03 9600 1314

johndowling@kldowling.net.au

John began his career as an estate agent and practising valuer in 1966. Over the past fifty years, he has valued a diverse range of property categories and property interests, including central business district, residential, commercial, retail, industrial, investment, development land, partial interests, life tenancies, rural and specialized properties such as aircraft landing sites, air space, pipelines, ports, wharves, hospitals, timber plantations, vineyards, wineries, quarries, thoroughbred horse breeding complexes, roads and sports grounds.

John has also been responsible for the sale, purchase, lease, and management of real estate in categories including central business district, specialized use, buildings of distinctive architecture, properties having alternative or multiple markets, residential,commercial, retail, industrial, investment, development land, partial interests, and rural.

John has valued metropolitan property in Melbourne, Sydney, Brisbane, Adelaide, Perth, Launceston and Hobart as well as property outside metropolitan areas in Victoria, South Australia, New South Wales and Queensland.

As a panel member of the Australian Property Institute and of The Real Estate Institute of Victoria, John is appointed regularly as an independent determining valuer in disputes concerning lease rentals, property settlements, land title partition and tenancies–in–common.

John has acted as an expert witness since 1975 in cases before the Supreme Court of Victoria, Federal Court of Australia, County Court of Victoria, Victorian Civil and Administrative Tribunal and commercial arbitrators. His expert evidence has concerned the valuation of real estate, interests in real property, estate agency practice and commercial matters relating to freehold and leasehold real property transactions.

In 1979, John became a Managing Partner in K L Dowling & Co, and is now the principal.

Qualifications

• Licensed Estate Agent (appointed 1973)
• Licensed Auctioneer (appointed 1968)
• Registered Valuer (appointed 1966)
• Certified Practising Valuer: (API)
• Accredited Sworn Valuer: (REIV)
• Accredited Specialist Retail Valuer (API Certificate)
• Member of the President’s Panel of Determining Valuers, Australian Property Institute (appointed 2006)
• Certified Property Practitioner (CPP) Australian Property Institute (appointed 2010)
• Certified Property Manager (CPM) Australian Property Institute (appointed 2010)
• Fellow of the Real Estate Institute of Australia (appointed 1975)
• Associate of the Australian Property Institute (appointed 1966)
• Fellow of the Australian Property Institute (appointed 1975)
• Member of the Royal Institution of Chartered Surveyors (appointed 2014)
• Honorary Life Member of the Real Estate Institute of Victoria (appointed 2000)
• Recipient of the S F Whittington Memorial Award - 2001: Australian Property Institute

03 9088 8311

debbiegriffin@kldowling.net.au

Debbie commenced employment with K L Dowling & Co in June 1989 as personal assistant to the managing director, Mr John Dowling. During her 30 years, Debbie has gained a wealth of experience in various estate agency roles involving commercial and residential property management, owners corporation management and trust accounting.

She has an empathetic understanding of the needs and requirements of the company's client base and has established and maintained strong and trusted client relationships whilst always displaying a high level of personal service with professionalism and knowledge.

Qualifications

• Agent’s Representative

Who owns your real estate?

"Macavity, Macavity, there’s no one like Macavity,
There never was a Cat of such deceitfulness and suavity".
Old Possum’s Book of Practical Cats (1939) – T S Eliot

Some people holding real estate assets might be surprised to learn that, in Victoria, all real estate is owned by the Crown. Governments today don’t like using that last word but, as a sovereign state, Victoria’s ultimate land ownership lies with the British monarch of the day. It’s an arrangement that has always worked well, since the foundation of Victoria. In practice, of course, the actual control is in the hands of the elected government.

It is the reason why, when privately held land is taken compulsorily by the State government, the acquisition is described strictly as a resumption. The government is resuming the land, that is, it is taking back what it already owns.

The position is different where it involves the Commonwealth, or Federal government. Its actions are bound by Australia’s Constitution. Its compulsory acquisition of land has to be on “just terms”. The State of Victoria, on the other hand, has the power to take (that is, resume) land without making any payment of compensation. Again, in practice, the State government is bound by legislation that it has enacted on itself, providing for the payment of compensation.

These somewhat theoretical questions lead to the practical issues surrounding the taxation of real estate. Real estate, known popularly as property, is a favourite target of governments, both state and federal. This is due largely to the fact that it is “real”, meaning that it is, in most senses, indestructible and, even more importantly, cannot be moved. It can’t be hidden and it is not surprising that governments see it as an obvious source of revenue. Not only is there no escape, but it is usually an asset of substantial value, meaning that it can be a major contributor to government revenue.

Much of the popular debate about sound financial investments involves the choice between real estate and equities, the latter itself having a broad definition. A third choice, of course, is to leave the money in the bank, where it may earn sufficient income to compensate for its steady decline in real value. That course has the advantage of being accompanied by a government guarantee.

This leads us to the Business Council of Australia, which has been spending a considerable amount of time recently in airing its views on government taxation policy. It has been talking about “negative gearing”, capital gains tax, land tax and stamp duties. The first two are Federal government responsibilities, while the third and fourth are under the control of State governments.

