Hypothetical development method of valuation is proved to be valuable:

Wednesday, 22 June 2011

Graham Trilby Pty Ltd v Valuer-General [2011] NSWLEC 68

These were three appeals under s 37 of the Valuation of Land Act 1916 (“the Valuation Act”) against the Valuer-General’s valuation of 16.48 hectares of bushland off Cattai Creek, Kellyville. The land is vacant, devoid of improvements, and adjourns existing residential land to the south and west. The land’s highest and best use is for residential subdivision development and resale of the finished allotments.

Section 6A of the Valuation Act provides that the land value is the capital sum which the fee simple of the land might be expected to realise if offered for sale on such reasonable terms and conditions as a bona fide seller would require. The Valuation Act also provides for an allowance for profitable expenditure on land.

The parties had adopted different valuation methodologies. The Valuer-General used the comparable sales method with the hypothetical development method as a check. The applicant used the hypothetical development method as it thought that there were no reliable comparable sales.

It has been firmly established that if sufficiently reliable comparable sales are available, direct comparison is widely accepted as the conventional valuation technique. Whether a sale is sufficiently comparable is a question of fact and degree. Some adjustment is always necessary; too much adjustment will render it unsafe to use. In some instances, therefore, a hypothetical development analysis is used to reflect alternative future development options in determining the highest and best use of the property.

It was a common ground that a subdivision of the land would yield 45 residential lots. The parties agreed on all the variables for a hypothetical subdivision analysis except for the following items:

  • Average selling price;
  • Profit and risk;
  • Contingency of development costs;
  • Interest period; and
  • Interest rates.

In allowing three appeals, the Court held, following the earlier determination by the Court with respect of the subject land:

  • The allowance for profit and risk should be higher than usual because the subject land was difficult to develop, adopting 17.5 per cent;
  • The allowance for a contingency on development costs is eight per cent;
  • The interest period for the development approval assessment period, given the difficulties on the subject land, is 21 months;
  • In a hypothetical development analysis it is preferable to adopt an objective interest rate which is not dependent on an assessment of the credit of the particular applicant. The Court therefore adopted the Reserve Bank’s published small weighted average interest rates according to the relevant period;
  • Part of the subject land is unusable because of its steepness and was not part of the hypothetical development assessment. The unusable residential land, comprising a total area of 3,958 m 2, however, is not zoned Open Space and no application can be made to acquire it. Hence, the Open Space land was further discounted by 50 per cent.

Written by Oksana Shashko, Solicitor

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Important disclaimer: The material contained in this publication is of a general nature only and is based on the law as at 22 June 2011. It is not, nor is intended to be, legal advice. If you wish to take any action based on the content of this publication we recommend that you seek professional advice.