Australia: Land valuations: the role of the weighting when relying on "far from perfect" comparable sales

Recently, the NSW Land and Environment Court handed down its decision in Marrickville Council v Sydney Water Corporation [2013] NSWLEC 222. The judgment is interesting because the Court applied a weighting to the comparable sales to reflect their reliability following significant adjustments made to those sales and no conclusive evidence of market value being derived.

FACTS

On 11 November 2011, Sydney Water Corporation (SWC) compulsorily acquired three easements over open space land owned by Marrickville Council (Council) for the purpose of the Sydney Water Act 1994 (NSW) (SW Act). SWC utilised the acquired easements to construct a water supply pipeline (Pipeline) from the desalination plant at Kurnell to the Sydney water distribution facility at Erskineville.

The land over which the acquired easements are situated had an irregular "U" shape and an area of 8.268 hectares comprising the following three distinct areas (Land):

1. generally level area beside the Alexandra Canal (being the area affected by the acquired easements);
2. a steeply rising vegetated area leading to an elevated level area; and
3. a western wetlands area.

The acquired easements were each 8 metres wide and have a total area of 4,379 square metres (Affected Land). The terms of the easements:

1. were expressed to be for water supply purposes and permit above ground infrastructure;
2. provided the Council with a right to permanent vehicular and pedestrian access alongside the works carried out by SWC; and
3. did not limit future works to what is currently on the land (i.e. the water supply pipeline).

The Council claimed total compensation in the amount of $2,589,460, while SWC contended for total compensation in the amount of $471,700.

VALUATION EVIDENCE

Valuation methodology

The parties' valuers agreed (and the Court accepted) the following:

• for the purpose of s 56(1)(a) of the Land Acquisition (Just Terms Compensation) Act 1991 (NSW) (Just Terms Act), it is appropriate to assume that the acquiring authority will use the easement to the maximum extent permitted by the terms of the easement;
• the highest and best use of the Affected Land was as public open space, particularly having regard to topographic constraints (landfill batter-slope), proximity to the heritage listed Alexandra Canal, flood liability, former contamination and aircraft noise constraints;
• due to the large size of the Land relative to the Affected Land, the before and after valuation approach would not accurately identify any decrease in the market value of the Land; and
• the most appropriate valuation methodology is the piecemeal method.

Land size and the piecemeal approach

In applying the piecemeal valuation method, the Council's valuer formed the view that the assessment of market value was to be undertaken by reference to the Affected Land rather than the entirety of the Land. The latter circumstance would likely have resulted in a lower rate per square metre than the former on account of its larger size. On the other hand, SWC submitted that the Council's valuer should have applied a discount to account for the larger size of the Land compared to the Affected Land.

Comparable sales analysis

In respect of comparable sales, the parties' valuers relied upon the following evidence:

• The Council's valuer relied upon the sales of two residential properties abutting the Land that had an underlying residential zoning and were acquired for an open space purpose. Based on these sales, the Council's valuer adopted adjusted square metre rates of $800 for the level sections of the Affected Land (applying a 20 per cent discount for the smaller size of the residential sites) and $600 for the sloping batter area of the Affected Land (applying an additional 20 per cent discount for the topography); and
• SWC's valuer relied upon the sale by Sydney Airport Corporation Ltd (SAC) to SWC of an easement for the continuation of Pipeline on land adjoining the Affected Land to the north (SAC Land) at a rate of $125 per square metre. SWC's valuer adopted this rate without adjustment because, in his opinion, the terms of the easement on the SAC Land were virtually identical to the terms of the acquired easements and the SAC Land had a number of the same physical constraints as the Affected Land.

The key issues for determination by the Court were whether residential sales should be considered and, if so, whether a discount should be applied for their underlying residential zoning and the particular features of the Affected Land.

DECISION

Ultimately, Biscoe J endorsed the approach of the Council's valuer and confirmed that, when applying the piecemeal approach, it was appropriate to value the Affected Land and correct not to make a discount for the larger size of the Land (citing Penrith City Council v Sydney Water Corporation [2009] NSWLEC 2 at [10]-[13]). However, His Honour noted that different considerations may apply if the valuers had adopted the "before" and "after" valuation method of valuation.

The Court accepted that it is legitimate to consider residential sales evidence to derive open space land values in circumstances where there is a shortage of needed open space in a locality and that no discount should be applied to comparable residential sales merely because the acquired land is zoned for open space (citing Leichhardt Council v Roads and Traffic Authority of New South Wales (No 3) [2009] NSWLEC 3 at [22], [25] and [33]-[34]). However, the comparable residential sales must be adjusted for factors such as location, topography and environmental features (citing Leichhardt Council v Roads and Traffic Authority of New South Wales [2005] NSWLEC 86)

The Court also accepted that:

1. the Marrickville local government area was deficient in public open space having regard to the Plan of Management Tempe Recreation Reserve 1997 and the Department of Planning's 2003 open space inventory; and
2. in 2005 and 2006, the Council paid residential rates to purchase two properties with an underlying residential zoning for open space purposes, namely the residential sales relied upon by the Council's valuer.