In its advocacy for taxation reform, the focus of the Business Council of Australia seems to be on real estate and on the taxes that can be imposed on real estate. However, its principal and real aim is to reduce the amount of tax paid by companies, in particular, by Business Council of Australia members. Its argument, in simple terms, is that a reduced rate of corporate taxation would be beneficial to Australia and that the cost of achieving such a reduction should be met by increasing taxes on real estate.

We should bear in mind that Australia has more than 2,100,000 businesses that are actively trading, according to the Australian Bureau of Statistics. On the other hand, the Business Council of Australia has, at last count, 133 members. Its membership consists of an interesting combination of Australia’s largest companies, its largest law firms and its largest accounting firms. The lawyers and accountants are in a different league financially to the corporations and one can assume that their membership derives from their representation of (and dependence upon) those corporations, in legal, financial, accounting or audit matters.

Perhaps the Business Council of Australia should be called the Big Business Council of Australia, given that it represents a lot less than 1% of Australia’s businesses; actually, less than one-hundredth of 1% of Australia’s businesses. The views of the Business Council of Australia cannot, therefore, be said to represent the views of Australian businesses at all. No doubt the Business Council of Australia would argue that it is representative because just 12of its members pay one-third of all the company tax in Australia. We will have to wait to see what notice, if any, is taken of the views of such an unrepresentative body, albeit one that has a great deal of power and influence.

The primary taxation philosophy of the Business Council of Australia is that Australia has an over-reliance on personal and company income taxes. It is saying, in effect, that taxation should not be related to income or to ability to pay. The converse to that argument is that taxation should have no regard for ability to pay, even if losses are being incurred. The Business Council of Australia argues, therefore, that a greater share of taxation should be derived from wealth taxes and, in particular, from real estate. Wealth taxes are, of course, an incremental confiscation of the asset that is being taxed.

“Negative gearing” is a euphemism for “tax‑deductible loss”. It refers to one of the many expenses incurred in holding and maintaining an investment property. It seems to have been singled out, because losses incurred through the costs of borrowing in other investment classes, such as business establishment, shares, equities and commodities are not described as “negative gearing”, even though they amount to the same thing. Two other points not often raised are first, that the interest cost paid on borrowings, tax deductible or not, is taxable income in the hands of the lender; and second, opposition to “negative gearing” is advocacy for taxation of income that is lost.

The Business Council of Australia is successful in achieving wide publicity for its views, due largely to the powerful business leaders who speak on its behalf. It would assist the consideration of alternative views if there were a public awareness that the Business Council of Australia is not representative, either of businesses or people. Its views should be seen in the context that it speaks on behalf of 130 or so of the largest and most powerful corporations in Australia. The attitudes of the other 2,100,000 businesses in Australia, not to mention the 16,000,000 or so Australians eligible to vote, could do with a little more exposure and consideration.

“We’re becoming a nation of landlords and serfs” wrote the Economics Editor of The Age newspaper on 10th March 2016. He said: "The negative gearing-driven explosion has made it harder for Australians to buy houses to live in”. He quotes the Reserve Bank’s statement that “…if an investor is buying a property an owner‑occupier is not”. Apparently, in the eyes of The Age, a tenant is an “enslaved serf” (something of a tautology) whose purpose in life is to add to the landlord’s wealth.

There seems to be a lot of sympathy being generated for 25 year olds who are unable to buy a million dollar house. There is, of course, a large supply of houses, new and old, available for less than $400,000 but, unfortunately, not in North Fitzroy, St Kilda or South Yarra. It is still the case in Melbourne, as it has been for the last 150years or so, that new home buyers gravitate to the outer suburbs to obtain the house that they can afford. As metropolitan Melbourne grows at the rate of about 100,000 people a year (a new town like Benalla being added to the population every month), the outer suburbs are becoming more distant. For those that need to travel to central Melbourne every day, alternatives such as Geelong and Ballarat have become realistic choices.

Notwithstanding the views of The Age, most tenants do not see themselves as serfs. Many prefer to rent rather than buy, keeping their options open for the future and enabling them to live in inner-suburban locations. It is a little harsh, dare we say false, to depict those tenants as victims, as does the Economics Editor of The Age.

It is worth noting also that the tenants are able to find accommodation and to have their requirements met, thanks to investors. An investment property, by definition, has to be let. Sensible investors make their choices according to the needs of tenants. The investor is dependent upon the tenant to the same extent that the tenant is dependent upon the property investor. They need each other.

It’s a bit of a mystery, then, why investors should be under attack from the Business Council of Australia and The Age. Contrary to the assertions of the critics of “negative gearing”, investors do not dominate the housing market and are not responsible for house prices. House prices reflect supply and demand, with Melbourne experiencing a continuous and significant increase in demand due to its growing population, against a fixed supply. That is, the supply of land can only be increased by the expansion of Melbourne. Air space, of course, is relatively unlimited, as is demonstrated by the growth in the number of apartment buildings constructed. Those buildings have been successful in providing for the needs of all three categories, namely owner-occupiers, investors and tenants.

There can be no argument in principle with the desire of the Business Council of Australia to reduce the level of company taxation. Unfortunately, it has failed to validate that desire, concentrating instead on its advocacy for property to be the target and source of government revenue. Why does the Business Council of Australia not explain that reduced company tax would reduce the price of everything?

