Decision: (2001) 115 LGERA 287
Land and Environment Court
of New South Wales
CITATION: Perpetual Trustee Co Ltd v Valuer General [2001] NSWLEC 108 PARTIES: APPLICANT
RESPONDENT
Perpetual Trustee Co Ltd
Valuer GeneralFILE NUMBER(S): 30140 of 2000 CORAM: Cowdroy J KEY ISSUES: Valuation of Land :- land values - economic downturn claimed to cause reduction on property values LEGISLATION CITED: Valuation of Land Act 1916 s 6A CASES CITED: Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1 ;
Chief Executive, Department of Natural Resources v Body Corporate for Golden Sands Community Title (2000) Queensland Land Appeal Court, (Judgment 15 December 2000) ;
Flack v Valuer General (1952) 18 LGR (NSW) 157;
Illawarra Meat (Developments) Pty Limited v The Valuer General (Rath J, Land and Valuation Court, 10 March 1978, unreported);
Ritchie v The Valuer General (1961) 21 LGRA 296;
Spencer v The Commonwealth (1907) 5 CLR 418 ;
Stubberfield v Valuer General (1989) 69 LGRA 133DATES OF HEARING: 9/5/01, 10/5/01, 11/5/01, 20/06/01, 29/6/01 DATE OF JUDGMENT:
08/03/2001LEGAL REPRESENTATIVES:
APPLICANT
Mr N Hemmings QCSOLICITORS
Anderson LegalRESPONDENT
SOLICITORS
Mr J Maston (Barrister)
Crown Solicitors
JUDGMENT:
IN THE SUBJECT PROPERTYAND
ENVIRONMENT COURT
OF NEW SOUTH WALESMATTER No. 30140 of 2000
CORAM: Cowdroy J
DECISION DATE: 3/8/01
v
Valuer General
Introduction
1. The applicant challenges the Valuer General’s valuation of land in the Sydney Central Business District (“CBD”) upon which is erected a multi-storied office tower building (“the building”). The challenge is predicated upon the claim that both rental values of properties in the CBD of Sydney and property values had fallen by 25% to 40% between the date of a prior valuation (1996/1997) and 1 July 1999 (“the base date”).
Facts
2. The applicant appeals pursuant to s 37(1) of the Valuation of Land Act 1916 (“the VL Act”) against the valuation made by the Valuer General in respect of 378-394 George St Sydney, (known as 388 George St Sydney) being the property comprised in Lot 102 DP 872734 (“the subject property”). The subject property has an area of 3,353 m2 and is situated on the corner of King and George Streets, Sydney. The building was formerly known as the “American Express Tower” and is used for commercial offices, retail shops and car parking. The registered proprietors of the subject property are AMP Life Limited and AMP Asset Management Australia Limited.
3. The Valuer General assessed the subject property to have a value of $44 million at the base date. The applicant claims such valuation is erroneous and that the correct valuation at the base date is $28 million. The parties agree that the subject property is contained in the core precinct of the CBD and is zoned ‘City Centre’ pursuant to the City of Sydney Local Environmental Plan 1996 (“the LEP”).
4. The building erected on the subject property has the benefit of a floor space ratio (“FSR”) of 13.4:1 for commercial and retail purposes. The prevailing zoning allows an FSR of 10:1 for commercial and hotel usage. Pursuant to the LEP the FSR can be increased to 12.5:1 for commercial use by the purchase of additional floor space from other heritage sites known as ‘transferable heritage floor space’ (or “THFS”).
5. Prior to 1998 a prospectus was issued by AMP Office Trust, a trust associated with the registered proprietors, for the purpose of raising funds to refurbish the tower building. Prior to such refurbishment the subject property was valued by its owners at $65 million, and following such refurbishment at a cost of $160 million, the subject property was then valued by them at $225 million.
Basis of objection
6. The applicant submits that an analysis of sales of comparable land to the subject property in the CBD establishes that land values fell in the core precinct of the CBD for the period between the date of the previous valuation and the base date. An alleged downturn in CBD rentals and an absence of sales of development sites in the CBD during 1999 are also relied upon as evidence that the market value of land in the CBD had fallen by the base date. The applicant furthermore relies upon economic evidence to establish a downturn in the Australian economy as at the base date which it claims has impacted upon sales in the CBD in the relevant period and accordingly the value of the subject property.
7. The Valuer General disagrees that there was an alleged downturn in the Australian economy during the relevant period which impacted upon the values of land in the CBD and disputes the applicants conclusion.
8. Both parties acknowledge that the valuation of the subject property is to be assessed by reference to s 6A(2) of the VL Act and agree that the highest and best use of the subject property is for commercial offices, retail shops and car-parking as exists currently on the land.
9. Section 6A(1) of the VL Act defines ‘the land value of land’ as the capital sum which the fee simple might realise if offered for sale on the reasonable terms and conditions a bona fide seller would require. Section 6A(2) of the VL Act codifies the assumptions that the land may continue to be used for any purpose for which it was being used at the base date and that any improvements may be continued or made on the land to enable such use: see Stubberfield v Valuer General (1989) 69 LGRA 133 at 143.
10. The parties also agree that the accepted principle of valuation, namely the ‘selling approach’ referred to by Isaacs J in Spencer v The Commonwealth (1907) 5 CLR 418 at 441, should be adopted.
