LUCKTIME LTD v. CHO KAI FUNG AND OTHERS

LDCS 2000/2018

[2021] HKLdT 8

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 2000 OF 2018

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JUDGMENT

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BACKGROUND

1.  This is the applicant’s application for an order for sale, for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”), of all the undivided shares of and in sub-section 15 of section A of Hung Hom Marine Lot No 1 (“the Lot”) together with the building erected thereon known as Nos 22, 22A & 24 Whampoa Street and Nos 88, 90 & 90A Baker Street, Kowloon (“the Building”).

2.  The Building comprises an 8-storey tenement block served by 2 common staircases. Occupation permit No K23 was issued for the Building on 16 April 1957, granting permission to occupy its ground floor (“G/F”) for non‑domestic purpose and upper floors for domestic purpose.  According to the approved building plans of the Building, there are 5 shop units and 1 store unit planned on G/F, and 6 domestic units planned on each of 1^st Floor (“1/F”) to 7^th Floor (“7/F”).

3.  The Lot together with the Building standing thereon has 48 undivided shares. Each of the G/F units and the upper floor units was allotted 1 undivided share, making up a total of 48 undivided shares.

4.  According to the records of the Land Registry, 4 units in the Building have been sub-divided as follows:

1)  5^th Floor (“5/F”) of No 24 Whampoa Street was sub-divided into 2 sub-divided units [i.e. Flat A (1/2 of 1/48) and Flat B (1/2 of 1/48)];

2)  G/F of No 88 Baker Street was sub-divided into 2 sub-divided units [i.e. Portion A (5/12 of 1/48) and Portion B (7/12 of 1/48)];

3)  1/F of No 90 Baker Street was sub-divided into 2 sub-divided units (i.e. Flat B (1/2 of 1/48) and Flat C (1/2 of 1/48)]; and

4)  2^nd Floor (“2/F”) of No 90 Baker Street was sub-divided into 2 sub-divided units [i.e. Portion B (1/2 of 1/48) and Portion C (1/2 of 1/48)].

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

5.  At the time of filing of the Notice of Application (“NOA”) on 2 January 2018, there were 8 respondents and the applicant owned 83.33% (i.e. 40 out of the total 48) undivided shares in the Lot, more than the threshold of 80% required for building aged 50 years or above.

6.  After the filing of the NOA, the applicant acquired units from the 1^st, 2^nd, 3^rd, 4^th, 7^th and 8^th respondents, and subsequently discontinued the proceedings against them.

7.  Section 3(1) of the Ordinance prescribes that the minimum percentage of undivided shares that an applicant or applicants should possess before making an application under the Ordinance is 90%. 

8.  Section 3(5) of the Ordinance provides that the Chief Executive in Council may, by notice in the Gazette, specify a lower percentage in respect of a lot belonging to a class of lots specified in that notice. 

9.  The Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice, made under section 3(5) of the Ordinance (“the Notice”), was gazetted on 22 January 2010 and came into operation on 1 April 2010.  Section 3 of the Notice lowered the threshold for compulsory sale of specified classes of lots from 90% to 80%.  Those classes of lots include:

“a lot with each of the buildings erected on the lot issued with an occupation permit at least 50 years before the relevant date”

10.  Since the occupation permit of the Building was issued in 1957, i.e. more than 50 years before the date of application (i.e. 2 January 2018; the relevant date under the Notice), the applicable percentage is therefore 80%.

11.  I am satisfied that as at the date of application, the applicant owned more than 80% of the undivided shares in the Lot.  I am therefore satisfied the applicant is entitled to make the present application under section 3 of the Ordinance.

THE REMAINING RESPONDENTS

12.  At trial, the applicant owned 93.75% (i.e. 45 out of the total 48) undivided shares in the Lot. The following 2 respondents (collectively referred to as “the Remaining Respondents”) remain in the present action: -

Respondent		Premises
5th Respondents	(“R5”)	1/F of No 88 Baker Street (“R5’s Property”)
6th Respondent	(“R6”)	G/F of No 90 Baker Street and G/F of No 90A Baker Street (“R6’s Property”)

13.  R5 is represented by Ms Vivian Lam and Ms Catherine Hau.  R5 primarily disputes the existing use value (“EUV”) of the Building and the redevelopment value (“RDV”) of the Lot as assessed in the application, and put the applicant to strict proof in respect of the other statutory requirements under the Ordinance.   

14.  R6 is represented by Ms Audrey Eu and Mr Julian Chan. R6 disputes the valuations as assessed in the application too.  While R6 has also put the applicant to strict proof in respect of the other statutory requirements, R6 does not accept the applicant has taken reasonable steps to purchase R6’s Property on terms that are fair and reasonable.