Everything that is produced by companies and businesses, whether it be manufactured goods like washing machines or whether it be services like taxis, is sold at a price that covers the cost of production. The cost of production includes company tax. It is reasonable to assume that the cost of everything would fall by 20% or more if there were no company tax. The Business Council of Australia needs to have a closer look at its case and to develop arguments that are not self-serving.

The Business Council of Australia believes also in land tax as an opportunity to add to government revenue, again in its pursuit of reduced company tax. It is something of a paradox, given that its members are already major contributors to the land tax pool.

The views of the Henry George League, which began the advocacy of land tax as the single source of government revenue, fell into disrepute in the century following its foundation in 1890. It hides nowadays behind the rather misleading name of Prosper Australia. To borrow a political caution from recent years, home-owners, investors, landlords, tenants, manufacturers and businesses occupying real estate (as they all do) need to be “alert but not alarmed” about the activities of Prosper Australia.

Underquote or Overquote?

How government deceit can lead you astray as a property buyer
“If you lie down with dogs, you will get up with fleas”
Jean Harlow, American actress (1911-1937)

Remembered as the Kennett government, the Victorian government in the 1990s did some good things. Perhaps its most important achievements were the extensive roadworks, tunnels and freeways that brought welcome relief, albeit temporarily, to Melbourne’s increasing traffic congestion. It would be fair to say that the five successive governments since that time have done, between them and by comparison, virtually nothing. Instead of accommodating the growing population with its associated needs for road transport, be it motor cars or trucks, the frequent response today is to discourage, if not ban, the use of motor vehicles.

That government of 20 years ago had another major achievement, in its reduction of Victoria’s state debt, inherited from Kennett’s predecessors at a level that would have put a commercial enterprise of similar size into receivership, if not liquidation. In the end, the Kennett government lost office because of its overweening hubris, which Australian history shows leads inevitably to the loss of public support.

One of the Kennett government’s less impressive acts was the damage it caused to the integrity of the estate agency profession. Estate agency, as a calling, had seen a steady and sustained rise in public respect, admittedly from a low base, beginning from as long ago as the 1930s. The “success” of the Kennett government, in its approach to the regulation of the estate agency field through legislation, was to bring that rise in public standing to a stop and indeed, to begin its steady and continuing decline. To be fair, the Kennett government cannot be blamed for the origination of its actions, which began and grew under each of its three preceding administrations, the Hamer government, the Cain government and the Kirner government. The actions of those three earlier governments provided, as history now affirms, the Kennett government with the political justification to obstruct and damage the professional aspirations of estate agents.

We need not dwell, in a brief newsletter, on the details of those government failings. Suffice to say that the advancement of estate agency in the public eyes was a steady upward path, especially from the 1960s and in particular, in Victoria where the professional body of the day, known then as the Real Estate and Stock Institute of Victoria, led the way. It was supported strongly by its federal body, the Real Estate Institute of Australia, where the sole topic for discussion, in those days, was professional standards.

A history of those two bodies would record changes of direction in the 50years since that will seem inexplicable to some but have a close connection with the changes in government attitudes. Close, respectful and constant if not permanent connections were maintained between the estate agency leaders of the day and the Premier of Victoria and the Attorney-General of Victoria. Those connections were damaged and ultimately destroyed by the Victorian governments of the 1980s, culminating in the creation by the Cain government of the Ministry for Consumer Affairs.

A new government department has to be kept busy and it is fair to say that the pressure has not ebbed, to this day, within the Department of Consumer Affairs to keep itself occupied so that it can justify its existence.

All of this comes at a substantial cost to the Victorian people, not just in direct government expenditure on a massive bureaucracy but, even more importantly, on the damage done to a large proportion of members of the public by the loss of their ability to take for granted the reliability, if not the honesty, of estate agents’ advice. It remains to be seen if the professional bodies for estate agents, being the Real Estate Institute of Victoria (as it is known today) and its now not-quite-federal affiliate, can overcome their impotence in their ability and willingness to reverse, or at least stop, this decline.

The daily press began the New Year with a frenzy of published articles on the evils of underquoting. Needless to say, none of those articles proposed a solution and nor, for that matter, did the representative bodies. With one or two exceptions, such as Woodend estate agent John Keating, no one has suggested a positive approach directed to education, through the provision of sound advice, of property sellers and property buyers.

Instead, the Department of Consumer Affairs is obsessed with the prosecution of venal estate agents, acting upon complaints made by thwarted purchasers, many of whom might equally be described as venal. Those complainants perform comprehensive research when contemplating the purchase of a washing machine or a motor car. When it comes to real estate, they are more likely to take the advice of their brother-in-law or of anyone other than an estate agent or property valuer.

The Real Estate Institute of Victoria should not let itself ignore its responsibilities to the public by assuming that underquoting cannot be prevented or will go away as a problem. The Institute is right to condemn any conduct that involves deceit. The core problem, though, is that most of the deceit encountered is unintentional. It stems from the ignorance of the estate agent
or, more particularly, the agents’ representatives who, for the most part, are the persons with whom the public deals. Those agents’ representatives have had the equivalent of ten minutes’ education in estate agency and valuation practice when compared to professional qualifications in any other field.