Summary of applicant’s evidence
11. The expert valuers for each party relied upon the sales of several CBD sites considered comparable, several of which were common to each expert. Adjustments were made to some sale prices to reflect particular considerations. The value of usable commercial floor space per square metre was obtained by dividing the adjusted sale price by the site area and applying the floor space ratio. In this way a dollar rate per square metre of indexed floor area was used to compare the site values.
12. Mr Peter Dempsey, a valuer retained by the applicant concluded that an analysis of market sales reflected a fall in land values of between 25% to 45% in the core precinct of the CBD between 1996 and 1997 and the base date.
13. In his report dated the 1 July 1999, Mr Dempsey states as follows:-
The above sales were facilitated by the opportunity to equity fund these projects rather than debt funding (which would add to cost), and were totally speculative with no risk management with regard to the outcome of rents and end value, these being the key drivers of return.
The market environment in 1996/97 was optimistic, with forecasts of strong rental and capital value growth. It was widely accepted that at the time that when office vacancies fell below 5% lessors would command their forecast rents. This did not occur.
1996/97 land sales reflect a consistent correlation between land value and the anticipated rental and end value outcome of a new development.Sales evidence in 1999 reflect reductions of 25%-45% in land values between 1996 and 1999.
14. Mr Dempsey considered that a fall in the market value of land was evidenced by the fact that in 1999 there were no sales of development sites in the core CBD district. He states that the ability to fund large building developments upon speculative funds raised by bank finance and by equity was no longer a viable option and that there was concern that an oversupply of office space had been created. He further stated that optimistic rental forecasts for leases in the CBD had not been achieved and that other economic factors were indicative of a slowing market. Mr Dempsey identified these factors as follows:-
In 1999:
10-Year Bond rates were rising;
As a consequence the required margin of return to commence a new development was also rising;
The Listed Property Trust (LPT) Capital Value Index was falling eliminating primary developers and purchasers of land of the late 1990s development period.Rental growth between 1996 and 1999 was minimal with potential oversupply restricting prospective growth potential;
15. These factors he states, ‘contributed to an absence of developer interest in 1999’ leading to the following consequence:-
The hypothetical purchaser would have regard to the material changes in the commercial office market in the Sydney CBD at the Base Date 1999, compared with the market in 1996/97 and pay a price reflecting these changed conditions.
- Such regard included the need to defer the commencement of construction; the absence of equity to fund the development; additional costs to cover debt funding; recognition that any change in the value of the completed development would impact upon the subject property value; and the need to manage risk with regard to achievable rentals.
16. Another factor upon which Mr Dempsey laid emphasis was the fact that when development of two comparable sites, namely 363 George St and 400 George St commenced, the developers held an equity commitment but had no pre-commitment to lease from any tenant. In respect of 363 George St the first lease was not signed until the building was nearing practical completion. This was in contrast to previous years in which developments commenced with a pre-commitment to lease space in completed project.
17. Mr Dempsey also considered that economic factors impacted upon the failure to achieve forecasted rental prices. In respect of 363 George St the expected rent was an average of $593 per m2 whereas $403 per m2 was actually received in 1999. In respect of 400 George St $596 per m2 was expected but $404 per m2 was received. From these examples, Mr Dempsey estimated that they established a reduction of between 32% and 21%. The results were similar for 60 Castlereagh St and 88 Phillip Street. Mr Dempsey said that bond rates were rising at the base date which indicated rising interest rates, resulting in a greater return on investment being sought by developers. Mr Dempsey said that if gross domestic product (“GDP”) was falling it would indicate that unemployment was rising and this would have a negative influence on the demand for office space. As a consequence of rental forecasts not being achieved, Mr Dempsey concludes that land values in the CBD must be assumed to have been reduced by similar proportions.
Summary of Valuer General’s response
18. The Valuer General relied upon the valuation evidence of Mr Errol Ferdinands, a registered valuer. Mr Ferdinands considered that the subject property, being located on a prominent location at the corner of King and George Streets, Sydney comprised one of Sydney’s ‘profile landmarks for visual presence’. He noted its location adjoining the General Post Office to the north, and its proximity to Martin Place, the MLC Centre and Glasshouse Mall to the east, as well as to The Strand Arcade and Pitt Street Mall to the south and south east and to the Landmark development to the west. He said that the locality of the subject property was ‘regarded favourably by Sydney’s business and retail community’.
19. The value of the subject property at the base date of $44 million constituted, according to Mr Ferdinands, ‘a conservative percentage of less than 17% to the completed value of $260 million’. The subject property provided a commercial floor space area of 33,530 m2 and adopting a FSR of 10:1, produces a site value of $1,312.16 per m2 of floor space area (“FSA”). Mr Ferdinands considered that such rate compared favourably to prices paid by developers for office space in commercial sites in the CBD at the base date.
20. In relation to the market for such land Mr Ferdinands said:-
The Sydney CBD in 1998 was a transition year from planning to construction phase. 1999 saw the emphasis shift from construction to completion. Pre-commitments of such developments were high and are high. The period from 1997 through to 1999 saw a total stock decline, due in part to a number of buildings being removed from the market for the purpose of conversion to residential premises.
