LDLR 10/2018
[2020] HKLdT 50
IN THE LANDS TRIBUNAL OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
LAND RESUMPTION APPLICATION NO 10 OF 2018
_________________
BETWEEN
TSE CHAN FAI (謝燦輝)
1st Applicantnd Applicant
and
DIRECTOR OF LANDS
Respondent
_________________
Before: Mr Lawrence PANG, Member of the Lands Tribunal
Date of Hearing: 19-20 & 23 October 2020
Date of Inspection of Comparables: 19 October 2020
Date of Judgment: 5 November 2020
_________________
J U D G M E N T
_________________
Background
1. This is an application by the applicants for determination of compensation pursuant to section 10(2)(a) of the Lands Resumption Ordinance, Cap 124 (“the LRO”). The applicants were the former registered owner of a property known as Ground Floor and Mezzanine Floor, No 351 Reclamation Street, Kowloon, Hong Kong (“the Property”), then being 2/36th equal and undivided shares of and in Kowloon Inland Lot No 8169 (“the Lot”) on which a 9-storey tenement building (“the Building”) was erected.
2. The Building was situated at the middle of a terrace of similar walk up tenement buildings lying between Shantung Street and Soy Street in the Mongkok district to the west of Nathan Road which is a main thoroughfare running north-south and where the Mongkok MTR station is situated underground. Developments in the locality are intermingled with composite buildings erected in the 1950s and 1960s with ground floor shops devoted mainly to engineering workshops and retailing of building materials, engineering or electrical accessories. The occupation permit of the Building was issued on 12 March 1963.
3. On 21 September 2015, the Government announced vide Gazette Notice 8014, inter alia, that the Lot including the Property was to be resumed by the Government for implementation of Development Project YTM-010 by the Urban Renewal Authority (“URA”). The ownership of the Property reverted to the Government at midnight of 16 January 2016 which is agreed to be the Valuation Date.
4. Immediately prior to the Valuation Date, the Property was registered in the ownership of Tze Chan Fai, Tse Chan Shung (hereinafter collectively referred to as “the applicants”) and Tse Chan Wah each holding 1/3rd of the interest of the Property as tenants in common. Thus, the applicants together owned 2/3rd of the interest of the Property only.
5. And as it turned out, the Property was subject to a tenancy in favour of a Ki Man Kin for a term of 2 years from 21 September 2015 to 20 September 2017 at a rental of $55,000 inclusive of rates.
6. The applicants and the respondent have no dispute that under section 10(2)(a) and section 12(d) of the LRO, the basis of compensation should be the market value of the Property as at the date of resumption, ie 16 January 2016. However, they cannot agree on the quantum.
The Evidence
7. For the purpose of the present application, the applicants and the respondent have produced the following expert reports on valuation of the market value of the Property as at the date of resumption:
(1) Valuation Report dated 14 March 2019 by Mr Liu King Tong (“Mr Liu) for the applicants;
(2) Valuation Report dated 20 March 2019 by Ms Ng Hung Mui (“Ms Ng) for the respondent;
(3) Supplemental Valuation Report dated 25 July 2019 by Ms Ng;
8. Mr Liu and Ms Ng have also prepared a joint expert statement dated 21 September 2020 setting out the areas of agreement and disagreement. In any event, Mr Liu arrived at the market value of the Property of $33,932,000 but Ms Ng arrived at $28,135,000 in respect of 100% interest of the Property.