You would not be likely to use the services of an accountant, a physiotherapist, a lawyer, an architect, an electrician, a plumber or a dentist who was not properly qualified. It is hardly surprising that the public has become cynical about estate agency services when those services are delivered, more often than not, by unqualified persons. Some of those unqualified persons have had wide experience and some are assisted and supervised by competent employers. However, the combination of lack of qualification, little experience and no expert guidance is widespread.

The ideal solution will lie in the exercise, by the public, of greater discrimination in its selection of estate agency services. This can be made to occur with strong leadership of the estate agency profession. The Institute might choose to return to its roots when Institute membership, of itself, gave an assurance to the public of such qualities as professional skill, integrity and reliability. That public awareness has ceased to exist and there are now few Institute members who promote their membership as an essential element of their service offering.

Property buyers can be gullible through no fault of their own. Entering a property transaction is a rare experience for most. That lack of experience combined with the financial magnitude of the transaction suggests that expert advice is essential. Reliable professional advice is available readily, but must not be mistaken for the spurious website “services” offering free advice.

The announcement that the person who has led the march downhill is departing opens the way for a return to the professional estate agency standards of the twentieth century. It is not too late to repair the damage, which will require a strong alternative to the present influence of the corrupt politicians and bureaucrats who deceive the public on a daily basis. The public interest will be served only by leadership from estate agents themselves, with the setting of standards that confine membership of The Real Estate Institute of Victoria to those who pass the tests of integrity, dependability, professionalism and expertise. It will make the choice easier and safer for buyers and sellers when they need estate agency services and advice.

Estate agency and Valuation – Conflict or harmony?

Q: What is a cynic?
A: "A man who knows the price of everything and the value of nothing"
Oscar Wilde (1854 – 1900) – Lady Windermere’s Fan

Motor cars need regular and expert service. They have a lot of moving parts, all of which will eventually wear out, including the engine. Most of us prefer to replace the car before those defects become too frequent. These days, as well as the moving parts, there is more electronic equipment on board than was installed in the first rocket sent to the moon.

The reliance upon efficient, prompt and high quality service is therefore a first essential. It follows that, when buying a motor car, we should give high priority to the service that will come with it. In other words, don’t buy a car without being satisfied that the associated service requirements will be met permanently and to the standard that you want.

The connection with real estate might seem tenuous but the principles are, in fact, the same. Real estate needs good and regular service to maintain it in optimum condition. Anything less will prove to be expensive, whether it be in high repair costs or in loss of income. Those two costs are connected, of course, because deterioration in physical condition is an automatic cause of lost income due to vacancies, lower rental value and low-grade tenants. The parallels to be drawn, between the proper maintenance of motor vehicles and the standard of care necessary for real property, lead to the common denominator, which is the avoidance of false economies. Yet it is as obvious as it is puzzling that there is a minority, in both cases, who follow the band-aid path with its ultimate costs and inconvenience, not to mention the substantial loss involved in the worst cases.

Contemplation of the automobile versus real estate analogy was prompted by David, a gentleman in the car industry whose organization handles the sale and service of one of the more expensive vehicle brands. He asked us what sort of business we conduct. We informed him that our primary activities are valuation and estate agency services. David’s response was that he thought our business has an inbuilt conflict of interest. He felt that valuation skills and estate agency skills are at odds with each other, to the point that a business offering valuation services and estate agency services has an automatic conflict of interest. We did not pursue the point due to shortage of time, but it is worthwhile doing so, to deal with a viewpoint that could be a misunderstanding.

David’s belief in a conflict of interest between valuation and estate agency services highlights the failure of our profession to inform the community adequately about those services. Even though most members of the general public have cause to use each of these services from time to time, the individual need to do so is infrequent. It means that there are relatively few members of the public who gain any real experience in the engagement of estate agency and valuation services; they have to rely, instead, on one or two past examples, often involving haste, stress and well-meaning but inexpert advice from family and friends.

At the next opportunity to talk to David, we will explain that valuation and estate agency are two parts of a whole. Valuation, as a science and a discipline, is at the heart of estate agency expertise. Although thorough valuation research has become detached increasingly from estate agency activities, the failure to conduct that research places any estate agency advice at a disadvantage because it introduces high levels of uncertainty and the likelihood of bad decisions.

Why has this situation evolved? The answer is probably shared between two sets of circumstances, the first being the subjective or emotional consequences of strong markets for most classes of real property since the start of this century, a period now exceeding 15 years. In the historical cycle, 15 years of such sustained, indeed strong, growth is uncommon but not without precedent. Rising prices diminish the need for valuation and estate agency skills, in the eyes of many buyers and sellers.

The second and more permanent circumstance is the separation of disciplines, where estate agency and valuation have come to be seen as two separate callings. That is a perception more than a reality, but the increasing differences in academic standards, unless arrested, will cause the separation to become more sharply delineated.

During the greater part of the twentieth century, most estate agents were valuers and most valuers were estate agents. It is true also that, during that time, specialization was the exception rather than the rule - most estate agents handled all classes of property and most valuers had a broad range of expertise and experience.