Sydney has emerged strongly from the recession experienced during the first half of the 1990’s and from the mid-1990’s experienced a phase of dynamic activity, development and growth. As at the Base Date fundamentals pointed to a strong market with further improvements in rents and capital values expected.
21. Mr Ferdinands considered the key property indicators for the CBD office market in Sydney and observed that some ‘media commentary’ and ‘industry research’ predicted that office vacancy factors would increase in 1999 leading to a ‘softening’ of the market. However by mid to late 1999 such fears were not realised. Mr Ferdinands nevertheless made a slight deduction in his valuation to take these perceived fears into account.
22. Mr Ferdinands said:-
It is considered that the Commercial property market peaked in late 1997/early 1998 and has been relatively stable since then. This is reflected in market conditions. A conservative approach has been taken to the sales analysis and a deduction made to reflect the early 1999 concerns.
23. Mr Ferdinands agreed there had been no comparable sales of prime commercial CBD sites in Sydney in 1999 but added:-
Market evidence suggests at the period leading up to the Base Date developers of new CBD commercial developments were able to achieve pre-commitments in the order of 45-55%. The subject property was 100% pre-committed leased. The market rental levels achieved were strong for this style of property with Structured rent reviews in place.
The key factors listed above reflect that the market has remained strong over these periods. The fact that further Development Applications for Commercial uses are being put before Council as well as further mooted commercial development within the SBD further enhance these comments.
24. Mr Ferdinands referred to the AMP Asset Management Office Trust Report (“the AMP Report”), an annual publication by independent valuers specialising in the CBD commercial market. The AMP Report referred to a schedule entitled the ‘Value on Completion as at 30 June 1998’ prepared by JLW Advisory Services. The schedule assessed the value ‘on completion’ of the subject property to have increased by 15.5% from $225 million in 1996 to $260 million at 30 June 1998.
25. In support of the Valuer General’s valuation of $44 million of the subject property as at the base date, Mr Ferdinands compiled a schedule of sales and resales of CBD properties sourced from a publication entitled ‘Citiscope Publications’, an organisation supplying property information relevant to the CBD. Having reviewed such valuations, Mr Ferdinands concluded that the respondent’s value of the subject property at the base date was conservative and that a valuation of $58 million at the base date could have been justified.
Summary of sales comparisons
26. A summary of each significant site is set out hereunder. Unless otherwise indicated, an FSR of 10:1 applies in respect of each site. Each valuer has created a comparable dollar rate per square metre of FSA which a developer would be prepared to pay for such sites.
400 George St Sydney
27. Both valuers agree that the best evidence of a comparable sale represented by this property. The property sold for the sum of $58 million on 27 November 1995 subject to a delayed settlement of 27 months to BT Sydney Development Trust (“the Trust”). It is located on the opposite corner of King Street and George Street to the subject property. The site occupies 4,698 m2. In view of the delayed settlement the present value of the vacant land was assessed by Mr Dempsey in the sum of $58,134,795.
28. Following the acquisition of the property the owner purchased 11,745 m2 of THFS at a cost of $5.3 million allowing an increase of 2.5:1 to the existing 10:1 FSR. The owner also obtained a development consent for the site. Mr Dempsey calculated a value of $987 per m2 of FSA for the property. To finance the purchase of the site, the acquisition of additional THFS, and the constriction of the proposed development, the Trust was publicly listed. The site was offered as an asset of the Trust on 17 April 1996 for $67 million from which Mr Dempsey calculated a value at $1,141 per m2 of FSA on the basis of the adjusted 12.5:1 FSR.
29. Mr Ferdinands challenges the reliance upon the second ‘sale’ on 17 April 1996 because the property was transferred to a trust. Mr Ferdinands concluded that the value of 400 George Street at the base date was $1,265 per m2 of FSA. This calculation was ultimately accepted by the applicant in its final written submissions.
363 George Street Sydney
30. This site is located directly opposite the subject property and represents an amalgamation of several parcels of land. It was sold in various stages between November 1995 and September 1996 at between $7,235 per m2 for a 1,935 m2 parcel in November 1995 to $10,942 per m2 for a 329 m2 parcel in April 1996. The total acquisition price was $27,100,000 for a site of 2,936 m2 representing $9,922 per m2.
31. Subsequently in a prospectus dated 30 April 1997 the land was offered by a development and investment fund for $43,700,000 plus acquisition and other costs which totalled $53,800,000. Such amount included income support of $10,500,000 during the development period, thereby reducing the nett purchase price to $43,300,000. This price included THFS valued at $6 million and demolition costs of $1 million, resulting in a land value of $38,300,000. Mr Dempsey made allowances for a delay in construction of 18 months and concluded that the value of this site as at April 1997 was $33,000,000. From this sum an amount of $1,250,000 was deducted to reflect the value of the retained improvements to arrive at a value of $992 per m2 of FSA.
32. Mr Ferdinands, after making several adjustments, concluded that the appropriate rate was $1,250 per m2 of FSA based upon a site value of $39,875,000. Mr Ferdinands considered such site to be inferior to the subject property because of its location and because of heritage restrictions which would need to be taken into consideration by a developer in the design and construction stage. Additionally, the shape of the site was irregular and did not possess the prominence of the subject site.
