Land and Environment Court New South Wales Medium Neutral Citation: Perpetual Limited v Valuer General [2013] NSWLEC 1227 Hearing dates: 28 October to 1 November 2013 Decision date: 06 November 2013 Jurisdiction: Class 3 Before: Moore SC Decision: 1.The appeal is upheld; 2.The value of Lot 21 in DP 732238 (known as the Gordon Centre and located at 802-808 Pacific Highway, Gordon) is determined to be $9,400,000 as at 1 July 2011; and 3.The exhibits, other than Exhibit A, are returned. Catchwords: Comparable sales; expected future planning controls; land improvements Legislation Cited: Ku-ring-gai (Town Centres) Local Environmental Plan 2010 Ku-ring-gai Planning Scheme Ordinance Ku-ring-gai DCP (Town Centres) 2010 Valuation of Land Act 1916 Cases Cited: Ananda Marga Pracaraka Samgha Ltd v Tomar (No 4) [2012] FCA 385 Friends of Turramurra Inc (and Ku-ring-gai Municipal Council) v Minister for Planning [2011] NSWLEC 128 Maurici v Chief Commissioner of State Revenue [2003] HCA 8; (2003) 112 CLR 111; (2003) 195 ALR 236 and (2003) 77 ALJR 727 Category: Principal judgment Parties: Perpetual Limited (Applicant) Valuer General (Respondent) Representation: Counsel Mr N Eastman, barrister (Applicant) Ms M Carpenter, barrister (Respondent) Solicitors Gadens Lawyers (Applicant) Crown Solicitors Office (Respondent) File Number(s): 31176 of 2012 Publication restriction: Nil Judgment 1SENIOR COMMISSIONER: The Gordon Centre (the site) is the largest single element of the Gordon retail commercial strip along the Pacific Highway on Sydney's North Shore. The Gordon Centre, located at 802-808 Pacific Highway, is on the western side of that highway and has a moderate fall from the highway towards its rear boundary in the Gordon Valley. It has, as its primary addressing frontage, frontage to the Pacific Highway; has another major frontage to Dumaresq Street; and has what might be regarded as a smaller and tertiary frontage to Moree Street. The site has been substantially excavated as part of the construction of the Gordon Centre, the excavation being a matter that is an issue in these proceedings. 2The Gordon Centre was constructed in the mid 1960s, subject to extensions some 20 years later and has been refurbished in the comparatively recent past. It has two major anchor tenants, being a Woolworth Supermarket and a Harvey Norman department store. There is a limited range of commercial space available on the uppermost level of the building. Some 500 plus car parking spaces are provided on the site partially within the area that has been excavated and partially on a number of decks that are elevated above the ground level and extend to the western boundary. 3As at 1 July 2011, the relevant base date for these purposes, the land value pursuant to s 6A of the Valuation of Land Act 1916 has been set by the Valuer General to be $12 million. The value is required to be established having regard to s 6A(1), essentially comprising the value, which an arm's length transaction would ascribe to the site in circumstances where the sale was one not in distressed circumstances and one having regard to the notional removal of any improvements that are on the site, other than what are defined as land improvements at the time of the notional sale. Land improvements are defined in s 4 of the Act and include, amongst a range of other things, the excavation that has taken place on the site. 4Section 14K(1) requires that the permitted use of the land is to be taken as being the use that is in place at the date the valuation is made for the purposes of assessing the base date valuation of 1 July in the relevant valuing year. That has some considerable significance in these proceedings as the date the valuation was made, being 25 August 2011, is some nearly two months after the base date, 1 July 2011. The reason for that arises from a decision of Craig J, given in Friends of Turramurra Inc (and Ku-ring-gai Municipal Council) v Minister for Planning [2011] NSWLEC 128. The effect of his Honour's decision was to determine that the Ku-ring-gai (Town Centres) Local Environmental Plan 2010 that had repealed the Ku-ring-gai Planning Scheme Ordinance, the making thereof was fundamentally flawed and in effect his Honour set aside that Local Environmental Plan as if it had never been. 5During the course of the proceedings, it has been necessary to consider what was the highest and best use of the site under the Ku-ring-gai Planning Scheme Ordinance and then to consider what would have been the potential highest and best use and any differences arising therefrom as a consequence of what is to be regarded as the likely coming into effect of a future notional planning regime to act in replacement of the 2010 LEP that had been declared a nullity by Craig J. 6To assist in that process, I have had the statements of evidence in three expert disciplines that inform me across all the range of matters in these proceedings, they being the disciplines of quantity surveying (as to the value of the excavation or at least as to its cost), the question of whether cost equals value being a matter of significant dispute in the proceedings, and with respect to the future use and the current use, including any possible potential expansion of the current use under the KPSO from two planners, Mr David Haskew, on behalf of the Valuer General and Mr David Hoy, on behalf of the applicant in the proceedings. 