There is a much greater focus today on the selection of a “local” estate agent and on estate agencies specializing in a property’s category, be it residential, commercial, industrial, retail or rural. Likewise, large numbers of valuers are preoccupied with high‑volume work for mortgage lenders, government agencies and municipalities, none of which allow sufficient time to make a definitive valuation of a given property.

David can be reassured that there are no conflicts of interest at all between valuation work and estate agency work. They should be seen as inseparable, being a natural consequence of their interdependence. If David finds an estate agency engagement where valuation services are not recommended or if he finds a valuation appointment where estate agency skills are deemed irrelevant, he should give each of them a wide berth.

Preserving our Heritage: Are Private Property Rights to Become Public Bequests?

"He could boast that he inherited it brick and left it marble" - Augustus - first Roman emperor (63 BC - AD 14)

Defending our heritage is like protecting traditions. Where we came from, the language we speak, the beliefs we share, are some of the things that characterize our heritage. It is something in which most of us take pride and that we want to preserve. World Heritage Sites represent a history of civilization. When they are damaged or destroyed by uncivilized people, all of us feel the loss because we are witnessing the annihilation of history.

Heritage means that which is inherited. Twenty years ago, the Victorian government of the day enacted the Heritage Act 1995. The original Historic Buildings Council, established under that legislation, has since become the Heritage Council of Victoria, with government-appointed members drawn from historians, town planners, engineers, architects, lawyers and writers. It does not include anyone with expertise or experience in the estate agency or valuation fields.

The Victorian Heritage Register is one of Victoria’s best tourist guides. It is a wonderful compilation of all the places, buildings and things worth visiting. Australians can be proud that these precious assets are given statutory recognition and, to the extent practicable, a measure of protection. Protection, however, cannot be guaranteed or even taken for granted, because some of these assets, especially buildings, will decay without constant and positive intervention.

Anyone with a financial stake in real estate knows (or should know) that deterioration in the condition of buildings is normal, automatic and continuous. In technical terms, it is called physical depreciation. People responsible for real property assets need to safeguard those assets by regular maintenance, repair and restoration. Even vacant land has to be maintained if loss in value is to be avoided.

All buildings perform at their best, have optimum utility, maximum economic life and greatest appeal, when they are kept in “as new” condition. Every building owner and manager knows that the property asset achieves its highest value when the building improvements to that property (and the accommodation within those buildings) are presented at their best.

What has all this to do with heritage? It means simply that heritage buildings have to be maintained with the same level of care and attention as any other building, be it domestic, commercial, retail, industrial or government use. Needless to say, examples of failure to do this abound. A conspicuous example of government failure is the Flinders Street Railway Station, a heritage building of the highest importance.

Internal restoration of Flinders Street Railway Station (Major Projects Victoria - State Government of Victoria, 2015)

Successive governments have allowed some of its most beautiful elements to become shabby to the point that the cost of restoration will be many times greater than it need have been.

Governments will find the money when necessary, as a matter of political expediency. The real problem is that a large proportion of heritage buildings are either in private hands or are held by institutions, such as religious orders. The financial capacity of private individuals, families, schools, religious orders and the like is often limited; typically, they are asset rich and cash-poor.

We need to bear in mind also that heritage controls do not stop with the buildings on the Victorian Heritage Register. Heritage overlays, as they are called, have become commonplace in the statutory planning schemes that now control the use of virtually every property in Victoria. Those overlays mean that a given property affected by them cannot be changed, let alone developed, without the heritage considerations being examined by statutory authorities, leading to possible restrictions or prohibitions upon any changes being made to a property.

How then do we balance the public needs against the private rights? It is a central question that we hope will be addressed by the present government’s Heritage Act Review, initiated in recent months. The government has published a Discussion Paperthat it says “… should kick-start conversations about how the Heritage Act is currently operating – and how it could be improved”. Those involved in real estate (which means all of us if we own a house or any other property) and the general public have the first opportunity in 20 years to respond to such an invitation. It is a good opportunity, because “heritage” has taken on additional meanings in Victoria since the advent of the legislation in 1995 and, particularly, since the introduction of heritage overlays into planning schemes.

The fundamental challenge, in the case of non-government property, is that heritage designations or overlays involve a diminution of private property rights which, in some cases, can amount to an effective confiscation of rights that used to be seen as inalienable from a given property and that were intrinsic to that property. Victoria has long-standing laws that protect private property rights and provide for the payment of proper compensation if those rights are taken away in the public interest. The creation of an easement for the construction of an electricity transmission line, or the acquisition of part of a property’s land for a road widening, are examples of this form of protection of property rights and the payment of compensation for the loss of those rights.

The “in-use” value of many inner suburban properties, where the existing buildings date from the first half of the 20th century or earlier, has usually been overtaken by the land value. Even where those buildings continue to have good utility, obvious examples being the abundance of attractive houses, the land on which they stand has become more valuable for an alternative use. That alternative use might simply be a larger house, or it might include the construction of dwelling units or apartments at a higher density.