11 Jamison St Sydney
33. Mr Dempsey did not rely upon this as a comparable site. The site was located in the north-western CBD and according to Mr Ferdinands the adjusted land value of this property is estimated to be $23 million with a site value of $978 per m2 of FSA based upon a FSR of 13.5:1. Mr Ferdinands considered the site to be inferior to the subject property due to location, lack of potential harbour views, sector location, exposure and insufficient lot size to create a landmark development.
22-26 O’Connell Street Sydney (these buildings are known as the Kindersley House site)
34. The sale of this land occurred in August 1997 for $53,500,000 for a site area of 2,661.7 m2. Upon Mr Dempsey’s calculations, after taking into account the sale of part of the site (50-58 Hunter Street), and allowing for delays due to development and a delayed settlement, Mr Dempsey considered that the remaining land should be valued at $32,250,000 yielding $867 per m2 of FSA.
35. Mr Ferdinands calculated that the appropriate rate was $1,586 per m2 of FSA. The site was located in the ‘financial’ sector of the city, which Mr Ferdinands described as the ‘city core’ area, and was regarded by him as superior to the subject property although adjustments were required because of site shape and ‘poorer floorplan configuration’. After these adjustments were considered Mr Ferdinands reduced his value by 20% thereby producing a value of $1,300 per m2 of FSA.
35-43 Clarence Street Sydney
36. Such property was sold on 27 June 1997 for an amount of $19,200,000. Mr Dempsey allowed for the value of the development consent which would require 18 months to obtain, and for opportunity costs. The present value of such purchase was calculated by Mr Dempsey to be $12,536,000. After an allowance of $500,000 for demolition, a nett land value was calculated at $13,000,036 or $953 per m2 of FSA. Mr Ferdinands made an allowance for the deferred settlement and the demolition costs and concluded that the adjusted land value was $18,500,000. He assessed the value at $1,285 per m2 of FSA. In his report in reply, Mr Ferdinands re-calculated the site value as $18,500,000 and $1,353 m2 of FSA, which he said was ‘far removed from Mr Dempsey’s analysed figures of $953 m2 FSA’. Mr Ferdinands considered such site to be inferior for reasons of its location on the north-west fringe of the CBD, as well as a height limit and very limited retail development opportunity.
60 Castlereagh Street Sydney
37. Such site was sold by way of prospectus on 13 October 1997 and included the development consent granted by Sydney City Council on 4 December 1996. The purchase price was $42 million, with half thereof being paid on completion and the remaining half on 30 June 1998 reflecting a delayed settlement. The area of the site was 2,497 m2 and after making allowance for the delayed settlement, the nett purchase price was assessed by Mr Dempsey at $40,570,000. Also allowing for demolition costs and removal of asbestos the vacant site was estimated by Mr Dempsey to have a value of $42,500,000 which represented an amount of $1,709 m2 of FSA. Mr Dempsey considered that the property enjoyed a superior location to that of the subject property because of its proximity to Martin Place.
38. Mr Ferdinands calculated the adjusted land value to be $44,072,200 resulting in a value of $1,770 per m2 of FSA. This was later adjusted to $1,737 per m2 of FSA. Such calculation was only slightly higher than Mr Dempsey’s analysed figure of $1,709 per m2 of FSA. Mr Ferdinands considered that this site was located closer to the financial sector than the subject property but it did not possess the same prominence, nor have the same retail prominence. Mr Ferdinands adjusted this site down by 20% compared to the subject property.
39. In addition to the above sales Mr Dempsey relied upon further sites as representing comparable values:-
88 Phillip Street Sydney
40. This property sold in June 1996 for $69 million having a delayed settlement to 31 March 1997. The present value of the site as at 30 June 1996 equated to $69,600,000. Allowing for demolition and removal of asbestos costs of $14 million Mr Dempsey calculated that the total cost was $78,600,000. Mr Ferdinands’ conclusions were similar.
161- 167 Castlereagh Street Sydney
41. This property was sold for $12 million in June 1999 producing a value of $904 per m2 of FSA. The property was allegedly resold in February 2000 for $9 million reflecting, on Mr Dempsey’s assessment, a 20% reduction in value and producing an adjusted value of $678 per m2 of FSA.
42. Mr Ferdinands responded that the evidence of a second sale was flawed since heritage restrictions were placed upon the site following its initial sale so that the purpose for which the purchaser acquired the site was prevented. In addition, the sale was not concluded. As a further ground for rejecting such premises as a comparable site Mr Ferdinands considered that the site is located in the mid-town precinct of the CBD, has only one street frontage, and has building restrictions which would cause a developer major concern with regard to future development.
232-236 Pitt Street Sydney
43. The site sold on 5 June 1998 for $8 million. Mr Dempsey allowed for an income stream over 4 years which was part of the sale arrangements and an allowance of $200,000 for demolition to achieve a present value of $7 million producing a value of $659 per m2 of FSA. Mr Ferdinands did not consider the site to be comparable in view of the fact that the site was located in the mid-town sector and comprises a narrow rectangular inside site purchased for the purpose of a small residential development. Mr Ferdinands does not concur with the assumptions made by Mr Dempsey which provided the basis for his valuation.