7After a deal of debate between those witnesses, both in their individual reports and in their joint expert report, the planners agreed that in addition to the calculated FSR that is embodied in the current building, being an FSR of 1.48:1, part of the car parking could be utilised for further commercial development - thus displacing part of that car parking and replacing it with some future notional use, whether retail or commercial, in the area above ground along the western boundary - it being the agreed position of the town planners, as I understood them, that residential use of that space would not be appropriate. The result of that evidence was that a theoretical FSR of 1.85:1 could be achieved under the Ku-ring-gai Planning Scheme Ordinance. This would result in, if it were to eventuate, the potential creation of a little less than 3,000 additional square metres GFA. 8The town planners also considered what might have been the impact on a future planning regime by Craig J's decision. They reached an agreement that, because the 2010 Local Environmental Plan had been declared invalid (but only for procedural and technical reasons rather than reasons of any substantial merit associated with its terms), a reasonable timeframe for a replacement planning regime, which would have the future effect from the base date of replacing and repealing the Ku-ring-gai Planning Scheme Ordinance would be of the order of two years. 9Mr Hoy, during the course of the concurrent evidence being given by the planners, sketched an outline of what he thought might be a possible shape of a resultant building taking advantage of the theoretical and hypothetical future development regime. That regime was based on a floor space ratio of 3.5:1 and a maximum permitted construction height of 26.5 metres with the possibility of bonus floor space and height being available for design excellence, a formulation generally consistent with the position contained in the Local Environmental Plan that had been set aside by Craig J. 10On that evidentiary platform, the valuers, Mr Adrian Watt for the respondent and Mr Grant Jackson for the applicant, had conducted joint conferencing based on their individual statements of expert evidence. During the course of the proceedings, Mr Eastman, counsel for the applicant, took exception to some of the material contained in Mr Watt's statement of evidence on the basis that it transgressed his expert discipline and trespassed into the area of town planning. 11Ironically, and I expect entirely inadvertently, Mr Watt's statement of evidence is titled on its cover sheet, Planning Report of Adrian Watt. 12However, I rejected that objection on the basis (consistent with a decision given in the Federal Court in 2012 in Ananda Marga Pracaraka Samgha Ltd v Tomar (No 4) [2012] FCA 385, where DoddsStreeton J held that it was possible for a person to give expert evidence even though they had no formal qualifications in an area provided they had the appropriate level of specialised knowledge to express an informed opinion) that it was clear to me from the material contained in Mr Watt's curriculum vitae that he had had considerable experience in assessing town planning issues as part of his valuation practice. I therefore permitted a broader range of evidence from him than might otherwise have been the case. 13In his individual statement, Mr Watt adopted a value based on comparable sales of $17,367,000 for the site. Ms Carpenter, counsel for the respondent, disavowed contending for that higher value and maintained the proposition -that the respondent adhered to a $12 million valuation as at the 1 July 2011 base date. 14On the other hand, Mr Jackson undertook an analysis of the primary sale that informed his conclusion, being a sale of the site itself in December 2010 and, deconstructing that in a fashion set out at p 10 of his statement of evidence, concluded that the appropriate land value to be adopted for the site was $9,400,000 - that being the value for which the applicant in these proceedings contended. 15At this point, I pause to observe that, during the course of the proceedings, we undertook an extensive inspection of a range of sites including a walk around of the site itself but including an extensive range of residential sites in the Gordon vicinity, a mixed use site at Lindfield, a residential site at Lindfield, a mixed use development site in Chatswood and two developed supermarket sites at Westmead and at Berala. 16In considering what use I might make of all of the material that has been presented to me in these proceedings, I am mindful of a number of propositions that flow from the decision of the High Court in Maurici v Chief Commissioner of State Revenue [2003] HCA 8; (2003) 112 CLR 111; (2003) 195 ALR 236 and (2003) 77 ALJR 727. There are a number of propositions that come from that decision, as I understand it, that inform me in my approach to the present valuation task I am to undertake as a statutory valuer. 