9. The other particulars of the Property have been agreed as follows[1] :
Saleable Area of G/F
:
56.32 sq m
Saleable Area of M/F
:
28.70 sq m
Area of Yard
:
6.39 sq m
Effective Area
:
68.72 sq m
Full Frontage
:
3.21 m
Headroom of G/F
:
2.92 m
Headroom of M/F
:
2.84 m
Comparables for Direct Comparison Method
10. Pursuant to the joint statement, Ms Ng relied on the following 5 comparables (all within 3 minutes’ walking distance from the Property) for valuation on direct sales comparison basis:
Ref No
Address
Date of Transaction
Consideration
Saleable Area
Effective Area
Full Frontage
Clear Headroom
C1
Shop B, G/F including Cockloft, Master Building, 297-299 Reclamation Street
8 Jan 16
$33,000,000
G/F: 69.14
83.17
3.65
G/F: 2.84
C3
Shops A, G/F including Cockloft, Master Building, 297-299 Reclamation Street
2 Nov 15
$32,600,000
G/F: 71.91
86.15
3.03
G/F: 2.84
C4
G/F, Joye Fook Mansion, 468 Shanghai Street
23 Jul 15
$25,000,000
55.80 + Yard: 14.70
58.25
3.69
5.33
C5
G/F & Cockloft,
21 Jul 15
$21,500,000
61.4 + Yard: 7.22
63.02
3.53
5.18
C6
G/F, 364 Reclamation Street
6 Nov 14
$26,000,000
41.01
42.08
5.85 + Return Frontage on Soy Street: 3.86
5.49
11. Out of the above 5 comparables, however, Mr Liu only adopted C1, C3, C4 and C6. Comparable C5 was disregarded by Mr Liu as being “out of tone”.
12. The two experts have also set out the adjustment factors that they agreed to be relevant for the purpose of valuation as follows:[2]
Adjustment Factors
Mr Liu
Ms Ng
Time
Private Retail Price Index of Rating and Valuation Department (“RVD”)
Location
0% to 30%
Size
1% for every 10 sq m difference
1% for every 4 sq m difference
Frontage
2% for every 1 m difference in clear frontage
4% for every 1 m difference in clear frontage
Headroom
1% for every 0.5m difference in G/F headroom
Return Frontage
-5% to reflect comparable units with return frontage which has better shop exposure and advertisement opportunity
Total Adjustments
The total adjustments are multiple of the adjustments for each of the factors
13. Notwithstanding the above differences, Mr Liu’s proposed adjustments and those of Ms Ng (in parentheses) are as follows[3] :
Ref
Unit Price
Adjustments
Adjusted Unit Price
Time
Location
Frontage
Return Frontage
Headroom
Size
Total
C1
$396,778
0.0%
25.0%
-0.9%
0.0%
0.2%
1.4%
25.9%
$499,544
C3
$378,410
-4.0%
25.0%
0.4%
0.0%
0.2%
1.7%
22.8%
$464,688
C4
$429,185
-6.1%
25%
-1.0%
0.0%
-4.8%
-1.0%
9.5%
$469,958
C5
$341,162
-6.1%
30.0%
-0.6%
(0.0%)
-4.5%
-0.6%
15.2%
$393,019
C6
$617,871
-1.6%
0.0%
(-5.3%)
-5.0%
-5.1%
-2.7%
-18.3%
$504,800
Adjustments of Comparables
Location
14. Although all the comparables are situated within 3 minutes’ walking distance from the Property, it is noted that the adjustments for location constitute the largest and major adjustment factor. In Shapiro, Mackmin and Sams, Modern Methods of Valuation , 12th edition, p 327, the location factor is explained as follows:
“Some of the most important points regarding retail location are: the class of the area; the type of street and the type of shopper; the position of the unit in the street; the proximity to any multiple stores or other “magnet” such as a department store; proximity to any breaks such as a town hall, bank or cinema; the relationship to the “prime” pitch – the location with the highest footfall; and proximity to car parks or public transport … Overall, consideration must be given to the catchment area and its spending power. ”
15. Ms Ng produced a set of photographs taken on 18 January 2016 just after the date of resumption which show that the type of trades in the subject locality was the same as today[4] . Ground floor units in the locality were dominated by engineering workshops and retailing of building materials, engineering or electrical accessories.
16. Comparables C1 & C3 are indeed on the same street one block to the south (ie south of Soy Street) in the same one building. Mr Liu considered they lie further away from Langham Place which is a commercial complex including a regional shopping cum office complex with car parking spaces and a cinema, the Mongkok MTR station and the minibus terminal underneath the Cordis, Hong Kong (formerly known as the Langham Place Hotel as at the relevant date[5] ).