44. Certain other sites, namely 298-304 Sussex Street Sydney and 129-145 Harrington Street Sydney, were contemplated by each of the parties but for various reasons substantial reliance was not placed upon them by the parties.
Economic evidence
45. In response to the applicant’s claim that there was a downturn in the Australian economy during 1999 which impacted upon the value of the subject property at the base date the Valuer General provided a statement by Mr John Banks, a Fellow of the Institute of Chartered Accountants of Australia and a former partner of the firm of KPMG. Mr Bank’s report examines the Australian government bond rates prevailing from 1994-1999 and publications of the Reserve Bank of Australia relating to lending rates for large business; lending growth; inflation; unemployment and economic forecasts as well as information concerning the equity markets and data concerning the CBD property market. Mr Banks concluded as follows:-
In 1999 the equity capital raising for new shares on the market was far higher than that of the period of 1995 to 1997. The number of transactions in the equity market had increased considerably since 1995. The value of equity trading had been increasing by a consistent level since 1995 and the ASX property trust index and trading volume was noticeably higher and heavier respectively in 1999 than that of 1995 to 1997.
We find no realistic support for the contention that the economic and market conditions at June 1999 were depressed compared to the climate in 1995, 1996 and 1997. The equity markets were buoyant and funds were available as both equity capital and as loan capital.Rental yields for 1999 for Sydney Prime CBD commercial building was only marginally lower than rental yields experienced in 1996. The overall rental level for the Sydney CBD commercial buildings has increased constantly since 1995.
46. The applicant relied upon a report prepared by Simon Doyle, senior Australian economist of AMP/Henderson Global Investors. Mr Doyle was critical of Mr Banks’ report upon the basis that it was a ‘general economic review’ and not a report ‘on expectations and crucially leading indicators that a property investor would take into account.’ Mr Doyle considered that Mr Banks’ report did not provide an accurate assessment of the future of the Australian economy. He observed that Mr Banks did not refer to GDP which he considered was the ‘key measure of overall economic activity/demand in the economy, bringing together key components of the economy’.
47. In response to Mr Banks’ conclusion that there was no realistic support that economic and market conditions at June 1999 were depressed Mr Doyle states:-
While some indicators of the economy are clearly stronger than in other periods, other indicators are more mixed. In particular GDP growth in the first half of 1999 rose by 3.2% annualised, well down on GDP growth in other years. My conclusion is that the economy at the time was somewhat more mixed than that concluded by Mr Banks.
48. Mr Doyle states that the expectation ‘at the time’ as supported by his research was ‘that the economy would experience some sort of economic slowdown’. He continued:-
In fact key forecasters of the Australian economy such as National Australia Bank were forecasting GDP growth to slow to 2.2% in 1999 and Access Economics, which is relied on in the report, were forecasting GDP growth of 2.5%. This compares to a consensus forecast of 3.1% and actual recorded growth in 1997 (the last full calendar year available) of 4.8%. Hence several forecasters were expecting a severe slowdown in economic growth over the 12-18 months ahead. Our own forecasts and that of the overall consensus were for a modest slowdown at the time.
49. Mr Doyle relied upon forecasts made by Access Economics which are also relied upon by Mr Banks. Mr Doyle considered that the evidence relied upon by Mr Banks concentrated excessively on past events and did not contain forecasts for the future. Mr Doyle also relied on the forecast by Access Economics of a ‘material slowdown’ in the economy at the relevant time.
50. Mr Doyle acknowledged that he considered the ‘slowdown’ in the economy to be mild and said:-
As it subsequently turned out growth was stronger than both what Access and ourselves were forecasting at that point in time but nevertheless the sort of indicators that were around at that time were suggesting that growth would slow.
51. In cross examination Mr Doyle was taken to the passage in the AMP Report which stated:-
Notwithstanding a modest slowdown the Australian economy should continue to perform well over the next couple of years. In fact we have revised up our expectation of Australia’s potential growth rate to 4%. This reflects the result of fifteen years of economic reform, the impact of technology…
- Mr Doyle was also cross examined concerning the publication prepared by Asia Pacific Consensus Forecasts which was available to AMP shortly after 14 June 1999 and to a passage contained therein which referred to the strengths of the Australian economy as follows:-
Australia’s economy has shown few signs of faltering with robust consumer demand continuing to offset the effects of weak exports. In the first quarter GDP rose by a surprisingly strong 4.8 per cent encouraging an upward revision in our panel’s four year forecast of 3.9 per cent.
- Mr Doyle conceded that Australia had ‘ weathered ’ the Asian financial crisis very well and acknowledged that economic forecasters often held differing opinions concerning the economic future of Australia.
52. Mr Michael Cook, a former vice president engaged by BT Funds Management (“BTFM”) provided evidence concerning the factors which would be taken into account by a prudent developer when deciding whether to purchase a site in the CBD. These included the market expectation in respect of the purchase for 400 George Street on the 31 May 1996 and at the base date and a comparison of the sites located at 400 George St and the subject property. Mr Cook was directly concerned with the purchase and development of 400 George St, and asset management of various other properties in city and suburban locations. Mr Cook’s report dealt with the motivations of a developer in acquiring a site, the considerations relating to leasing and obtaining finance, and the market expectations for 400 George St.