17The first is that it is appropriate to use, when it is possible to do so, comparable sales methodology as the basis for valuation and, that although other valuation methodologies are available and are valid, comparable sales provides a starting point appropriately in circumstances such as this. The second proposition that flows is that even a single appropriately comparable sale is a sufficient basis for undertaking such an analysis. The third proposition that flows is that although it might be desirable that such comparable sales be of vacant land, as is the comparison to be undertaken actually or notionally pursuant to s 6A of the Act, it is permissible to use improved sales provided they are appropriately deconstructed to reflect what would be a proper analysis giving rise to a value consistent with s 6A of the Act. 18It is in the context of those principles that I turn to consider the sale that took place of the site in December 2010. The site had been owned by a Dexus Property Syndicate split between two property trusts, the Gordon Property Trust and the Gordon Property Investment Trust. The real estate that was owned by those trusts was the Gordon Centre and on the eastern side of the Pacific Highway, slightly offset to the south but with a coincidence of at least part of their frontages on the other side of the highway, the Gordon Village Centre - the two being connected by a steel and glass pedestrian overbridge above the Pacific Highway at Gordon. 19In the Dexus Property Syndicate annual report for 2010, they observed, with respect to a proposed sale in the manager's report, the following, under the heading Sale Progress, "Since our last communication and in accordance with the strategy outlined in the December 200 half year report, the complex was offered for sale via an open market campaign. The sales campaign concluded in April this year and whilst a number of offers were received, all were below expectations and not reflective of the December 2009 valuation, therefore were not considered acceptable. The manager will continue to offer the property for sale to interested parties with a view to achieving an acceptable sale as soon as practicable." 20And then, as the trusts had run to their term, the manager's report observed that as the property had not been sold, "the trusts will continue to operate until the property is in fact sold." 21In their half yearly report for the period to the end of December 2010, the report from Dexus to its property syndicate for these two trusts, reported the sale. Under the heading Valuation, the report said, "The property sale price of $67 million was supported by an independent valuation as at 31 December 2010. This represents and 11% decrease on the previous independent valuation taken 12 months ago of 75.4 million. The decrease largely reflects a 0.5 softening in the capitalisation rate for the Gordon Centre and a 1% softening in the capitalisation rate for the Gordon Village Arcade based on current market conditions. The property has been marketed for sale twice during the past year and as such has been thoroughly tested in the market place. Transaction activity has slowed in the past six months and only a small number of secondary neighbourhood and sub-regional centres have been sold at yields of 7.25% to 9.25%, depending on their performance, location and prospects for growth." 22Mr Watt made enquiries of one of the agents involved in the sale of the centre, a Mr Fox from Stonebridge, on 23 August 2012. He did so because he had been concerned that the sale might be one that should be regarded as being a distressed sale - that is one that was made necessary and to some extent driven by the need to finalise the trusts and the fact that they had needed to continue beyond their expected expiry date in mid 2010. Mr Fox informed Mr Watt that it was not a distressed sale, although the unit holders wanted their money and had agreed to it. 23The centre was purchased by Charter Hall Retail Real Estate Investment Trust on 23 December 2010. Charter Hall announced that they had entered into an unconditional contract to acquire the centre for $67 million. They had undertaken an analysis that said that it represented a passing yield of 8.7% (noting, as I do, that this falls within roughly the upper 50% of the range discussed by Dexus but is not outside that range so as to be considered exceptional). 24The remainder of the statement makes it clear, in my view, that Charter Hall did not regard the sale either as being one undertaken in distressed circumstances. Mr Jackson had undertaken the analysis needed as part of its disaggregation, I note at this time, to apportion the sale between the sale of the Gordon Centre, being the dominant real estate element of the package sold to Charter Hall, and the Gordon Village Arcade on the eastern side of the highway. Mr Jackson apportioned that sale as to $59 million to the Gordon Centre with the residual being to the Gordon Village Arcade. Mr Watt did not contest that apportionment. 25It is important to note that, as part of the marketing campaign by Dexus for the sale that ended up being effected to Charter Hall, it was undertaken by Jones Lang LaSalle and the Stonebridge Property Group as agents in conjunction. They published an information memorandum for these properties that went into some considerable detail about a wide range of matters. It is important in these proceedings, in my assessment, to have regard to particular elements contained in that memorandum between pp 11 and 15 and subsequently on p 23 of that memorandum. 