17. Mr Liu had proposed an adjustment up to 25% by reference to the rental value of Comparable C1 & C3 in comparison with that of G/F & M/F, 333 Reclamation Street which was resumed under the same URA project:
Comparable C1
Comparable C3
G/F & M/F, 333 Reclamation Street
Saleable Area
G/F: 69.14 +
G/F: 71.91 +
G/F: 60.76 + Mezzanine: 37.90 + Yard: 5.95
Effective Area
83.17
86.15
74.39*
Term of Tenancy
Due to expire on 31 Jan 17
From 1 Mar 15 to 28 Feb 17
Monthly
Monthly Rental
$65,000 exclusive
$65,000 exclusive
$65,000 exclusive for G/F + $16,470 for C/L
Unit Rental
$781.53
$754.50
$1,095.17
* Effective Area is calculated on the assumption that value of M/F is 1/3 that of G/F and value of yard is 1/6 that of G/F, the basis of which had been agreed by the 2 experts in their joint statement[6] .
18. After an adjustment for time which is 1.0078 for Comparable C1, Mr Liu arrived at a difference about 35% between Comparable C1 and G/F & M/F, 333 Reclamation Street[7] . However, Ms Ng considered this analysis not appropriate and unreasonable:[8] For instance, rental difference for two shops is not only affected by location but also many other factors such as time of entering the lease, size, frontage and headroom.
19. In addition, I note that the monthly rental of $65,000 was for G/F, 333 Reclamation Street only with commencement date unknown. The $16,470 per month was derived from a separate license agreement granted by the URA which stated as follows:
“… in the event of the Licensee failing to deliver up vacant possession of the Untenanted Portion upon the expiration or sooner determination of the Licence Period, the Licensor shall be entitled to claim from the Licensee the following amounts and the licensor shall deduct such amounts from the Licence Deposit:
(a) the mense profits of HK$16,470.00 per month from [ ] until the actual date of delivery of vacant possession of the untenanted Portion to the Licensor …”
The background upon which this license agreement was entered is in doubt and it is not prudent to adopt $65,000 + $16,470 = $81,470 as market rental of G/F & M/F, 333 Reclamation Street for the purpose of analysis.
20. On the other hand, according to our joint site inspection, this so-called proximity to Langham Place, the Mongkok MTR station etc contributes no apparent advantages to the vicinity of the Property probably owing to the type of trades predominating here significantly different from those of a commercial complex; pedestrian flow arising therefrom seems not to be obvious. That there are a restaurant[9] and a juice shop around the corner of Reclamation Street and Shantung Street to the north of the Property in neither here or there as such presence would not affect the trading environment of the ground floor premises in the middle of a street block like the Property. See for instance Top Harmony Limited v Cheung Yuet Sheung & Others , LDCS 39000/2018 (unreported, dated 15 October 2020) at §33. In another regard, these 2 comparables C1 and C3 share the same type of street and same type of
shopper and similar kind of business. Indeed, the 2 comparables are situated close to the Yau Ma Tei MTR station to the south. I agree with Ms Ng that the adjustment of 15% is adequate.
21. Comparable C4 is situated on Shanghai Street which is supposed to be a busier local distributor catering for a variety of trades. However, pedestrian flow was broken by an open carpark next to this comparable to the north. As acknowledged by the experts, this comparable was formerly occupied as a Japanese noodle shop (醬家) but is now replaced by an air-conditioner trading and engineering company. The two shops immediately to the south were also not in the same trade as the other comparables in Reclamation Street (one was a trophy store and another was a photofinishing shop). Nevertheless, I consider a location adjustment of +10% as suggested by Ms Ng more than adequate (that is, despite the variety of trades present along Shanghai Street, both experts agree that C4’s location was inferior to the Property).
22. Comparable C5 is situated on Canton Road this section of which is a quieter and narrower street. However, the character of trades in the vicinity is comparatively the same as the surroundings of the Property. Again, I consider a location adjustment of 20% as suggested by Ms Ng adequate.
23. Comparable C6 is situated opposite the Property across Reclamation Street but further south at a corner location enjoying double frontages. Save for the latter, I agree with the experts that there should be no locational adjustment.