A recent example is the large site at 16 St Georges Road, Toorak where a house described as an historic mansion was demolished. The matter was controversial, because the City of Stonnington had attempted to prevent the demolition of the house, for which it had sought interim heritage protection. Notwithstanding the views of that Council, Heritage Victoria, being the responsible government agency, had given advice that the building was not of sufficient architectural significance to warrant its protection.

There are numerous such examples where a requirement for the building’s preservation, had it been enforced, would have caused a measurable loss in the property’s value, due to the inability to put the property to its highest and best use. The question that arises is whether the serving of the public interest through the imposition of a demonstrable private or personal loss, without compensation, should be acceptable practice in a free society.

If the house in which you live is on the Victorian Heritage Register, you have the good fortune to be occupying a national treasure. In any case, you might find that the house in which you live is subject to a heritage overlay. Or you might find that a property in your family or that is held as a long-term investment is within a heritage overlay. If so, there might be a detrimental effect upon the property’s value, caused by the heritage overlay, a loss that will depend on the individual circumstances and which, in some cases, will be substantial. As matters stand, that loss is not accompanied by any rights to compensation, even though the imposition of the heritage overlay amounts to the compulsory forfeiture of an interest in the property.

Raising these concerns with the government may not attract much sympathy from some of the more zealous planning officials, whose philosophy is increasingly to view private property rights as public property. If we are to prevent the incremental erosion of those private property rights (and the speed and extent of the erosion will increase if we do not), the review of the Heritage Act 1995 is a timely opportunity to remind our legislators of the need to recognize property rights that are integral with the property. Otherwise, property ownership will become ownership in name only, where you will not be allowed to do anything with or to the property that does not have bureaucratic endorsement.

There are no improper motives in the heritage legislation, whether in the Act itself or in the heritage overlays made under statutory planning schemes. The problem has arisen because of a lack of awareness of the eventual and detrimental financial impact on a given property. If we, as a society, believe in the principle of the payment of compensation for the compulsory taking of property, it seems to be sensible that we should define more clearly the meaning of the rights that, as a whole, constitute a given property. We can then be clear about which of those rights we consider to be integral with the property and part of the asset and which, if any, of the rights should be given to the public free of charge if such a need is identified.

We met recently with the newly-appointed Executive Director of Heritage Victoria, Mr Tim Smith. He comes to his new role with extensive experience gained in New South Wales, Australia’s original state now lying in the shadow of our great state of Victoria (we say that without any hint of parochialism). We can say with accuracy that Mr Smith is a person of high ability and high integrity. If you let him know your views, whether or not consistent with our own, he will both welcome them and give weight to their merits. Mr Smith’s postal address is 1 Spring Street, Melbourne, Victoria, 3000. Although planning overlays under statutory planning schemes are not within his area of responsibility, Heritage Victoria is part of the government department responsible for planning schemes. We are sure that Mr Smith would be pleased to bring your views on those matters before the responsible head of the Department and the responsible Minister.

This newsletter is not a new initiative, as the tautologists would say. We have been sending our occasional newsletters for many years by post, their purpose being to offer informed comment (we hope) on subjects that are topical, relevant and important. The relevance is intended, of course, to mean that the subject relates to real estate in all its guises.

The reason for the newsletters is to offer comment that might not otherwise be made. A principal aim is to point to shortcomings or mistakes in the conventional wisdom. If it happens that our view is wrong, we will at least have provided food for thought.

We hope that you will find our views helpful in dealing with the multitude of complexities that characterize real estate.

A valuation is an estimate of the value of something. The first question that arises is, what does ‘value’ mean?

Value is the price for which something will sell, immediately raising more questions about the meaning of ‘price’ and ‘sell’. Most people would agree that ‘price’ means the highest price that can be obtained for something. Then again, the highest price might take a long time to achieve, while a lower price may be accepted for a quick sale. When it comes to real estate, lenders such as banks, for example, usually think of a quick sale and therefore a lower price. In such a case, ‘price’ may not equal ‘value’.

Real estate differs from most other things that are sold because it usually needs a long time, such as several weeks or months, to bring about a sale. Things like commodities and company shares have a ‘daily’ market, meaning that they can be sold on a day’s notice as a rule and their prices, or values, will fluctuate from day to day, often greatly.

Antique furniture can be like real estate, in the time needed to sell it. A particular piece might sit on the shop floor for a year before a buyer is found at the article’s full price. When it is sold eventually, the price becomes the value and can be used as a possible reference point by people buying and selling similar articles after that date.

In order to sell the piece of furniture more quickly to a fixed timetable, such as a week or two, it would have been necessary to reduce the price to meet the market, in this case, a quite different market to the one first described. The second, lower, market could be termed a ‘trader’s market’, being a readily accessible market characterized by relatively high volumes and dominated by resellers. In other words, the buyers in the trader’s market are professional dealers who purchase items to hold for resale at a higher price.

When it comes to real estate, there is not much of a trader’s market. Most people want to sell their property at its full value, rather than the discounted value that would be paid by a trader or reseller. The full value can be obtained only from a buyer with a clear ‘end use’ in mind, whether as an investment to earn rental income or to occupy personally. This market behaviour applies equally to residential properties and to business properties.

