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Standing Committee on Infrastructure, Transport and Cities
07/03/2016
Role of transport connectivity in stimulating development and economic activity

CONABERE, Mr Marcus, Representative, Shopping Centre Council of Australia

NARDI, Mr Angus, Executive Director, Shopping Centre Council of Australia

CHAIR: I now welcome representatives of Shopping Centre Council of Australia to provide evidence today. Although this committee does not require you to give evidence under oath, I should advise you that this hearing is a legal proceeding of the parliament and, therefore, has a same standing as proceedings of the House. Do you have any comments to make on the capacity in which you appear?

Mr Conabere : I am Director of Urbis.

CHAIR: I invite you to make an opening statement, if you wish, before we proceed to discussion.

Mr Nardi : Thank you, Mr Chairman. Thank you for the opportunity to participate in this inquiry through providing a written submission and appearing before the committee today. The Shopping Centre Council of Australia is the national industry advocacy group for Australia's major owners, managers and developers of shopping centres. It is a highly regulated sector that represents companies that are long-term investors and holders of assets. Our core business is regulation, policies and taxation matters that have material impact on our members across all levels of government and jurisdictions. This includes issues that are highly relevant to so-called value capture infrastructure funding—such as statutory land valuation, taxation, infrastructure contributions or developer charges and land use planning.

We are represented on various government advisory groups dealing with matters such as Valuer-General advisory groups and various state reviews of infrastructure contributions. Shopping centres, in certain cases, are treated as being unique from other real estate assets classes. This includes the statutory valuation process whereby the standard mass valuation approach to land valuation, based on transactions, does not readily apply, particularly for shopping centres where there is minimal transaction activity. To illustrate, for example: that is why stamp duty is less of an issue for our members when compared with land-based taxes where the valuation is done by governments and you are then taxed by governments across the country.

We are strong supporters of well-planned cities and integrated land use and transport planning. Our members make long-term investments based on longstanding principles such as activity centres policies, where major retail development generally needs to be located adjacent to transport infrastructure and co-located with mixed uses. You may have gleaned from our submission that we have a healthy scepticism of value capture funding models. We strongly believe that much of the debate oversimplifies the issue and seems to jump to a funding or financing solution without, most importantly, acknowledging or testing fundamental issues such as valuation. In essence, a shopping centre's value is already captured and taxed multiple times by Australia's governments, and this includes the value of any infrastructure. Further, we do not believe there is a credible method to properly isolate or quantify the contribution made by an infrastructure project, let alone a proposed future infrastructure project.

We are concerned that this policy discussion may continue to oversimplify the issue and ultimately result in the imposition of additional land-based property taxes for our sector. This additional tax burden could come in addition to the considerable land-based taxes that are already paid by our members. It would also come in addition to the contributions our members already make to the provision and upgrade of infrastructure through the development process. Our position is summarised in our policy position paper that we provided to the government in January this year and attached to our submission to this inquiry. This paper details 10 critical issues that we believe are largely missing from the policy discussion and that should be scrutinised under the terms of reference of this inquiry. We were also very wary about overseas models that are frequently referenced without any corresponding acknowledgement of either regulatory regimes or taxation structures that apply in those jurisdictions. As one example, tax increment finance might be well used in the US; however, the heads of taxation, along with other regulatory regimes, are vastly different from the Australian approach.

Based on the tone of the current debate and the content of most of the submissions to this inquiry that we have reviewed, we would suggest that many stakeholders have not actually spoken with valuation experts on this particular matter. In this regard and as a final point, with me today is Marcus Conabere from Urbis, which is a leading national property consultancy. Urbis is regularly engaged by the Shopping Centre Council and a number of its members on valuation matters. Marcus is appearing today in his capacity as an advisor to the SCCA, as someone with a detailed knowledge of shopping centre valuation and someone who actually undertakes statutory valuations for our members and also prepares their rating and taxation budgets across the country. Marcus provided advice and reviewed our policy position document that I referred to previously.

We are very pleased to be of assistance to the committee and would be very pleased to take any questions.