Although Biscoe J accepted that the sales relied upon by the parties' valuers provided "some indication of value", they were considered to be "far from perfect" comparable transactions. In the circumstances, the Court applied further adjustments to the comparable sales relied upon by both valuers, which narrowed the difference between the parties' valuation evidence.

In respect of the residential comparables, Biscoe J derived per square metre rates of $550 for the level land (after a downward adjustment of 45 per cent) and $375 for the sloping batter area (after a downward adjustment of 63 per cent). In deriving these rates, the Court applied downward adjustments for the availability of utility services, flood affectation, aircraft noise environmental issues and controlled airspace height limitation, and an upward adjustment for view.

As for the sale of the SAC Land, His Honour derived per square metre rates of $419 for the level land (after an upward adjustment of 235 per cent) and $397 for the sloping batter area (after an upward adjustment of 217.5 per cent). In determining these rates, the Court applied upward adjustments for flood affectation, aircraft noise, road access, environmental issues, controlled airspace height limitation and onerous easement conditions, and a downward adjustment for topography.

After adopting rates derived from the comparables, the Court considered it necessary to apply a weighting to each sale to reflect its reliability. Biscoe J considered that the rate derived from the residential sales should carry a weighting of 60 percent, and the rate derived from the sale of the SAC Land a weighting of 40 percent, having regard to the latter sale requiring the highest percentage adjustments. This weighting appears to be based on His Honour's finding that the sale of the SAC Land was the "most subjective" due to percentage adjustments required to account for the development height restriction, aircraft noise, environmental issues and the onerous easement conditions. Consequently, the Court determined a rate of $497.60 for the level land and $383.80 for the sloping batter area. In total, the Court determined compensation in the amount of $1.634 million for the acquired interests.

IMPLICATIONS

This decision is important because it reiterates that the Court will consider residential sales in determining open space values where there is a shortage of open space in the relevant locality (as will often be the case in inner city localities) and will not apply a discount to such sales.

The facts of this case are quite extraordinary in that the comparable sales required downward adjustments of up to 63 per cent and upward adjustments of up to 235 per cent, as there was no truly comparable sales evidence available. Further, despite these significant adjustments, it was still necessary for the Court to apply a weighting to the sales to assess their reliability. This weighting exercise is based on the Court's best assessment of the reliability of the comparable sales, following a review of the features of those sales as compared to the acquired land.

OBSERVATIONS

While the adoption of a weighting to comparable sales is a fairly rare phenomenon, it is not without precedent (for instance, see Maurici v Chief Commissioner of State Revenue [2005] NSWLEC 20; Babcock v Brown Properties Pty Ltd v Valuer-General [2005] NSWLEC 526 (Babcock); and Sharsay Pty Ltd v Valuer-General [2013] NSWLEC 181). A weighting to the reliability of comparable sales may be applied where no single sale can be said to be entirely comparable to the particular acquired land.

The commentary in the American textbook, The Appraisal of Real Estate (12^th ed., 2001) published by the Appraisal Institute, adopted by the Court in Babcock (at [63]) provides a useful exploration of the weighting exercise:

When many adjustments are applied by the appraiser and when their individual and collective amounts are substantial, the appraiser must ask, "Is the comparable property really comparable?" The greater the amount of collective adjustment, the more the appraiser may reduce the weight placed on a given comparable, or the appraiser may determine that it is not sufficiently comparable to be used at all. [pp 458-459]...

Re-examining an appraisal helps ensure its accuracy, its consistency, and the logic of leading to the value indications. An appraiser relies more on professional experience and judgment in reconciliation than in any other part of the valuation process. The appraiser weighs the relative significance, applicability, and defensibility of each value indication and relies most heavily on the approach that is most appropriate to the nature of the appraisal problem. [p 600]

The appropriate valuation methodology for open space sales has been the subject of some contention in recent case law. Where there is a lack of truly comparable sales evidence, it seems likely that a weighting will be applied to determine the reliability of a comparable sale. The question that arises for determination at a later date is whether a weighting can or should be applied to a comparable sale that is adjusted by more than 50, 100 or 200 per cent? Adjustments of this quantum to a comparable sale in the ordinary course would call into question the true comparability of that sale.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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