So, we see that terms such as ‘price’ and ‘sell’ can mean completely different things, depending upon the particular case. As estate agents, we have little interest in the ‘trader’s market’, as our clients are not usually under such pressure to sell that they need to accept a price that is less than the property’s full value.

This brings us to the estimation of the value and when a valuation is, in fact, a valuation. People talk sometimes about ‘Council’ valuations and ‘kerbside’ valuations. Neither has any sensible commercial use, although municipal (or Council) ‘valuations’ serve the purpose of fixing the amounts to be paid in wealth taxes, such as rates and land tax. To place any reliance on municipal valuations for any other purpose is dangerous, even reckless. Council valuations are not valuations at all, but are a responsible attempt to provide an equitable basis for rating and taxation across hundreds of thousands of properties.

‘Kerbside valuations’ on the other hand, have no redeeming features whatsoever. Indeed, they would be better described as gutter valuations to indicate their lack of merit. While it is true to say that a kerbside valuation will be wrong, by definition, such a simple statement does not convey adequately the extent of error and the magnitude of risk involved for those that request, provide, or use so-called kerbside valuations. Responsible estate agents, if asked for a kerbside valuation will recommend half-seriously that the client consult a soothsayer, if what is required is shonky advice dressed up in a professional disguise. More seriously, the estate agent will explain the pitfalls involved in giving advice based upon invention, hope and guesswork rather than upon objective research of the relevant data, followed by its analysis and application to the case in hand.

Valuation is difficult, not because it is rocket science, but because it needs to be performed in a painstaking way that takes into account the large amount of relevant information. The mistake, implicit in the term ‘kerbside valuation’, is the assumption that property values can be derived by using short cuts. They cannot, and it is time for lawyers, accountants, estate agents, valuers and advisers generally to impress this upon their clients, who are seduced too easily by false economies. A cheap ‘valuation’ is one of the world’s worst investments.

This discussion paper deals principally with the independent determination of rental by a valuer, appointed under a lease to fix the rental where the parties are in dispute and where the valuer’s determination will bind the parties. The issues discussed relate particularly to those leases that are silent on the matter of goods and services tax and under which a liability for goods and services tax has arisen on the part of the lessor.

Liability for goods and services tax, a tax introduced by the Australian federal government, began on 1st July 2000. It applies to most goods and services (although there are some major exemptions and special categories), including the rental supply of ordinary commercial business premises. The effect of goods and services tax, in relation to the market rental values of commercial leasehold premises, is yet to be seen fully because of the relatively short time since the introduction of the tax and the correspondingly limited amount of evidence that can be deduced from completed lease transactions.

Although goods and services tax has been levied only since 1st July 2000, the certainty of its introduction was known from the time of its legislative enactment in 1999. Since that time, most commercial lease transactions have included an agreement that any goods and services tax liability on the part of the lessor will be reimbursed by the lessee to the lessor. In practice, such a reimbursement obligation has presented no material impediment generally to commercial lease negotiations, because the goods and services tax is a “value added” tax, where a particular party’s net liability for the tax relates only to that party’s retained earnings, or net profit. That is, the ultimate liability for the full cost of goods and services tax is transferred to the eventual consumer of the thing being sold.

In most cases, this means that a commercial lessee’s customers, as the actual “end-users” of the lessee’s products, meet the whole of the cost of the goods and services tax; the lessee and, in turn, the lessor of the premises, are entitled to an “input tax credit”, representing their respective liabilities for goods and services tax.

The input tax credit is the amount of goods and services tax contained in the price of goods and services purchased from other suppliers.

These complex arrangements to determine the liability of a lessor or a lessee for goods and services tax have not been found to be a material impediment to the negotiation of lease transactions. In that respect, the tax has not yet had any measurable effect upon market rental values. However, that experience is not necessarily a guide to the assessment of market rental value where a lease contains no provision for the responsibility of either party for goods and services tax.

A lease agreement reflects the parties’ respective obligations. If a lease fails to require the lessee to meet future, undefined, statutory taxation liabilities of the lessor, it is not possible for a valuer to read into the lease some contrary implied entitlement of the lessor that any such liabilities of the lessor, if and when they should arise, are automatically to become the corresponding liabilities of the lessee. If it is the parties’ intention that future, unforeseen, liabilities of the lessor should be recoverable from the lessee, the particular lease agreement will record that fact. In practice, many lease agreements do anticipate future or potential lessor’s liabilities and include the lessor’s right to recover the cost of those liabilities from the lessee.

In the case of a lease in which no such provisions have been made, the lessee’s liabilities will be limited to those defined by the lease. Any future liability not so defined, whether a statutory tax liability or any other form of liability, will be at the cost of the lessor alone, unless legislation says otherwise.

For these reasons, it is my view that the rental value to be assessed, in the case of a lease in which no reference is made to liability for goods and services tax, is to be measured by reference only to comparable market evidence. In my opinion, it is not reasonable to assume that the rental value assessed is to be increased by a factor that equals the lessor’s liability for goods and services tax, if the lessor has such a liability.