Mr Conabere : I am basically here to answer any questions—to fill in the gaps, if you like.

CHAIR: In our work to this point we have looked at any number of factors that add value to a region in terms of infrastructure and zonings.

A problem that Australia has had was demonstrated to us earlier today by Dr Tim Williams, where he said that there had been an oversight in a cross-city rail in London where they had neglected to look at the opportunity of capturing the value of uplifted properties. In evidence from a group we heard from this morning it was noted that, when shopping centres are established at transport hubs near your residence, that was another factor in uplifting property values. Would your industry be benefited if there were certainty of zoning for shopping centres for land to be purchased that was convenient to mass transport?

Mr Nardi : Probably the thing that we differentiate is that there is a big difference between greenfield development and greenfield provision of infrastructure versus brownfield infrastructure. Our members are generally already commercially zoned. That zoning reflects the provision and access of infrastructure to that site—it may be in a CBD or a major regional centre, like Parramatta, Liverpool or Penrith—and our members' assets are often built to the full capacity of that site. So, when the statutory valuations are done on the highest and best use of that site, it already incorporates the value of that infrastructure.

We obviously, though, acknowledge that it is very different in a greenfield scenario, where it is going from, say, non-urban land being significantly up-zoned to urban land, which essentially creates a development right that was not there previously. So I think our main differentiation is around if you are an asset already sitting in an urban area. In some cases, by the way, our members host government infrastructure on their land for very minimal payment of funds to them by governments, such as a bus terminal or a bus interchange. So our members are actually quite integrated with government infrastructure and transport infrastructure. Yet, even in those cases, governments will not in some cases pay them fairly for them sitting on top of their land, basically.

Mr ZIMMERMAN: I assume it would be bad for business having a bus terminal feeding—

Mr Nardi : It is often assumed that there is just a direct benefit. One thing I can say about shopping centres is that they are managed within an inch of their life. They understand where foot traffic comes from and they understand retail turnover within the centres based on different access and exit points. As an example, they may get a better commercial return if that land were a car wash or a drive-in restaurant, because often these facilities are located on the prime road frontage. It could also be that they could be utilising it as a car park more effectively. So quite often it is just not a given that having a public transport facility adjacent to their asset is actually of any specific material benefit.

Mr Conabere : As a point of clarification, our primary concern with value capture relates to a scenario where you have existing improvements as distinct from greenfield. If the infrastructure that was put in place did not add any value to an existing property, in a scenario whereby value capture was applied broadly, effectively there would then be a concept of double taxation at the end of the day.

I will talk to the valuation aspect. Again, this is not a greenfield scenario. A greenfield scenario where you are talking about rezoning land and adding value is a completely different scenario to what we are talking about. A primary concern for us is that, basically, there is a broad tax put across existing property and we do not derive any benefit from that particular infrastructure. The issue would be that presently in New South Wales and Queensland the statutory valuation process is a land value assessment. That land valuation is done on an annual basis. So the valuer-general in each state assesses that land value each year. In the event that there is mooted infrastructure, actual infrastructure, or in fact a rezoning that is undertaken, that statutory value reflects that infrastructure or that rezoning.

So, effectively, that uplift in value would then be embedded within that statutory valuation. That statutory valuation in Queensland and New South Wales is the basis upon which land tax is paid and also the basis upon which council rates are paid. Every state in Australia has a land tax charge and that land tax charge is based on a site value assessment that gets undertaken. They have varying valuation cycles. Typically they are annually. Victoria has a biennial cycle where it is done every two years.

So the primary concern in the set markets for shopping centres would be if there is a perceived benefit from some form of infrastructure that comes into that marketplace and the decision for value capture is a broader based property tax. That broader based property tax then puts an additional charge onto the property. So, in effect, by default, it is an additional tax.