ISSUES FOR DETERMINATION BY THE TRIBUNAL

15.  The remaining issues to be decided in this case are as follows:

1)  What was the respective EUV of all units in the Building as at 27 November 2017, the valuation date adopted in the application valuation report dated 18 December 2017, as assessed in accordance with Part 1 of Schedule 1 of the Ordinance?

2)  Whether the redevelopment of the Lot is justified due to age and/or state of repair of the Building in accordance with section 4(2)(a) of the Ordinance?

3)  Whether the applicant has taken reasonable steps to acquire all the undivided shares in the Lot on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance?

4)  If an order for sale should be granted, what should be the reserve price (i.e. RDV of the Lot) for the purpose of auction sale?

DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING

16.  Pursuant to section 4(1)(a)(i) of the Ordinance, if there is a dispute between the parties on the EUV of the units as assessed in the application, the tribunal shall determine the proper value. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the lot who cannot be found, the majority owner of the lot is required to satisfy the tribunal that the value of the minority owner’s property as assessed in the application is: -

“(A) not less than fair and reasonable; and

(B) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”

17.  There are disputes between the Remaining Respondents and the applicant on both the EUV and the RDV valuations.  R5 and R6 rely on the reports and valuations prepared by Mr Wayne Lee of Wayne Lee & Associates Limited and Mr TC Wong of CBRE Limited respectively, whilst Mr CW Wong of Grandmax Surveyors Limited is appointed by the applicant.

18.  The 3 valuation experts agree on most of the areas and parameters of the units in the Building (i.e. except effective saleable area of R6’s Property, frontages of G/F of No 24 Whampoa Street, and view of all domestic units) and the comparables (i.e. except effective saleable area and some parameters of the shop comparable S12, the effective saleable area of the domestic comparables ED9 and ED10, and view of some domestic comparables) and the adoption of the same shop reference unit (i.e. G/F of No 22A Whampoa Street) and domestic reference unit (i.e. 3/F of No 88 Baker Street). They disagree on selection of both shop and domestic comparables, some adjustments to them, and some adjustments to both the shop reference unit and the domestic reference unit.

19.  It is odd to note in these proceedings that Mr CW Wong and Mr TC Wong cannot agree on some factual measurements including some measurements of saleable area.  The conflicting parties could not come to a compromise, but they have not presented their respective cases to the tribunal in detail at trial. Nonetheless, since the subject differences are all minor, I decide to take an average of them in the valuation.

Effective Saleable Area of R6’s Property

20.  Both Mr CW Wong and Mr TC Wong value R6’s Property as a combined shop unit and have also converted a covered yard next to it at the rate of 1/9 in their respective assessments, whilst Mr Wayne Lee is indifferent to value it as a combined shop unit or two separate units but he disregards the covered yard in his assessment. Nevertheless, it is not in dispute that the merger of the 2 units in R6’s Property can increase its overall value, and the covered yard is a common area of the Building encroached by the occupier of R6’s Property.

21.  On the condition that R6’s Property was a combined shop unit as at the date of valuation and there is no evidence the merger is illegal, I agree to adopt the market reality approach and value it as a combined shop unit, in which the partition walls between the two units are removed. As stated by the structural engineer appointed by the applicant, Mr CM Wong, whose evidence is unchallenged, “all enclosing walls and internal partition walls are non-structural”.

22.  However, I disagree to assign any positive value to the covered yard, which is an unauthorized building structure on a common area. Even though this unauthorized structure has existed for a long period, the occupier of R6’s Property has encroached this common area for a long period too, and there is no record of enforcement action for its removal in the past, it can never be regulated and permitted, and is still subject to the risks of enforcement. After balancing its advantages and disadvantages under the market reality approach, I consider a prudent buyer would not pay for it. Nevertheless, although the covered yard should not be counted, I am of the view R6’s Property can enjoy a return frontage onto the yard of 5 feet wide and the lane of another 5 feet wide immediately next to the yard, which can enhance its value.  Since the condition of the yard and the lane is dissatisfactory and cannot draw pedestrian flow, I consider a nominal adjustment at 2% only for return frontage is appropriate in this instance, which in terms of calculation is similar to the benefit of covered yard at the conversion rate of 1/9.