If the market evidence relating to comparable lease agreements establishes that the value should be at a particular level, the valuer is bound to follow that evidence. If the result of doing so is to cause the lessor to have a liability for which a corresponding lessee’s liability does not exist, it must be concluded that such a lessee’s benefit was always the intention of the parties, as expressed by the lease agreement itself.

Nevertheless, the question of goods and services tax liability cannot be ignored, in the examination of comparable market rental evidence. It is to be expected that market rental value will reflect, over time, all the benefits, rights, obligations and liabilities possessed by both parties to a lease. This is to say that the valuer, in assessing the effect upon rental value of the goods and services tax liability of either or both parties to a lease, will have regard, among other things, for the negligible material impact of such a tax upon either party in most commercial lease transactions. The existence of a supposed benefit to a lessee, due to the omission from a lease agreement of any obligation on the lessee to meet the cost of the lessor’s goods and services tax liability, will be a benefit that is reduced by the input tax credit foregone by the lessee.

It is evident that commercial leasing practice has not changed since the introduction of goods and services tax, in that commercial leases continue to be negotiated, transacted and recorded on the basis of rentals that are exclusive of goods and services tax liability. It means that goods and services tax is being treated, by the parties to commercial lease transactions, as a financial transaction that is separate from rental.

Despite a view taken by the Australian Tax Office, in its notification dated 5th February 2001, that commercial rentals should be fixed on a basis that is inclusive of goods and services tax liability, it seems probable that the established practice will continue and that goods and services tax will be kept separate from rental in accounting for the parties’ financial liabilities and entitlements under lease agreements.

In similar form, many other financial liabilities under commercial leases, such as a building’s operating costs, are kept separate from rental, both in accounting for them and in their definition. The first of two important distinctions, however, is that a lessee’s assumption of liability for operating costs and such matters is different in substance to a liability for goods and services tax, because goods and services tax is usually a much smaller actual liability than its nominal cost. The second important distinction is that the goods and services tax collected by a lessor from a lessee is not the property of the lessor, but is taxation revenue which the lessor has the responsibility to collect and remit to the Australian Tax Office; likewise, the goods and services tax collected by the lessee from its customers is not an asset in the hands of the lessee.

An earlier discussion paper on the subject, dated 4th July 2000, distributed for information to its members by the New South Wales Division of the Australian Property Institute, but not representing the view of the Institute, said that: “The simple approach is to exclude GST from estimates of value and rely on GST exclusive prices and rents. The general rule is that valuers should exclude the tax status of purchasers, vendors, lessors and lessees in estimating values and there is no reason to deviate from this principle for GST”.

The same discussion paper appeared though to contain the following inconsistency in its conclusion: “Where a lease does not provide for GST recovery from the tenant then valuers have to determine a GST inclusive rent if a market rent review occurs after 30th June 2000.

“Since market evidence of recent leases is likely to be GST exclusive it will be necessary to convert to a GST inclusive market rent. Prior to doing this every effort should be made to persuade the parties to convert to a GST exclusive lease. However if this is not possible, the valuer will have no other option than to add 10% to the GST exclusive market rent.”.

In my view, this latter argument is not tenable. First, that approach if adopted would purport to remove, from a lessee, a benefit possessed by that lessee under the particular lease agreement; second, it confuses goods and services tax with rental by stating, in effect, that a goods and services tax liability is equal to its equivalent sum in rental value. In my view, such a proposition is not valid.

Goods and services tax is required to be recorded separately to rental, both for commercial and legal reasons; it is not an amount that, in itself, reflects the actual cost to an individual party of the goods and services tax liability in respect of a particular transaction. Hence, it is not likely to affect the market rental value of typical commercial premises to an extent that is greater than the real cost of goods and services tax to a party to a lease transaction.

The valuation principle to be followed in making rental determinations is that market rental value will reflect the benefits to which either party to a lease is entitled and correspondingly, it will reflect the obligations of each party. As argued earlier, a valuer making a determination of rental, when appointed under a lease to do so between the parties, cannot establish a liability on the part of the lessee for goods and services tax where the lease itself does not establish such a liability. The valuer will determine the market rental value having regard for the benefits accruing to of each of the parties, as well as the obligations of each of the parties. The valuer’s determination will be made on the basis of market evidence, rather than by an arithmetical calculation that reflects only the lessor’s nominal liability for goods and services tax.

It is open to the parties to a lease agreement that makes no provision for a lessee’s liability to the lessor for goods and services tax, to negotiate a variation of the agreement to create such a liability. A lessor, becoming liable to pay goods and services tax for the supply of rental premises under a lease that makes no provision for the recovery of that liability from the lessee, will not necessarily be required to provide the lessee with a tax invoice under the relevant legislation.

In that case, the lessee will be denied the ability to obtain an input tax credit for the cost of the goods and services tax paid by the lessor; the amount of such goods and services tax, in the hands of the lessee, will simply be a part of the lessee’s rental liability.

In such circumstances, a lessee may even prefer to pay a greater aggregate sum than the amount of rental determined, in order to establish an input tax credit entitlement in respect of the lessor’s goods and services tax liability.

The practical importance of the issues discussed will diminish over time, as the incidence of specific goods and services tax liability under lease agreements becomes universal. For the moment, however, the question has considerable relevance to the determination of rental in many cases.