26Page 11 set out the title details and the site area and then from p 12 under the heading Planning, set out a wide variety of matters derived from the Ku-ring-gai LEP (Town Centres) 2010. It set out the zoning; it set out the permitted uses; it set out the floor space ratio and building height limit and the fact that it had been identified as a key site. A link was provided (setting out the URL) for the relevant maps of this nature. The Development Control Plan then applicable, the Ku-ring-gai DCP (Town Centres) 2010 was also referred to, together with two pages of analysis on pp 13 and 14 of the potential development including the extended height and FSR that would be available under the 2010 LEP and the 2010 DCP. 27Key planning and development contacts were provided on p 15 including the name of the council's Team Leader, Urban Planning, and his phone number. Useful websites were provided that would enable the developer, if there were to be a developer, to obtain further information. Finally, under the heading Future Potential on p 23 of the information booklet, there is a point form outline of the possible future development potential under a variety of scenarios, either the existing site or the acquisition of further sites and consolidation. 28I consider that this material constitutes a comprehensive and complete disclosure of all necessary information to inform a purchaser, not only of that which was there but of that which was potentially there under the 2010 LEP. As the planners have indicated, subject to an allowance for delay, that which was actually there under the 2010 LEP at the time of this sale should be regarded as that which is potentially there in the future. 29It is now convenient to note a number of things that should be taken into account, at least in a negative sense, concerning the building as it is. The first is that the valuers agreed, after an analysis of what would need to occur if the additional approximately 3,000 square metres of floor space that could be freed for commercial and or retail use were to be so freed, as a necessity of requiring the relocation of the existing car parking spaces that would be displaced and the creation of the additional car parking spaces that would be necessary if that 3,000 or so square metres were to be created, would add no extra value to the value of the centre under the KPSO. Second, they agreed that there was no market movement between December 2010 and the base date of 1 July 2011. 30It is appropriate to note, as well, that Mr Watt conceded that, on the basis of everything he had been able to ascertain, the sale was not only at arm's length but was to not be disregarded (because it was not a distressed sale). However, Mr Watt made two significant criticisms of the valuation methodology followed by Mr Jackson on p 10 of his report - Mr Jackson's adoption of the proposition that the 2010 sale was one that fully comprehended not only the KPSO value of the land but also the future potential under the notional future two year away LEP. 31His criticisms were these. First, that the allowance for depreciation that had been adopted by Mr Jackson in his disaggregation analysis of the sale should have been significantly higher to have regard to the second factor that was of concern to him - that is what he (Mr Watt) considered would be the likely construction impacts of realising the potential under the future LEP values, and what he foresaw as the necessity to close either one or more of the major tenants, particularly the supermarket, or potentially to close the whole of the site during the redevelopment hypothetical process. 32Mr Watt postulated that he would have adopted a different depreciation allowance under those circumstances, a depreciation allowance that he thought have resulted in a value of the property for about $22 million on my notation. 33He provided no analytical basis why that was the appropriate figure to be adopted and with respect to the potential necessity to close the site, it is appropriate to note that having both valuers having disavowed having any engineering qualifications, they accepted - at least as I understood it - that it was their postulation of what might be necessary. Mr Watt postulated that under some circumstances closure might be required. 34Mr Jackson disagreed with the postulation and gave evidence that he was aware of a number of locations where major construction had been undertaken to existing shopping centres with complete or significant trading occurring during such periods of construction. 35I think it fair to say that for both of these experts, their evidence in this area was largely anecdotal and was not borne out by specific examples. I do not find that there is any basis upon which I could accept Mr Watt's proposition that closure would be necessary, and although Mr Jackson did not give specific examples, he did testify that from own knowledge and experience he considered that such total closure would not be necessary based on his experience of other unspecified locations where continued trading had been able to occur. 36I therefore accept, on balance, Mr Jackson's evidence on this point as he had expressed the view that he had had experience under those circumstances, whilst I understood Mr Watts' position to be a little more speculative on that point. 