53. Mr Cook said that during the late 1980’s many development projects were debt funded by banks and financial institutions which, in consequence of substantial losses, no longer provided such finance. Instead, a new form of fund raising was instigated known as the development trust. Such trusts would select a site for future development and raise funds from unit trust investors to finance the project. Mr Cook explained that by mid-1999 the poor performance of development trusts led to the demise of such schemes and that a developer in 1999 would have had difficulty in arranging finance.
54. Mr Cook concluded that at the date of the purchase of 400 George St the market for such properties was ‘benign’. Several sites existed in the CBD for future development but four projects had been put on hold for the first time since the recession of the early 1990’s. BTFM had considered that rents would need to rise substantially in the late 1990’s to justify a purchase of $58 million for the 400 George St site. At that stage rentals were approximately $400-420 per m2. Mr Cook said that there was a substantial downturn in business activity leading to negative rental growth outlook in mid to late 1999 because of the sheer volume of commercial space becoming available in the CBD. He said that the market did not collapse despite declining rental growth rates. From the period of 1999 to 2000 Mr Cook said that there was ‘tremendous business activity in preparation for the Olympics, the introduction of the new tax system and the Y2K - Millennium related issues’. Mr Cook said that these factors coincided with the growth and expansion of the technology sector which also assisted in absorbing a great deal of the surplus CBD office space. Data issued as at January 1996 established a vacancy factor in the CBD of 10.6% which decreased by July 1999 to 5.5%.
55. Contrary to Mr Cook’s assessment a report entitled ‘Office Property Market Indicator Sydney CBD’ (published by JLW) indicated a nett effective rent at $234 per m2 per annum at December 1995 compared to $340 per m2 per annum in June 1999. Mr Cook agreed that this represented an average nett effective increase in rentals of 45% between 1995 and 1999 which was applicable to ‘Capital A’ grade buildings such as 388 George St and 400 George St.
56. Mr Cook also agreed with the data contained in the relevant column applicable to interest rates and yields which showed the ten year bond interest rate at 8.18% in December 1996 dropping to 6.2% in January 1999. Mr Cook acknowledged that neither Australian Government bond rates nor interest rates were of relevance when calculating the offering price for 400 George St.
57. Mr Ferdinands considered that nett effective rental levels were strong and increasing upwards into 2000. Mr Cook partially agreed with rent valuations in relation to premium buildings with harbour views. Mr Cook said that buildings without views such as 363 and 400 George Street, 60 Castlereagh St, 1 Martin Place and 2 Park Street were all ‘commodity stock’, which are defined as buildings having no ‘special views’ and there was little to distinguish them from other buildings.
58. Mr Cook claims that Mr Ferdinands ‘has mistaken the volume of leasing activity for the value of leasing activity’. Mr Ferdinands had stated:-
As at the Base Date the fundamentals pointed to a strong market with further improvements in rents and capital values expected.
Mr Cook stated in reply:-
That is, there were many leases executed during the period (absorption reached record levels of in excess of 210,000m2 for the calendar year), however, this activity occurred at the expense of value. Rental levels declined significantly during 1998-99 as major developments at 400 George Street, 363 George Street, Darling Park, 60 Castlereagh Street and 1 Martin Place neared completion. The financing structures which were implemented on many of these developments (Equity Unit Trust) placed pressures on Trust Managers which forced them to reduce rents significantly to get the space leased.
59. Mr Cook made a comparison between 400 George St and the subject property. He acknowledged that the subject property, being located on a corner site, may have been considered by some purchasers as ‘marginally superior on locational grounds’. Mr Cook took issue with Mr Ferdinands’ observation that the subject property had an ‘excellent shape and plotage for medium to large scale commercial and residential development’ and pointed out that the northern and eastern sides of the boundaries were irregular and shared with adjoining developments which had been built to the boundary. He considered that the subject property had a ‘difficult site configuration’. Mr Cook also disagreed that the views from the subject property were extensive, pointing out that only a small portion of the north-eastern facade enjoyed harbour glimpses and that the balance of the northerly view was obstructed by the Macquarie Bank building at 1 Martin Place. Views to the east were only available to the upper floors while to the south the views were obstructed by 400 George St. He considered that the building on the subject property did not have panoramic views.
60. Mr Cook concluded that 400 George St was the superior site compared to the subject property because of its proximity and location in relation to adjoining developments, especially its location adjoining the Pitt Street Mall which generated substantial income from retail trade.
61. Mr Cook also took issue with Mr Ferdinands comment that ‘pre-commitment of such developments were and are high’ and stated:-
Buildings such as Darling Park Tower II, 400 George Street, 60 Castlereagh Street and 363 George were all financed through Development Trust Structures (or hybrid structures). None of these developments waited for pre-commitments prior to commencing construction. However, once stated the management teams raced to sign leasing deals prior to completion of the buildings.