It is a very different concept to greenfield land, rezoning sites and creating sites for development. It is a completely different concept. We do not really have a position on that, but our position is not such that that would be a particular concern. As to your point, Chair, where we talk about a site that is created and rezoned to sustain a shopping centre development and it is a new development, yes, there will be value uplift in that process. I think it is very important to make that differentiation between existing property and greenfield development. A lot of what we have heard today was obviously about greenfield development, rezoning of land and uplift in value.

CHAIR: The Macquarie Park Mall, an existing property, has a large bus interchange. Is that of no benefit to the mall?

Mr Conabere : You would have to assess that. The difficulty with that is how you actually itemise the added value of that particular infrastructure in the broader context of market parameters and the like.

CHAIR: Is it of any value? I will not ask you to quantify the amount of value, but surely some people catching a bus will buy a coffee or go shopping. Surely someone travelling by bus will use that mall and it will not be used solely by those arriving by car and parking in the extensive parking.

Mr Conabere : There would be an added value in those circumstances, yes.

CHAIR: Is the train station that is located nearby of added value to that mall—which was there prior to the train station being there?

Mr Nardi : To use the bus facility as an example, the way that we look at it is that that land could be utilised as a car park, which could also possibly derive a similar benefit. We just do not think that it is a given. There are a lot of other factors that drive a centre's value, such as supply and demand, rental costs, consumer confidence and the like. It is then very difficult to work out how you then isolate and quantify what benefit is derived. When the debate gets to 'beneficiary pays', which is the term that is used in the Infrastructure Australia plan that came out in the last couple of weeks, it seems to segue from going from user pays to beneficiary pays and then everyone talks about drawing a circle around a train station of 400 square metres.

We cite an example in our policy. The example used is Bondi Junction train station. If you draw a 400-metre circle around that train station there are about 2,000 landholders, yet about 15,000 people use that centre in the morning peak. So it is essentially saying that there is are a lot more beneficiaries to that infrastructure than just the surrounding landholders, and we think it would be unreasonable to charge those landholders when there are a lot of other beneficiaries to that infrastructure. So it should possibly be in the form of user-pays ticket pricing or whatever it may be. We think it ends up being this very narrow attempt to quantify or articulate who a beneficiary is for some of this infrastructure, and you cannot just draw a 400-metre ring around it.

CHAIR: The concept of value capture is that those with unearned benefits, which have been funded through infrastructure, should contribute. That seems fair. Would you agree?

Mr Nardi : Yes.

CHAIR: Therefore, if you are not getting a benefit you should not be taxed. Are you aware of the last phase of development at the Macquarie mall?

Mr Nardi : The Macquarie Centre?

CHAIR: Yes.

Mr Nardi : Yes.

CHAIR: What was the quantum of that investment?

Mr Nardi : It was around $500 million, I believe, in two stages.

CHAIR: Do you know the trigger that the operator quoted for that investment?

Mr Nardi : No, not specifically. It would have been a range of factors, including proximity to competition in Chatswood because I understand that centre has taken a bit of trade away from Chatswood. They are a long-term investor there. I think AMP own that centre. Yes, it is AMP.

CHAIR: When I went to the opening, I was told by the operator that it was absolutely as a result of the off ramp and the ability to enter the motorway that links with the Harbour Bridge and the city centre. That gave them access because people judge time to get to a shopping centre not by distance but by time. So, again, what I would put to you is that that infrastructure added so much value to that location that they spent half a million dollars upgrading.

Mr Nardi : I would also add, though, that the value of the infrastructure would be inherent in their land value on which they pay taxes. They would also have made a development contribution, in New South Wales known as section 94 contributions, to part of the infrastructure.

CHAIR: This was an existing mall.

Mr Nardi : Yes. The managing director of that particular company is a board member of mine and endorses our view, particularly around the value of that infrastructure that is inherently in their land value on which they pay taxes.

Mr ZIMMERMAN: But there are no section 94 contributions for major road projects or public transport.

Mr Nardi : But there are for major shopping centre projects, amongst other projects.

Mr ZIMMERMAN: Section 94 levies are applied to shopping centres—

Mr Nardi : Yes.

Mr ZIMMERMAN: and include infrastructure being provided, other than by the local council.