Size
24. It is agreed by the parties that the effective area of the Property is 68.72 sq m. For the adjustments on size, Mr Liu suggested 1% for every 10 sq m difference whereas Ms Ng suggests 1% for every 4 sq m difference; this means Ms Ng considered a more sensitive adjustment is required. I note that in Tai Ping Restaurant Limited v Director of Lands , LDLR 1/2013 (unreported, dated 8 December 2014) which concerned the market value of a building erected thereon known as No 600 Shanghai Street which is now occupied and replaced by the Langham Place. In that case, the Tribunal adopted also a size adjustment of 1% for 4 sq m. In Snowland Limited v Director of Lands , LDLR 2/2014 (unreported, dated 11 November 2016) which concerned the market value of a shop at a very busy part of Mongkok, the Tribunal adopted 1% for every 2.5 sq m for the first 50 sq m but 1% for every 10 sq m after the first 50 sq m. Taking into account the above, I consider Mr Liu’s proposed adjustment too low and I adopt Ms Ng’s 1% for every 4 sq m difference.
Frontage
25. For the adjustment for frontages, Mr Liu proposed 2% for every 1 m difference in clear frontage but Ms Ng proposed 4% for every 1 m difference in clear frontage, that is doubling that of Mr Liu.
26. In the valuation of a shop, it is well understood that a shop with a wider street frontage (and hence, a bigger shop window) is more valuable than a shop of the same area but with a narrower shop front and a greater depth. But as explained by the Tribunal in Tai Ping Restaurant , supra at §48, there shall not be any adjustment for frontage “unless the frontage in consideration is clearly superior or inferior to the norm that the benefits or disabilities which the frontage produces are clearly evident”. In that case, therefore, the Tribunal preferred 2% for every 1 metre difference to 4% for every 1 metre difference. I am content to adopt 2% for every 1 metre difference as per Tai Ping Restaurant .
27. I note that both experts agreed an adjustment -5% for the return frontage of Comparable C6. However, I consider it too low. This comparable is situated closest to the Property and has the smallest area. However, its unit price before adjustments is the highest. Thus, the difference must be owing to the size and frontage (or more particularly the return frontage) adjustments. In such regard, I tend to adopt Ms Ng’s adjustment based on both streets[10] , ie a further deduction of some 9% or a total adjustment of return frontage up to -14%. This is more in line with the -20% adjustment in Snowland , supra.
Headroom
28. There is no disagreement on the headroom adjustments and therefore the experts’ proposed adjustments are adopted.
The Valuation on Direct Comparison Method
29. Thus I have altogether five comparables as follows:
Ref
Unit Price
Adjustments
Adjusted Unit Price
Time
Location
Frontage
Return Frontage
Headroom
Size
Absolute Total
Total*
C1
$396,778
0.0%
+15.0%
-0.9%
0.0%
0.2%
3.6%
19.7%
18.30%
$469,404
C3
$378,410
-4.0%
+15.0%
0.4%
0.0%
0.2%
4.4%
24.0%
15.95%
$438,767
C4
$429,185
-6.1%
+10.0%
-1.0%
0.0%
-4.8%
-2.6%
24.5%
-5.18%
$406,943
C5
$341,162
-6.1%
+20.0%
-0.6%
0.0%
-4.5%
-1.4%
32.6%
5.47%
$359,811
C6
$617,871
-1.6%
0.0%
-5.3%
-14.0%
-5.1%
-6.7%
32.7%
-29.04%
$438,419
Average:
$422,669
Average (excluding C5):
$438,383
* By multiplication
30. Mr Liu considered C1 is the best comparable by reason of the date of transaction, style and the size[11] . At trial, on the basis of his analysis, Mr Bosco Cheng (“Mr Cheng”), counsel for the applicants, also referred to what the Tribunal remarked in Sarford Development Limited & Others v Super Star Properties Limited & Others , LDCS 14000/2018 (unreported, dated 27 March 2020) at §30 that “the sale that requires the least significant or lower total adjustments (ie the absolute adjustment based on the sum of the adjustments [12] However, in common valuation exercise, it is imprudent to rely on only one comparable which may have been a one off. Indeed, as submitted by Ms Ebony Ling for the respondent, Comparables C1 and C3 are side by side with each other and are also very similar in every aspect. It would be artificial to adopt only Comparable C1 and not C3. Mr Liu also accepted during cross-examination that the more comparables one uses, the more accurate the valuation will be.