Selection of Shop Comparables

23.  The 3 valuation experts have proposed altogether 8 shop comparables and only 2 of them are common (i.e. Comparables S9 and S10). I agree with both Mr CW Wong and Mr TC Wong not to adopt Comparable S8 (i.e. G/F of No 18 Wuhu Street), which is a corner shop in a much better location, and Comparable S10 (i.e. Unit C, G/F and 1/F, Top Growth Court, No 123 Wuhu Street), which comprises a substantial portion on 1/F, proposed by Mr Wayne Lee.  Whilst, I agree to adopt Comparables S6 and  S12 that are close to the Building, though Comparable S6 is smaller in size with narrower frontage and Comparable S12 was transacted about 1 year earlier than the valuation date. I also agree to adopt Comparables S5 and S7 on the north side of Wuhu Street, but their analyses and weightings in the valuation should be further reviewed.

Adjustments to Shop Comparables

24.  The 3 valuation experts agree on the adjustment for time with reference to price indices and the adjustment for size at 1% per 5-square meter difference, but disagree on some of the adjustments for location, layout, depth, frontage, return frontage, headroom, age and condition.

25.  With the benefit of site inspection together with the parties, I consider the locations of all 6 selected comparables are better than that of the reference shop unit facing Whampoa Street.  The locations of Comparables S5, S6, S7 and S12 are similar and would command an adjustment at -15%.  The location of Comparable S9 facing Bulkeley Street is better than the other comparables and an adjustment at -25% is appropriate, whilst S11 is situated in a quieter section of Wuhu Street and the adjustment should be -12.5%.

26.  The 3 valuation experts have adopted different approaches to review the depth and layout of the comparables. In the adjustment for layout, Mr CW Wong has already considered depth of the comparable. Mr Wayne Lee has made adjustments for depth and layout separately.  Mr TC Wong has just made adjustment for depth and considers that no adjustment for layout is necessary for these comparables. In order to better illustrate the differences, I have no objection to adjust for depth and layout, which in fact are similar, separately. I consider depth would affect value much because the area around the shop front is more valuable, and an adjustment at 1% per 1-meter difference is appropriate in the subject secondary retail location, where the shops serve mainly the local residents. In addition, in terms of layout, I consider an adjustment at +2% could be made to Comparable S6 which is a bit irregular in shape, and an adjustment at +1% could also be made to Comparable S11 which has a large column near its shop front.

27.  Regarding the adjustment for frontage, I agree with Mr CW Wong and Mr TC Wong to adopt an adjustment rate at 1% per 1-meter difference instead of 4% per 1-meter difference proposed by Mr Wayne Lee, which is much excessive in the subject secondary retail location.

28.  Regarding the adjustment for return frontage, I consider the lane next to Comparable S5, which connects Wuhu Street and Station Lane, is comparable to Kun Yam Street next to Comparable S11, and both should be adjusted at -10%.

29.  Regarding the adjustment for headroom, I am of the view an adjustment rate at 3% per 1-meter difference, a midway figure proposed by the valuation experts is appropriate.

30.  Regarding the adjustment for age / condition, I agree with Mr CW Wong and Mr Wayne Lee to make greater adjustment at the rate of 1% per 5-year difference instead of 1% per 10-year difference proposed by Mr TC Wong.

31.  The valuation of the shop reference unit is listed in Appendix I of the judgment.  The average unit rate of the 6 comparables is about $471,796, whilst the average without Comparables S5 and S7 on the north side of Wuhu Street is about $486,266.  I consider that the shop reference unit should be assessed at $475,000 per square meter.

EUVs of Shop Units

32.  By applying the same principles above, the valuation of all the ground floor shops is listed in Appendix II of the judgment, and the sub-total EUV is determined at $151,460,000.

33.  Regarding the adjustment for location, I consider Baker Street is better than Whampoa Street but the difference is 5% only.  Further, I agree with Mr TC Wong to adopt Baker Street as the main frontage of G/F of No 24 Whampoa Street.  It is odd for Mr CW Wong and Mr Wayne Lee to adopt an inferior street, Whampoa Street, as the main frontage in the analysis.

34.  In terms of layout, I consider an adjustment at -2.5% should be made to R6’s Property, which is irregular in shape and has a column between the 2 units. In addition, as discussed above, an adjustment for return frontage at +2% should also be made to R6’s Property, whilst the adjustment for return frontage to G/F of No 24 Whampoa Street should be +10% only proposed by Mr Wayne Lee and Mr TC Wong instead of +20% proposed by Mr CW Wong.

Selection of Domestic Comparables

35.   The 3 valuation experts have proposed altogether 10 domestic comparables and only 2 of them are common (i.e. Comparables ED3 and ED4).  I agree to adopt Comparables ED9 and ED10 proposed by Mr CW Wong and Mr TC Wong, though they were transacted about 1 year earlier than the valuation date. Further, since there are not many relevant comparables, I agree to extend the analyses to the comparables bounded by Wuhu Street on the north and Gillies Avenue South on the east (i.e. Comparables ED1, ED2, ED5, ED6 and ED8) and the comparables that might have attachment of covered roof (i.e. ED2 and ED7).