Final written submissions
62. The applicant submits that the valuation of the subject property on an FSR of 10:1 is $24,611,020. The applicant submits that this amount must be further adjusted to reflect the value of the FSR in excess of the standard FSR of 10:1. Adopting the cost paid for THFS in respect of 400 George Street in 1995 as a market value, namely $451 per m2 , the applicant adds this cost for the additional floor space. The applicant multiplies the site area (3,353 m2) by the increased FSR (3.4:1) at $400 per m2 to establish a hypothetical cost of THFS which amounts to $4,560,000. The applicant submits therefore that the value of the subject property is to be calculated by adding together the purchase prices for the FSA ($24,611,020) and hypothetical THFS ($4,560,000) to result in a final valuation of $29,171,020.
63. The Court rejects this approach to valuation. Firstly, it is not consistent with the application of s 6A(2) of the VL Act which is predicated upon the continuation of the use and of the improvements which exist at the base date (see s 6A2(a) and s 6A2(b) of the VL Act). The suggested method of adding the value of hypothetical THFS in excess of the standard 10:1 FSR is without legal basis since the building enjoyed the benefit of a 13.4:1 FSR at the base date. Additionally there are numerous factual issues which warrant rejection of such approach. There is no evidence to establish important facts, such as: the cost and the availability of THFS; the desire of purchasers to acquire land adopting such method of assessment; that town planning requirements would permit development in such manner; and risks to a developer adopting such method. Further until the receipt of final written submissions the applicant had not conducted its case on this basis. Accordingly the Court cannot draw the inferences asserted by the applicant.
Findings in relation to valuation evidence
a) Defects in applicant’s valuation method of comparable sales
64. Mr Dempsey has treated the subject property as if a development consent was required to erect a building on the land. As such, its value is depreciated compared to any comparable sale of property sold with the benefit of development consent. Mr Dempsey incorporated such discount factor in respect of both 35-43 Clarence St and 400 George St. However the existing use which must be considered pursuant to s 6A of the VL Act is the highest and best use of the subject property which is predicated upon the basis that all lawful rights pertaining to the use of the building would exist at the base date. Thus the valuation method of Mr Dempsey does not accord with the requirements of s 6A of the VL Act.
65. A further consideration arises in respect of the allowances made by Mr Dempsey in his valuations. It is acknowledged by the applicant that as at the base date an approval had been granted by Sydney City Council for upgrading and modernising the existing building. It therefore becomes unnecessary to make the discount as Mr Dempsey has allowed in respect of various comparable sales for risks and delays associated with obtaining such approval for development. In this respect the valuation method adopted by Mr Ferdinands is preferable (see for example the note to Ritchie v The Valuer General (1961) 21 LGRA 296; and see also Stubberfield v Valuer General; Pye & Anor v Valuer General (1973) 29 LGRA 160 at 162; Chief Executive, Department of Natural Resources v Body Corporate for Golden Sands Community Title (2000) Queensland Land Appeal Court, (Judgment 15 December 2000); Illawarra Meat (Developments) Pty Limited v The Valuer General (Rath J, Land and Valuation Court, 10 March 1978, unreported).
66. Mr Dempsey’s method of valuation of comparable sales involved numerous subjective assessments and adjustments with no demonstrable objective standard. In respect of at least one comparable sale relied upon by Mr Dempsey, namely 20-26 O’Connell Street, Mr Dempsey had initially deducted the cost of demolition of the structures from the purchase price in order to achieve his valuation. In fact such costs constituted an addition to the purchase price, as he later recognised. Further, the assessments of Mr Dempsey result in unreliable valuations. For example the sale of 363 George St was an amalgamation of three sites, some of which had heritage restrictions and required restoration of an existing building. The development involved complex cantilevered engineering in the airspace above the heritage building which obliged Mr Dempsey to make allowances and adjustments. The subject property did not require any similar complex adjustments.
67. Additionally, Mr Dempsey made no allowance for any alteration in the value of the comparable properties from their sale dates to the base date. The Valuer General claims that some of the valuations would have increased by more than 30% during the intervening period.
68. The only ‘sale’ relied upon to show an actual decrease in capital value is that of 161-167 Castlereagh Street. However, because of the imposed heritage restrictions upon such land after its initial sale, any subsequent agreement to sell at a reduced figure is explicable. Such sale does not reflect market conditions or a general trend suggesting a downturn in CBD property values. Rather, the evidence of sale prices recorded in the office of the Valuer General (as set out in annexure G to the principal report of Mr Ferdinands) establishes that at the relevant period the value of commercial properties in the CBD was increasing.
69. Having considered evidence of the sales of comparable land, the Court is satisfied that the alleged fall in CBD values at the base date as claimed by Mr Dempsey is not supported by the evidence. Mr Dempsey’s assessment of value of comparable sales, containing multiple hypothetical and subjective calculations are not as reliable as the actual sale results relied upon by Mr Ferdinands. Mr Ferdinands’ method and his comparable sales examples are the best available estimates when collectively assessed for the purpose of attaining a valuation assessment of the subject property at the base date.
b) Absence of sales evidence in 1999
70. It is common ground that there were no sales of development sites in the CBD during 1999 prior to the base date. Mr Ferdinands observed that whilst no prime commercial CBD sites were sold in 1999, ‘further development applications for commercial uses are being put before council’. Mr Cook responded by pointing out that the sites for which development applications were being made related to sites acquired more than four years previously and the delay in developing the sites, ‘suggests less than acceptable conditions in 1999 and 2000’.