31. In the present case, following my analysis above, I find the average of the adjusted unit price is $422,669 per sq m but I agree with Mr Liu that the adjusted result of Comparable C5 is out of tone with the others, yielding a sample standard deviation as much as $46,832. If this comparable is excluded, the average becomes $438,383 per sq m and the sample standard deviation is decreased to a more comfortable $31,232.
32. I do not agree with Ms Ng that Comparable C1 has to be disregarded as well merely because its average adjusted unit price is the highest; as said, I agree with Mr Liu that this is the best comparable though it is prudent to rely on at least three transactions[13] .
33. Thus, I assess the market value of the Property by Direct Comparison Method as follows:
68.72 sq m x $438,383 /sq m = $30,125,680
Subject to Tenancy
34. As at the date of valuation, ie 16 January 2016, however, the Property was subject to a tenancy agreement dated 15 September 2015 (“the Tenancy Agreement”) for a term of 2 years from 21 September 2015 to 20 September 2017 at a monthly rent of $55,000 with an option to renew for 1 year at a monthly rent of $63,250 exclusive of rates and management fees. The tenant then was occupying the Property in the name of 動力園藝公司 (Power Equipment Co).
35. Mr Liu considered that some comparables adopted were also subject to tenancy agreement(s) eg C1 & C3 but some were not. He took a broad brush by allowing a 0.5% discount to reflect the value of the Property being subject to tenancy. If this be the case, based on my assessment of $30,125,680 on vacant possession basis, the resultant value would become $28,619,396.
36. Ms Ng, on the other hand, resorted to the Term and Reversion Approach in taking care of the term income prior to the expiry of the tenancy[14] . Again, based on my assessment of $30,125,680 on vacant possession basis, the calculation would have become:
Term Value
Monthly Rent
$55,000*
Annual Rent
$660,000
YP for 1.6795 years @
2.5%
pa
1.6249
_______________
$1,072,434
Reversionary Value
$30,125,680
PV for 1.6795 years @
2.5%
pa
0.9594
_______________
$28,902,577
_______________
Total:
$29,975,011
_______________
* Instead of adopting the term rent of $55.000 per month, Ms Ng took into account the rent free period from 21 September 2015 to 30 September 2015 and determined the average net annual rent as follows[15] :
($55,000 x 23 months + $55,000 x 20 days/30 days) x ½
37. Alternatively, if I work on monthly rental receivable in advance basis, my calculation would be as follows:
Term Value
Monthly Rent
$55,000
YP for 20.16 months @
0.20833%
pm in advance
19.7635
_______________
$1,086,993
Reversionary Value
$30,125,680
PV for 20.16 months @
0.20833%
per month
0.9589
_______________
$28,887,515
_______________
Total:
$29,974,508
38. However, I note that Clause 11 of the Tenancy Agreement states as follows[16] :
“The Tenant is aware of the fact that the subject premises has been included in the lay-out plans (draft for approved) under the Urban Renewal Authority’s acquisition project or any other scheme or project of acquisition or re-development implemented by the Government/Urban Renewal Authority. The Tenant therefore agrees to abide by the order/direction of the Government/Urban Renewal Authority. The Tenant acknowledges that the Landlord shall not be able to continue to honour its promise to continue to allow the Tenant to continue use the said Premises…”
39. Mr Liu in his Valuation Report dated 14 March 2019 also had the following comment:[17]
“As the tenancy agreements of … the Property were entered on 15/9/2015, which is about a week before the resumption of the development scheme was gazetted, it was very likely that the tenants were aware of the risk of earlier termination of the tenancies and would take a conservative attitude to bid the tenancies and the rent-passing might not reflect the then market rental value.”