36.   I agree with Mr TC Wong the area bounded by Wuhu Street on the north and Gillies Avenue on the east, where is affected by the funeral parlours nearby, may has a different domestic property market. Hence, the comparables within this area should be analysed and reviewed with care.  Whilst, I consider the effect of covered roof if any on value would not be substantial.

Adjustments to Domestic Comparables

37.   The 3 valuation experts agree on the adjustment for time with reference to price indices, the adjustment for size at 1% per 5-square meter difference, the adjustment for floor at 2% per floor level and the adjustment to top floor unit at +3%, but disagree on some of the adjustments for location / accessibility / environment, view, lighting / ventilation, age and headroom. They also disagree on the conversion rate for the roof area.

38.   I agree with Mr CW Wong and Mr Wayne Lee to convert the roof area at the conversion rate of 1/8 instead of 1/6 proposed by Mr TC Wong.  In addition, I also agree with Mr CW Wong and Mr Wayne Lee not to adjust for headroom because the differences in headroom and their effects if any on value is minimal.

39.   Regarding the adjustment for location, accessibility and environment including noise, I consider they can be grouped together under the sub-heading location. I agree with Mr TC Wong the effects of the funeral parlours on its immediate area is unknown and is hardly to be quantified. Nevertheless, and on the face of transaction records, the aged domestic units in this area appear to have been transacted at a higher price. In the circumstances, I am of the view not to adjust for location to the comparables in this area in their initial analyses, and their acceptability and/or weighting in the valuation will be further reviewed.  

40.   In addition, I consider the location of Comparables ED3 and ED9 in a relatively quiet and concealed residential area is relatively better and would justify an adjustment at -2.5%. Whilst, the location of Comparables ED7 and ED10, in a short distance from a temple and a methadone clinic along Station Lane, is relatively worse than that of the domestic reference unit and would justify an adjustment at +1.5%. Comparable ED4 is also affected by Wuhu Street in the front and a rubbish collection point at the back and would justify an adjustment at +2.5%.

41.  Regarding the adjustment for view, I agree with Mr CW Wong Comparables ED5 and ED9 are relatively better, but the adjustment rates should be -3% and -5% respectively, and there would be nil adjustment to the other comparables. In terms of lighting and ventilation, I agree with Mr TC Wong to make an adjustment at -3% to Comparables ED9 and ED10 only, which are corner domestic units. In terms of age, I agree with Mr Mr CW Wong and Mr Wayne Lee to make an adjustment at 1% per 5-year difference instead of 1% per annum proposed by Mr TC Wong.

42.  The valuation of the domestic reference unit is listed in Appendix III of the judgment.  The average unit rate of the 10 comparables is about $77,717 whilst the average of Comparables of ED3, ED4, ED9 and ED10 only is about $72,889.  I consider lesser weighting should be given to the comparables bounded by Wuhu Street on the north and Gillies Avenue South on the east and the comparables that might have attachment of covered roof, and the domestic reference unit should then be assessed at $76,500 per square meter.

EUVs of Domestic Units

43.  By applying the same principles above, the valuation of all the domestic units is listed in Appendix IV of the judgment, and the sub-total EUV is determined at $171,080,000.

44.  The adjustments for internal condition are agreed by the 3 valuation experts. In terms of view, I consider all domestic units would have similar building view, and therefore nil adjustment is made. In terms of lighting and ventilation, I agree to make an adjustment at +3% to those corner domestic units at No 24 Whampoa Street and No 90 Baker Street only.

EUVs of All Units in the Building

45.  The EUVs of all units in the Building as at the relevant date of valuation, i.e. 27 November 2017, and adopted by this tribunal are appended below: -

