Valuation is a discipline that extends into numerous fields, such as real property, plant and equipment, artwork, jewellery, motor vehicles, to name just a few.
According to the Shorter Oxford English Dictionary, valuation is “the action of estimating or fixing the monetary value of something, especially by a professional valuator”. The first step will be the identification or definition of the asset to be valued that, usually, will be a thing that is tangible or material. It might, of course, be something intangible, such as business goodwill. Our focus, in this article, will be on the first of these items, “Real Property”. It means simply property that is immovable and is within one of its original definitions, being lands, tenements and hereditaments.
Those categories need, in turn, to be defined, a tenement being land that is the subject of tenure, such as a lease and a hereditament being, usually, land that is able to be inherited. The definition of “land” itself is more complex. The problem with land is that it cannot be owned in a literal sense. A landscape painting, a diamond necklace, or a farmer’s tractor can be the subject of absolute ownership, meaning its possession is exclusive without reservation and is not affected (unless agreed otherwise) by the rights of any other person.
We cannot “own” land in a way that passes those tests. It may seem ironic we cannot own something that is immovable, cannot be stolen (except by government!) and can be treated, in every practical manner, as having the right of exclusive use and occupation. However, in most countries, including Australia, the ultimate ownership of land rests with the State. Australia is a federation that includes sovereign States, with all land held initially by the Crown (the British monarch) and with subsequent “ownership” being granted by a limited form of devolution, known usually as an estate in fee simple. Such a grant is an estate of inheritance and is the most extensive and unrestricted interest its proprietor can possess under the Crown.
An estate in fee simple carries the implication it is an absolute inheritance, clear of any condition, limitation or restrictions, to cite the British barrister and lexicographer P G Osborn. The finer points described may seem, at first sight, to be technical, legalistic and academic. However, they are not, first because the land can be recovered by the Crown upon government behest (known aptly as “resumption”) and second, because limitations in the Crown grant will often have a material bearing upon the use of the land and, as a consequence, the making of a valuation.
You may ask, what is the relevance of political science to these matters? If political science is the scientific analysis of political activity and behaviour, we can adopt that description to lead us to understand the terms and conditions upon which land is held and occupied, by private individuals and entities, are determined by political decisions. There is no cause for complaint about anything in particular being determined by political decisions. It is a process that is the foundation of democracy. The problems that arise are due often, not to the decisions as such, but to their interpretation, as well as to the personalities responsible for giving effect to those decisions.
The increasing proliferation of regulatory bodies, within government, has led to protracted delays in the obtaining of approval for actions proposed under legislated rules. That same statutory framework, with no offence intended to the legal profession, provides a field day for lawyers, as evidenced by the constant and exponential growth in the litigation of property-related disputes. Our political decision makers, meaning elected parliamentarians, would show impressive leadership by ensuring all legislation and regulations are enacted only if they are seen to be simple, essential, unambiguous and fair. How does this relate to valuation practice?
As can be inferred from the legal estate complexities mentioned, the valuation of any property interest must be based upon the clear identification of that interest as well as its precise definition. For example, some properties in St Kilda Road, Melbourne are restricted, in the terms of their Crown Grant, to residential use, notwithstanding their later development as commercial buildings. Their present use is contrary to the use allowed at the outset, seen now perhaps as a technicality but nevertheless an unequivocal breach.
Many properties are subject to restrictive covenants that must be given weight but are sometimes overlooked because the particulars themselves do not appear on the initial land title search. Site contamination may be in significant breach of statutory obligations but is unlikely to be evident or even identified without specific investigations being made. Sometimes reclaimed land proves to have been improperly filled, a defect that may take several decades to become evident, as was found to the dismay of property owners in Elwood, another Melbourne suburban example. Easement rights can be contested, even when registered on title, with a case presently before a State Supreme Court being a claim to confirm such a right where a neighbour has appropriated the easement land and seeks to deny the uses it allows (the “appropriatrice” is a justice of that Court!).
The list of encumbrances, whether recorded officially or being invisible to a casual observer, is an essential element of valuation investigation. Valuers cannot afford to be casual observers. The risk of potential negligence must be ‘front of mind’ for us in the conduct of a valuation. We are in a year of strong political discussion and debate, due to the recent Federal election. The practice known as negative gearing has become an important topic upon the political agenda. It relates to the circumstances where, in the case of real property, the borrowing costs incurred under a mortgage loan arrangement exceed the net income able to be generated by a particular property. Negative gearing allows the borrower to treat the excess borrowing costs, meaning those not covered by the property’s net income, as a tax-deductible expense against other taxable income earned or received by the borrower.
It is, in principle, a legitimate arrangement because it replicates the parallel circumstances of a taxpayer earning profits and incurring losses in separate business enterprises having common proprietorship. That is, the taxable income of the taxpayer is the actual net income after meeting the costs, which may include interest payments on loans, incurred in the operation of those businesses. To that extent, restrictions or prohibitions affecting “negative gearing” would amount, in reality, to a form of double taxation, meaning at least one income stream is to be taxed on a gross basis, without the right to deduct some of the costs incurred, such as loan interest, in earning the income.
These circumstances may seem, at first glance, to have little or no relevance to valuation practice. However, the question for valuers will be the extent to which any change or changes in the relevant taxation legislation might affect the market value of a particular property or category of properties. As valuers, we are not alone in our need to be on constant alert to political science. Every field of endeavour, every trade and every profession is subject to political decisions, through changes in laws and regulations that arrive sometimes without notice. In the real property field, the most striking changes are often at the local or municipal level, such as permanent road closures and traffic route alterations resulting in improvements to the setting and environment of some properties and corresponding disadvantages to others through exposure to increased traffic volumes.
Town planning, perhaps better described nowadays as town regulation, gives us daily examples of new limitations upon the use and adaptation of private property. We can keep abreast of all these questions and challenges, provided that we are not tempted to complete valuations in a cursory or extemporary manner. We are all familiar with the request “I am looking for a quote …” and the frequent response, to our answer, “sorry, I was expecting it to cost a quarter of that amount”. As professionals, it is our responsibility to provide value for money, just as it is our responsibility to give advice that is accurate and reliable and is likely to be accepted and adopted by a court of law after intensive cross-examination.
Our masters of political science, being those elected to represent us (and everyone), would be acting in the ultimate public interest by ensuring that peoples’ property rights are protected. That means informing the public at large, continually, that family and business decisions about real property, being often the major assets of those families and businesses, need to be based upon expert advice that is properly researched. The advice preparation requires several and, sometimes many, hours to complete to the point that it is safe to rely upon it. As valuers, we must decline engagements where the fee proposed is insufficient to allow the standard to be met.
Political science and conduct of integrity by our legislators will act to protect private property assets through adequate consultation, well in advance of the enactment of any legislation or the approval of any regulations that might affect those assets. It is a fundamental principle of equity seen often in the breach rather than the observance. The science of valuation can be brought to bear in every case, to advise the parliamentarians directly, instead of through a spaghetti maze of bureaucratic channels. The community benefit will be acknowledged electorally with gratitude.
This article was first published in the ANZPJ May 2019 edition. Visit the ANZPJ library to read past publications.