40. By virtue of the common law principle, the Pointe Gourde principle which obtains its modern nomenclature from the Privy Council decision in Pointe Gourde Quarrying and Transport Co Ltd v Sub-Intendent of Crown Lands [1947] AC 565, any increase (or decrease) in value which is entirely due to the scheme underlying the acquisition should be disregarded[18] . Thus, as the rent passing may not reflect the then market rental value, the Term and Reversion exercise taking that into account may result in “any increase (or decrease) in value which is entirely due to the scheme underlying the acquisition”. I therefore consider not appropriate to take into account the rent passing; I would only determine the market value of the Property on the basis of vacant possession, ie $30,125,680.
Partial Interest
41. As stated in §4 above, the applicants together owned ⅔rd of the interest of the Property only. Mr Liu made no allowance for this partial interest and simply divided his assessment for ⅔rd . Ms Ng, on the other hand, analysed certain transactions of partial interests which showed a discount ranging from nominal to as much as 55%[19] .
42. Unfortunately, Ms Ng’s analysis was solely founded on residential units and Mr Liu argued such a discount would not be applicable to commercial investors who are only interested in receiving market returns.
43. But as pointed out by me at trial, market returns have no absolute figure and different investors would have different expectations; these investors may sometime not be able to come to a consensus just like the 2 valuation experts before me. I also agree with Ms Ng that a partial interest, ⅔rd or otherwise, cannot obtain finance from banks and may even have difficulty in letting out premises. This latter would affect the marketability of the partial interest. As explained by Ms Ng during cross-examination, those buyers of partial interest would only be willing to do so if the risks they face are adequately compensated by a discount in purchase price.
44. With respect, Mr Cheng’s referral to para 4.3.2(d)(iii) or para 6.3.17 of the HKIS Valuation Standards 2017 does not assist the applicants. For instance, at para 6.3.17
“a) Discounts for Lack of Marketability (DLOM) should be applied when the comparables are deemed to have superior marketability to the subject asset ...
b) … All else being equal, participants would generally prefer to have control over a subject asset than not. [DLOCs] … are typically calculated based on …
reductions in risk associated with control …”
45. I appreciate that such discount for lack of marketability is usually difficult to quantify and will vary from case to case. But in the absence of a meticulous calculation, I agree with Ms Ng that a discount of 10% is appropriate for valuing such partial interest.
Conclusion
46. Thus, my determination of the compensation payable to the applicants on the basis of their ⅔rd interest in the Property is as follows:
$30,125,680 x ⅔ x 90% =
$18,075,408
Say
$18,000,000
Orders
47. Accordingly, I order that the respondent do pay the applicant compensation for the ⅔rd interest of Property in the sum of $18,000,000.
48. The matters of professional fees, interest, costs and any other ancillary and consequential matters shall be adjourned to a date to be fixed by parties in consultation with counsel’s diaries if it needs.
49. Last but not least, the Tribunal thanks all Counsel for their helpful assistance.
Mr Lawrence PANG
Member
Lands Tribunal
Mr Bosco Cheng, instructed by Messrs Lui & Law, for the applicants
Ms Ebony Ling, instructed by the Department of Justice, for the respondent
[1] See Bundle pp198-199.
[2]
[3] See Bundle pp207-208.
[4] Exhibit R2.
[5] In 2015 the Langham Place Hotel was rebranded as the Cordis.
[6]
[7] See Bundle pp21-23.
[8] See Bundle p182.
[9] 肥牛火鍋海鮮酒家The entrance of this restaurant is in fact located on Shantung Street instead of Reclamation Street. Patrons to this restaurant do not necessarily go further and turn the corner into the section of Reclamation Street on which the Property was located.
[10] Unlike the Tribunal’s comment in Snowland , supra at §75, Ms Ng considered the frontages on both Reclamation Street and Soy Street are of equal benefits.
[11]
[12] See also the Appraisal Institute & the Appraisal Institute of Canada, The Appraisal of Real Estate , 3rd Canadian Edition, 2010, p 13.12.
[13] “Making a Comparison” , Estates Gazette, 12 September 2015.
[14] See Bundle p209.
[15]
[16]
[17] See Bundle p23.
[18] See also Lam Kit V Director of Lands , LDLR 15 of 1994(unreported, 5 May 1995) §11
[19] Exhibit R1.