Address

Floor

Unit

EUV

No 22 Whampoa St	G	-	$24,480,000
No 22A Whampoa St	G	-	$21,720,000
No 24 Whampoa St	G	-	$34,830,000
No 88 Baker St	G	A	$9,750,000
No 88 Baker St	G	B	$17,010,000
No 90 & 90A Baker St	G	-	$43,670,000
No 22 Whanpoa St	1	-	$4,560,000
No 22A Whampoa St	1	-	$3,820,000
No 24 Whampoa St	1	-	$5,830,000
No 88 Baker St	1	-	$4,650,000
No 90 Baker St	1	B	$1,900,000
No 90 Baker St	1	C	$2,690,000
No 90A Baker St	1	-	$3,180,000
No 22 Whanpoa St	2	-	$4,470,000
No 22A Whampoa St	2	-	$3,950,000
No 24 Whampoa St	2	-	$6,020,000
No 88 Baker St	2	-	$4,350,000
No 90 Baker St	2	B	$1,880,000
No 90 Baker St	2	C	$2,630,000
No 90A Baker St	2	-	$3,280,000
No 22 Whanpoa St	3	-	$4,390,000
No 22A Whampoa St	3	-	$3,670,000
No 24 Whampoa St	3	-	$5,910,000
No 88 Baker St	3	-	$4,260,000
No 90 Baker St	3	-	$4,240,000
No 90A Baker St	3	-	$3,210,000
No 22 Whanpoa St	4	-	$4,070,000
No 22A Whampoa St	4	-	$3,600,000
No 24 Whampoa St	4	-	$5,210,000
No 88 Baker St	4	-	$3,970,000
No 90 Baker St	4	-	$4,370,000
No 90A Baker St	4	-	$2,990,000
No 22 Whanpoa St	5	-	$4,210,000
No 22A Whampoa St	5	-	$3,720,000
No 24 Whampoa St	5	A	$2,870,000
No 24 Whampoa St	5	B	$3,180,000
No 88 Baker St	5	-	$3,890,000
No 90 Baker St	5	-	$4,060,000
No 90A Baker St	5	-	$3,080,000
No 22 Whanpoa St	6	-	$3,870,000
No 22A Whampoa St	6	-	$3,420,000
No 24 Whampoa St	6	-	$5,150,000
No 88 Baker St	6	-	$3,750,000
No 90 Baker St	6	-	$3,940,000
No 90A Baker St	6	-	$2,870,000
No 22 Whanpoa St	7	-	$3,670,000
No 22A Whampoa St	7	-	$2,860,000
No 24 Whampoa St	7	-	$4,110,000
No 88 Baker St	7	-	$3,220,000
No 90 Baker St	7	-	$3,390,000
No 90A Baker St	7	-	$2,720,000

46.  I therefore accept the total EUV of the Building is $322,540,000 (i.e. $151,460,000 + $171,080,000). 

SECTION 4(2) OF THE ORDINANCE - JUSTIFICATION AND REASONABLE STEPS

47.  Section 4(2) of the Ordinance provides as follows: -

“2. The Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot the subject of the application under section 3(1) concerned, the Tribunal is satisfied that—

(a)  the redevelopment of the lot is justified (and whether or not the majority owner proposes to or is capable of undertaking the redevelopment)—

(i) due to the age or state of repair of the existing development on the lot; or

(ii) on 1 or more grounds, if any, specified in regulations made under section 12; and

(b)  the majority owner has taken reasonable steps to acquire all the undivided shares in the lot (including, in the case of a minority owner whose whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable).”

48.  The applicant must satisfy this tribunal the above statutory requirements are met; otherwise, an order for compulsory sale would not be granted.

Whether development of the Lot is justified due to the age and/or state of repair of the Building

49.  The applicant adduces expert evidence of Mr CM Wong, a structural engineer, of CM Wong & Associates Limited and Mr Dennis Wong, a building surveyor, of Prudential Surveyors International Limited. Mr CM Wong conducted a structural survey of the Building and prepared a Structural Assessment Report on 7 November 2019.  Mr Dennis Wong conducted a condition survey of the Building and prepared a Condition Survey Report in November 2019.

50.  None of the respondents adduced expert evidence to rebut the reports complied by Mr CM Wong and Mr Dennis Wong.  

51.  Having considered the reports of Mr CM Wong and Mr Dennis Wong, I accept their expert opinion. The Building, being erected more than 63 years ago, is in poor condition and has come to the end of its design life.  The design of the Building has become obsolete over time in many aspects, both physically and functionally, and fails to conform to modern safety standards and statutory requirements.

52.  I am also of the view the Building is in poor state of repair and the costs of repair to bring the Building to tenantable condition is disproportionate to the costs of redevelopment.   Even if repair works are carried out, such works will bring about a modest improvement only to the existing condition of the Building and the Building will continue remain a sub-standard one.