Mr Nardi : There is generally section 94 contributions at the local level and often a condition of consent imposed by the RMS or—

Mr ZIMMERMAN: But it is not correct to say that section 94 would pay for state-provided public transport or road infrastructure.

Mr Nardi : Section 94 is a broad term, but it would be imposed by the RMS by a condition of development consent. There are essentially two forms—

Mr ZIMMERMAN: I do think you need to be quite clear. Section 94 is levied for the provision of municipal infrastructure—

Mr Nardi : Local infrastructure.

Mr ZIMMERMAN: which would not incorporate state or—

Mr Nardi : And, similarly, the special infrastructure contribution levy, the SIC levy as it is known, is a similar differentiator.

CHAIR: We have had evidence, in pursuing this concept of value capture, that value capture represents an opportunity to be a major contributor to the retrofitting of infrastructure and the payment for the cost of infrastructure. That can allow infrastructure to be retrofitted into our cities to allow urban renewal, densification and the master planning of our cities. We have had representations regarding the value of the essential need for value capture to be considered in major projects, such as high-speed rail from Sydney to Melbourne. In fact, there are three groups who will be presenting who maintain they can fund the entire thing from their own private value capture.

As a government, we sit here looking at our strategy for settlement for the retrofitting of infrastructure into our cities, which has been sadly lacking. Our cities are among the most expensive and the most congested in the world when, strangely, our biggest asset is land. A government has to consider all of these things and some of these issues are very large. You have come to us today representing shopping centres, and there is a problem.

And so it is our job to address all concerns, but I would ask you to consider the size of the matter and the size of the challenge, which is proportionate to the scope of opportunity—that value capture, if it cannot entirely fund it, will be critical funding in many cases and essential funding. If I understand you correctly you think that value capture was not a good concept?

Mr Nardi : We just do not think it is entirely proven and our baseline view is that the value of that infrastructure is already inherently in the shopping centre's value, which is already taxed by governments. So when we are talking about the possibility of an additional or separate stream we think that needs to be scrutinised fairly significantly.

CHAIR: So value capture is not beneficial to shopping malls but could be beneficial to uplift of other real estate?

Mr Nardi : I think if you are looking at the greenfields scenario, going from non-urban urban land to urban land, there is obviously a massive value lift because it is granting a development right over farmland. It is very different in our view to the case of our members' centres, because they are on commercially zoned land. That is generally fully built out, so there is the highest and the best possible use already on that land as it is zoned. We just think those two very different scenarios need to be properly considered if there is possibly going to be a separate funding stream or a separate levy system. Even more broadly, our estimation is that there is about $650 billion of land value in NSW which is not taxed, which is the family home. When you look at land based taxes, where commercial property pays the family home does not pay. There is a range of possible areas of value that are not being taxed either, so we do acknowledge it is a broad discussion. But when it comes to infrastructure that leads to a value uplift which could be captured, that just that needs to be properly scrutinised.

CHAIR: You are aware that in most of our major markets in recent years investors have dominated the market to such an extent that new home buyers have virtually been excluded?

Mr Nardi : But new home buyers have been excluded in the residential market?

CHAIR: They have virtually been excluded from the marketplace because of the domination of investors in the market. It would not be a good time to start putting more taxes on homes I would think.

Mr Nardi : But you are talking about residential land, though. If the discussion is about statutory values and land values and you then look at those that we have articulated—we have actually provided some numbers where we found that in our case we are taxed currently. We are talking about land value; there is a lot of land value that is not actually taxed. It is part of a broader-based discussion in the broader tax review, but we have just highlighted that we do not believe that essentially providing infrastructure automatically leads to a value uplift.

CHAIR: What about a scenario where all stakeholders, whether they are developing shopping centres or clusters of shops around a train station, when rezoning occurs to create greater densification, and a fair and equitable system of value capture is effected to create this investment, doesn't everybody win in such a scenario?

Mr Nardi : In the scenario of a new train station?