71. The lack of sales, per se, does not lead to the inference that the market value for land is too high, nor does it lead to the inference that purchasers were not prepared to pay the price required by law of a willing but not anxious vendor for a purchase by a willing but not anxious purchaser (see Spencer v Commonwealth of Australia at 441 per Isaacs J).
c) The alleged second sale of 400 George St
72. The applicant criticises Mr Ferdinands’ valuation because he did not take into consideration the second sale of 400 George St which took place on 17 April 1996 when the site was purchased by the Trust. Mr Cook provided evidence in cross examination concerning the initial sale of 400 George St by contract dated 27 November 1995. The sale was unusual in that upon exchange of contracts a letter of credit was provided in lieu of a deposit for only 5% of the price with the result that no money was handed over on exchange of contracts and 99.5% of the purchase price was to be paid by 31 May 1996. The objective of the purchase was to obtain a vacant development site so that it could be developed into an office tower building with retail shops at lower levels and also to place the property in the Trust. Later, the BT Office Trust acquired all the units in the first Trust, the funds for which were raised by way of prospectus. Accordingly there was never a ‘sale’ of 400 George St in 1996 as relied upon by the applicant because the property was never placed on the open market. The Court accepts Mr Ferdinands opinion that the arrangement for the ‘second sale’ is unreliable for valuation purposes.
d) Claimed reduction in rentals in the CBD
73. Mr Dempsey relied upon the fact that the rental forecasts made in 1995 and 1996 for 400 George St in the range of $500 to $700 per m2 which were not achieved as indicative of a fall in the rental market in Sydney and therefore of the value of land. However such a narrow basis does not provide an accurate assessment of rental markets or land values generally in the CBD at the relevant time. The evidence establishes that vacancy of office space was falling in the period leading up to the base date. Contrary to the negative portrayal of the rental market, in fact rentals had shown steady increases leading up to the base date.
74. There is no evidence to confirm that the forecast rentals contained in the prospectus for the property trust relied upon were realistic. Based upon the reports of JLW, such figures were in fact grossly optimistic. When it was put to Mr Cook that the forecast rentals in the prospectus for the trust had been set too high Mr Cook responded, ‘There’s always an element of fat in the number’. The Court infers that the rental forecasts were not necessarily regarded as achievable.
75. Mr Dempsey’s method of capitalising rents offered in the past and conducting a hypothetical development calculation in order to achieve a valuation of land is a method of valuation which is prone to error. Wherever assumption, estimates, and percentages are involved in the preparation of a valuation the conclusion reached is often unreliable compared to estimates based on market sales of comparable land (see Gwynbill Properties Pty Limited v Commissioner for Main Roads (1983) 50 LGERA 322 at 326; Pamalco Pty Limited v Minister administering the National Parks and Wildlife Act 1974[No 3] (1990) 71 LGERA 441 at 447).
e) Findings in respect of economic evidence
76. Significantly, Mr Banks was not cross-examined. Accordingly when determining its findings of fact the Court is entitled to consider this circumstance: see Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1 at 15-27.
77. The Court also finds the evidence of Mr Doyle unsatisfactory. Whilst he was critical that Mr Banks’ evidence contained no reference to GDP being a factor which he regarded as highly important, Mr Doyle was unable to explain any relationship between GDP and CBD property prices.
78. Although the applicant claims that the 10 year Treasury Bond rates were rising, Reserve Bank data shows that such rates in fact fell from 8.88% in June 1996 to 6.27% in June 1999. The 10 year bond rates were lower at the base date when compared to the dates of the sales of the comparable CBD properties.
79. The Court also finds that the economic evidence relied upon by the applicant fails to establish that there was in fact a downturn in the Australian economy which in turn resulted in a reduction of land values in the CBD as at the base date.
Conclusion
80. In his report dated 1 July 1999 Mr Dempsey acknowledged that 400 George Street was ‘only marginally’ inferior to the subject property. The Court accepts Mr Ferdinands’ assessment that the subject property is 10% superior in value to 400 George St.
81. The Court accepts the submission of the respondent, which succinctly summarises the analysis of Mr Ferdinands as follows:-
The reality is that the land at 400 George Street sold for $58 million and at the date of sale the land had a commercial entitlement of 10:1 under the Central Sydney LEP. The land area being 4,698, this produced an available floor space of 46,980 m2. The price for 400 George Street equates to $1,234 per square metre (total FSR). Compared to that, the subject land is valued by Mr Ferdinands at $58 million for a site of 3,353 m2 carrying a FSR entitlement of 13.47:1. This yields almost the same floor area as 400 George Street viz, 45,165 m2 which equates to a value for the subject land of $1,284 per square metre (a figure slightly above 400 George Street and revised to $1,265 per square metre).
82. The onus lies upon the applicant to establish on the balance of probabilities that the valuation of $44 million is erroneous (see Flack v Valuer General (1952) 18 LGR (NSW) 157 at 158). The Court finds that such evidence does not prove that there was a reduction in the value of CBD properties as claimed at the base date.
Orders
83. Taking into consideration the above findings the applicant has not proven that the valuation of $44 million as at the base date is erroneous. Accordingly there is no reason to vary the valuation made by the Valuer General.
84. The Court therefore orders that:-
1) The application be dismissed.
3) Exhibits be returned2) Costs reserved.
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