53.  By reason of the matters set out above, I am satisfied the redevelopment of the Building is justified.   

Whether the applicant has taken reasonable steps

54.  In assessing the reasonableness of the offers, I have considered the case of Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578. In particular, I have considered paragraphs 33 and 36 of the judgment in which   Ribeiro PJ stated: -

“33. In making that assessment the Tribunal is not conducting a valuation exercise. It does not need to adjudicate upon any disputes about the correct valuation principles to be applied. It does not itself arrive at any conclusion as to what figure represents the correct valuation. It merely needs to be satisfied that, on the evidence available, the offer falls within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. It is obviously necessary to recognise that there will often be differences of opinion on that matter……”

“36. ...... We are of course not suggesting that it is necessary for the offer to “beat” the valuation as if it were a payment into court. What the Tribunal must do is to consider whether, in the circumstances of each case, the offer falls within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site……”

55.  The applicant has made 3 batches of offer on 15 December 2017, 9 January 2020 and 10 November 2020 to the Remaining Respondents, which were assessed by Mr CW Wong and have reflected the then pro-rata share of the RDV. Ms Nancy Ngai, counsel for the applicant, submits the applicant has taken reasonable steps in acquiring all the undivided shares in the Lot and the offers are fair and reasonable.

56.  I note the respective pro-rata shares of the RDV attributable to R5’s Property as assessed by Mr CW Wong in these 3 offers are close to or higher than the determination of the tribunal above (i.e. $4,650,000 / $322,540,000 = about 1.4417%). Whereas, the pro-rata shares of the RDV attributable to R6’s Property in the 1^st and 2^nd offers are lower than the tribunal’s determination (i.e. $43,670,000 / $322,540,000 = about 13.5394%), and only the 3^rd offer is close. I also note there is no evidence in detail of the RDV in about 2017.  Although the 3 valuation experts differ in opinion of the RDV in late 2019, such has not been fully argued at trial. Whilst, the determination of the recent RDV by the tribunal below (i.e. $482,000,000) is higher than that as assessed by Mr CW Wong (i.e. $439,000,000), but it is much lower than those as assessed by Mr Wayne Lee (i.e. 608,500,000) and Mr TC Wong (i.e. 588,000,000).

57.  On the evidence available, I am of the view, at least, the applicant’s 3^rd offer prices do fall within a range of what may broadly be regarded as fair and reasonable. 

58.  The applicant acquired G/F of No 24 Whampoa Street (“R2’s Property) owned by the 2^nd respondent (“R2’) at $78,000,000. Although all the 3 valuation experts have assessed the EUV of R6’s Property higher than that of R2’s Property, the applicant’s offers to R6 are all lower than this acquisition price. Ms Eu submits there is no conceivable reason for R6’s Property to be worth less than the compensation paid to R2, and there is also no evidence and no reason to suggest that the applicant should over-compensate or pay R2 more than the appropriate compensation.  Hence, as a counter-check, by adopting the pro-rata shares of the RDV attributable to R2’s Property (i.e. 9.88%) and R6’s Property (i.e. 13.14%) as assessed by Mr CW Wong and the acquisition price at $78,000,000, R6’s fair compensation should be about $103,736,482 (i.e. $78,000,000 / 9.88 x 13.14).

59.  From valuation viewpoint, I consider it is irrelevant to consider the acquisition price for R2’s Property.  It is not a relevant comparable to be adopted in the EUV assessment.  All 3 valuation experts have not taken it as comparable too. Further, it is also not reasonable to assume in site assembly, a commercial exercise, that the acquisition prices paid to different owners should then be proportional to their respective underlying values.

60.  By reason of the matters set out above, I am satisfied that the applicant took reasonable steps to acquire all the undivided shares in the Lot.

RESERVE PRICE FOR THE AUCTION

61.  By reason of being satisfied that redevelopment of the Lot is justified and that the applicant has taken reasonable steps to acquire all the undivided shares in the Lot, I am satisfied an order for sale should be granted in favour of the applicant.

62.  The 3 valuation experts agree to adopt residual method and update their respective RDV assessments as at 18 November 2020.  They agree to develop the Lot on a registered site area of 434.32 square meters at a plot ratio of 9 (i.e. non-domestic of 1.5 and domestic of 7.5) and build a high-rise commercial / residential composite building of 3,908.88 square meters gross, but they disagree on its detailed composition. They also disagree on how to derive the gross development value (“GDV’) including selection of comparables and their adjustments. Further, in the residual valuation, although they agree on demolition costs of $6,673,964 (i.e. $2,200 per square meter), professional fees at 6%, interest rate at 4% per annum, construction period of 2.5 years and profit at 15%, they disagree on mainly construction cost and whether legal cost and stamp duty on residual land value should be allowed in the assessment.

Hypothetical Development Scheme

63.  After the 2^nd without prejudice meeting among the 3 valuation experts, Mr TC Wong accepts the areas on G/F and 1/F proposed by Mr CW Wong, but Mr TC Wong proposes to build special domestic units on the top domestic floor (i.e. 22^nd Floor) and 6 domestic units with larger common area instead of 5 domestic units on each typical upper floor. Mr TC Wong also proposes a different G/F layout and adopts different shop reference unit and domestic reference unit.  Whilst, Mr Wayne Lee proposes to build a higher building with domestic entrance on G/F off a scavenging lane and smaller domestic units (i.e. similar to those as suggested by Mr TC Wong).