CHAIR: Yes, a new train station—the increased traffic that can be built into existing train lines or other complementary transport, as you have at Macquarie Park. I hate to keep getting back to Macquarie Park. I think that three of the most congested of the 10 most-congested roads in New South Wales surround that area. There is that bus terminal, there are train stations and there are main roads. Now there is a plan of densification for more residential development in that area, all of which I would have thought adds to the value of Macquarie mall? Unless I am really missing something here?

Mr Conabere : At the end of the day, shopping centre asset values are predicated on sales within the shopping centre. Those sales will drive the rentals that can be paid for by tenants. The rental drives the value of the shopping centre. The key point that we are trying to make—and I need to make sure that it is not being lost between brownfield development and greenfield development—is that presently there is a land value assessment that is undertaken by the states. When they come in to assess that land value, they assume that the shopping centre is not there and that it has never been there, and what the highest and best use of that land is, and they value the land accordingly.

There is a principle, called the Toohey's principle at case law, which basically states that if you are valuing the Macquarie Centre then you assume that the Macquarie Centre is not there, it is vacant, it has never been there, and that everything outside the title boundaries is there, including infrastructure, catchment and everything. When the statutory valuer comes in to assess the land value, they have full regard to all of those factors. Once they have assessed the land value, the shopping centre owner then pays land tax based on that statutory value and the shopping centre owner also pays council rates on the statutory value.

One of the primary concerns that we have under this scenario, unless it is properly dealt with, is the potential for double taxation. Effectively all of the value of the infrastructure outside of the title boundaries and any future infrastructure that is pending, it is incumbent on the statutory valuer to take that into account and to assess that in the land value, and then we pay tax on that particular figure. There is a demarcation line there that if there is value capture that yes, ultimately it will be reflected in that land value, but our concern though would be that we end up paying land tax plus an additional tax over and above for so-called value capture, which is already embedded in that land value. That is a primary concern. That is not disputing the position of value capture. It is a double taxation concern that applies in those circumstances.

As Angus touched on—and it is quite unique to shopping centres—when you go through the process of doing a major expansion on a shopping centre then yes, local government will see that as a very significant opportunity to say, 'We need this infrastructure around the shopping centre upgraded, at your cost,' or that, 'We need a library or we need x,y and z.' It is the equity of the system and making sure that it is equitable so that there is not this concept of double taxation.

CHAIR: I fully agree. I think we have violent agreement actually. The key thing is that it is properly dealt with, but if there is an uplift in the value of any property that is unearned because of infrastructure or zoning or anything else then value capture would seek to take a fair and an equitable levy on such. Is that unreasonable?

Mr Conabere : The concept, yes, is absolutely correct at the end of the day. It comes back to the point that you made at the start, we need to make sure that the value is actually there and it is then the ability to assess that value. In the context of the Macquarie Centre, there will be lots of fundamentals that drove the opportunity to expand the centre. Having been involved in a lot of the feasibility analysis that goes into the expansion of these shopping centres, there are numerous items that have to be ticked off to achieve it. The next challenge is then what component of the added value relates to the particular piece of infrastructure that we might be assessing in terms of value capture.

Mr VAN MANEN: Would it be fair to say—let's use the chair's example of Macquarie Park—that the fact that you spent $500 million on upgrading that shopping centre, does that have a flow-on effect to related property values in the area? And, consequently, would not the state government and the local council pick up not only an increase in land tax revenue from the shopping centre, both in terms of land tax and rates, but also increased rates revenues from surrounding properties as a result of the impact of your development?

Mr Conabere : Quite possibly. Again, these can all be unique situations, so you may find that the expansion of a particular shopping centre has a detrimental impact on near or adjoining retail or commercial. You may find the opposite scenario. So you are going to have different dynamics in each individual scenario, but it is absolutely feasible.

CHAIR: Thank you for attending the public hearing today. The secretariat will send you a draft transcript of proceedings so requests can be made to correct any errors of transcription. Do you have anything further to add? I think we are done with our questions. Thank you again.

Mr Conabere : Thank you.