37However, just in case my adoption of Mr Jackson's deconstruction process was in error, the valuers were asked to undertake a valuation of the land on a traditional basis and they produced a further supplementary joint report on this basis. In that report, Mr Jackson's calculation, based on the lower expected yield of a redevelopment, achieved a value of a little over $9 million, whilst Mr Watt, on a higher FSR and a higher rate per square metre, came to some $13.75 million. They were as part of that - a matter to which I will return - unable to agree on what value, if any, should be ascribed to the excavation that existed on the site. 38I do not consider it is necessary for me to go to a detailed analysis of the supplementary joint report because it was based, as Mr Jackson expressed the opinion, on the necessity for such an analysis if I were not to accept that the sale of the site itself in December 2010 provided a sufficiently defining commercial transaction to enable me to disregard the need to undertake adjustments to the other sites that were necessary to reach their conclusions - there being in some instances agreement between them and in others, disagreement about the percentage adjustments needed to make the other sites, those sites being one in Gordon, one in Lindfield and one in Chatswood, comparable to the site itself. 39I am satisfied, for the reasons that I have earlier described relating to the information that was put out to the market and not confined to being made available to Charter Hall, that the 2010 sale was fully informed, fully priced, not distressed and requiring no adjustment for time. I am satisfied that the deconstructed analysis that has been undertaken by Mr Jackson has not been displaced by Mr Watt's two criticisms of it, as I consider that Mr Watt did not provide any express evidentiary basis upon which I would either quantify or adopt his criticisms. 40That leaves me in the position of turning to whether an additional allowance should be made for the land improvements or not, me being satisfied that on the basis of the 2010 sale and in light of the propositions I have said flow from Maurici, that the starting point valuation should be as contended for by the applicant, $9.4 million. 41The question of the excavation arises as a consequence of the interaction of s 6A(1) of the Valuation of Land Act 1916 and the definition of land improvement contained in s 4 of that Act. To assist me in considering this matter the applicant provided a quantity surveying report prepared by Mr Covington in July 2013. He ascribed a cost to the excavation of a little over $2 million, which when taken on a GST excluded basis, as was accepted by the valuers as being the appropriate basis, came to a little over $1.9 million. In his individual statement of evidence at p 27, Mr Watt simply equated the cost to the value of this excavation. He, in that statement of evidence, adopting the post GST application number. 42In their first joint report they did not reach agreement on this point at all, Mr Watt expressing the view, at least as I understood it from the matters set out at paras 99 and 100 of the joint report, that cost and value should be regarded as, if not absolutely the same, almost entirely the same. Mr Jackson on the other hand, analysed several excavated and unexcavated sites at other localities, at least one of which was the site at Berala that we inspected, that was sold excavated. 43Although there was an argument as to whether or not the Berala sale was a forced one or not, it is perhaps unnecessary to reach a determination on that point. 44Mr Jackson's proposition was simply that on his experience, having regard to the sites that he had nominated, excavation did not add value to the sale price of undeveloped land. Mr Jackson expressly rejected the approach of Mr Watt of relying on cost. Mr Jackson's evidence on the limited range of comparable matters upon which he relied was that excavation added no value. 45Although Mr Watt disputed this, he did not provide any example - at least as I understood his evidence - of sites where excavation had been demonstrated, as providing added value to a sale price. On this basis, I prefer the evidence of Mr Jackson that no value, in these circumstances, should be ascribed to the excavation based on that comparable basis evidence. 46However, in any event, if I am wrong in the conclusion that I have reached on this module of the evidence, it is the position that the 2010 sale, as analysed by Mr Jackson and for the reasons I have earlier outlined, has fully priced into the $9.4 million sale price any value, if value is necessary to be ascribed to it, of the excavation. That being the case, it follows that nothing should be added to the value resulting from Mr Jackson's analysis on p 10 of his expert report, that the value of the land should be regarded as at the base date of 1 July 2011, as being $9,400,000. 47The necessary consequence of that is that the order of the court are, (1)The appeal is upheld; (2)The value of Lot 21 in DP 732238 (known as the Gordon Centre and located at 802-808 Pacific Highway, Gordon) is determined to be $9,400,000 as at 1 July 2011; and (3)The exhibits, other than Exhibit A, are returned. Tim Moore Senior Commissioner DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 27 November 2013