64.  I have doubt on financial viability of building a domestic lift lobby on G/F off a scavenging lane in this location, and have reservation on building special domestic units in such a relatively small development. I also consider it is prudent to build larger flats of 27.51 square meters saleable on average proposed by Mr CW Wong, instead of 23.25 – 23.91 square meters saleable proposed by Mr Wayne Lee and Mr TC Wong, in the current market. There is a lot of supply of tiny flats and building of tiny flats would incur greater risk.

65.  Having reviewed the 3 hypothetical development schemes, I prefer that proposed by Mr CW Wong and also accept his proposed layouts and reference units in the assessment.

GDV – Shops on G/F and 1/F

66.  The 3 valuation experts have proposed altogether 7 shop comparables and only 3 of them are common (i.e. Comparables S1, S3 and S4). I agree with Mr TC Wong not to adopt Comparable S2 (i.e. G/F of No 2 Ma Tau Wai Road), which is a corner shop occupying a much better location. I agree with Mr CW Wong to adopt Comparable S6 that is close to the Lot, though it was transacted more than 1.5 years ago.  Whilst, similar to the EUV assessment, I agree to analyse Comparables S5 and S7 on the north side of Wuhu Street and their analyses and weightings in the valuation will be further reviewed.

67.  The 3 valuation experts agree on the adjustment for time with reference to price indices, the adjustment for size at 1% per 5-square meter difference, the adjustment for frontage at 1% per 1-meter difference, and the adjustment for age at 1% per 5-year difference.  However, they disagree on some of the adjustments for location, layout, depth, return frontage and headroom.  They also argue whether there should have an additional adjustment for business condition.

68.  In comparing with the shop reference unit that has frontage facing Baker Street, I agree with Mr CW Wong to adjust for location to Comparable S1 at -20%, but lesser negative adjustments should be made to the other comparables.

69.  Similar to the EUV assessment, I prefer the adjustment for depth at 1% per 1-meter difference and the adjustment for headroom at 3% per 1-meter difference. Regarding the adjustment for layout, I consider +2% should be made to Comparables S1 and S6 that are a bit irregular in shape, and +1% should be made to Comparable S4 that has a column at the shop front. In terms of return frontage, -10% should be made to Comparable S5.

70.  Before the adjustment for business condition if any, the valuation of the shop reference unit is listed in Appendix V of the judgment.  The average unit rate of the 6 comparables is about $492,787 whilst the average without Comparables S5 and S7 is about $508,894.  I consider that the shop reference unit should then be assessed at $500,000 per square meter.  

71.  Nonetheless, I agree with Mr Wayne Lee and Mr TC Wong to make to make an additional adjustment for business condition, but the adjustment rate should be +5% only instead of +10% proposed by them. Hence, the adjusted shop unit rate should be $525,000. I accept that the shop reference unit will have better business condition when the subject development is completed. At that time, its nearby developments developed by the same developer will have been completed too and the retail business potential in the area will have further improved. Since the comprehensive redevelopments in this locality have begun in 2018, I consider the enhancement of business condition would have been partly reflected in the comparables in the immediate area, but the business condition will further improve during the development period of the subject development.

72.  In applying the adjustments above to the hypothetical development scheme proposed by Mr CW Wong, the whole hypothetical G/F is assessed at $169,790,000 at an average unit rate of $517,578 per square meter, which is listed in Appendix VI of the judgment.  I consider an adjustment for location at -5% should be made to the hypothetical shop facing Whampoa Street, and there should also have adjustments for return frontage at +10% to the hypothetical shop at the junction of Baker Street and Whampoa Street and +2% to the hypothetical shop at the junction of Baker Street and a lane

73.  The 3 valuation experts have valued the hypothetical 1/F shops with reference to the average unit rate of the hypothetical G/F shops only, and have also adopted the same conversion rate at 1/3.  I am of the view the conversion rate at 1/3 is appropriate in this instance, and the flat roof on 1/F could be converted at 1/6 of the 1/F unit rate.

GDV – Flats on Upper Floors

74.  Since there are better and relevant comparables, I agree with Mr CW Wong and Mr TC Wong not to adopt the comparables in The Vantage proposed by Mr Wayne Lee, which are pre-sale transactions.  I consider it is appropriate to adopt the comparables in Metro6 proposed by Mr CW Wong and Wuhu Residence proposed by both Mr CW Wong and Mr TC Wong that are close to the Lot, though the comparables in Metro6 are larger in size.  I also agree with Mr TC Wong to adopt the comparables in Axis, which is a similar single block composite development situated in the adjacent district To Kwa Wan, but disagree to adopt the comparables in Upper East, which is larger in scale. In selecting the comparables in each comparable development, I prefer the recent transactions in 2020 without attachment of ancillary areas.

75.  I agree with Mr CW Wong and Mr TC Wong to make adjustment for time with reference to time indices, adjustment for floor at 0.5% per 1-level difference and adjustment for headroom at 2% per 1-meter difference. Further, I agree with Mr CW Wong to make adjustment for size at 1% per 5-square meters difference, age at 1% per 1-year difference and condition (i.e. reflecting the provision of new fittings, finishes and appliances in newly completed unit) at +5%.

76.  Regarding the adjustment for location, I consider nil adjustment should be made to Metro6 and Wuhu Residence that are close to the Lot, and +2% should be made to Axis in To Kwan Wan. I also consider the adjustments for view and noise can be grouped under the same sub-heading in this instance. The view and noise of the comparables (i.e. most of them face main road with heavy traffic) are generally inferior than those of the domestic reference unit, and hence adjustments in the range of 0% to +7.5% are made accordingly.

77.  Further, I am of the view an additional adjustment should be made to the comparables facing nearby sites. I agree with Mr TC Wong that some comparables in Metro6 will be affected by the nearby developments during their construction period. I also note some comparables in Axis will be affected by the redevelopment projects on the opposite side of Ma Tau Wai Road too.

78.  Following the above determinations, I assess the unit rate of the domestic reference unit at $237,000 per square meter, close to the adjusted unit rate derived from the comparables in Wuhu Residence.  The valuation of the domestic reference unit is listed in Appendix VII of the judgment.

79.  In addition, I agree with Mr CW Wong to adopt the adjusted unit rate of the domestic reference unit as the average unit rate of the domestic units in the hypothetical development, and the units on 4^th floor together with flat roof should be further adjusted at +15%, but the units on the top floor together with roof should be further adjusted at +25%, instead of +20% proposed by Mr CW Wong, to reflect the better view of these units.

Construction Cost

80.  The 3 valuation experts differ on the quantum of construction cost. Mr CW Wong proposes a higher construction cost at $159,857,851, and those proposed by Mr Wayne Lee and Mr TC Wong are $146,583,884 and $131,744,029 respectively.

81.  Mr CW Wong has prepared a checklist to estimate the construction costs. He assumes the residential portion of the hypothetical development will have high to very high quality finishes at the basic rate of $30,000 per square meter, and applies medium quality shopping centre rate at $28,400 per square meter to the shop portion. Mr Wayne Lee has also prepared a checklist and assumed high to very high quality finishes for the residential portion, but he applies a basic rate of $29,800 per square meter to the residential portion and a discounted basic rate at $21,000 per square meter only to the shop portion, because in his opinion the hypothetical shops will be completed in the form of bare shell only. Whilst, Mr TC Wong applies the same basic rate of $24,700 per square meter to both shop and residential portions, and assumes the hypothetical development will have high quality finishes only.

82.  With reference to the quality of the comparable developments, I consider it is appropriate to assume in the assessment the subject hypothetical development will have finishes slightly above high quality only. I also consider the construction cost for the shop portion should be less than that of residential portion.  Above all, I accept the construction cost of $146,583,884 (i.e. about $37,500 per square meter gross) proposed by Mr Wayne Lee, a midway figure between those proposed by Mr CW Wong and Mr TC Wong.

Legal Cost and Stamp Duty on Residual Land Value

83.  Given that profit at 15% is agreed by the 3 valuation experts, I agree with Mr CW Wong to make further deduction for legal cost and stamp duty on residual land value in the subject residual valuation. I accept that legal cost and stamp duty are expenses that should be borne by the purchaser in the hypothetical transaction, and profit at 15% only as at the valuation date, when was adversely affected by social movement and pandemic, is not enough to embed these expenses in the residual valuation.

RDV of the Lot as at 18 November 2020

84.  Based on the agreements of the 3 valuation experts and the above determinations, the residual valuation of the Lot as at 18 November 2020 is listed in Appendix VIII of the judgment.  The Lot is assessed at $482,000,000, equivalent to an accommodation value of about $123,309 per square meter (i.e. about $11,456 per square foot).

ORDERS

85.  For reasons given in this judgment, I have set out reasons why I am satisfied an order for sale should be granted and I therefore make the following orders: -

1)  All the undivided shares in the Lot, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lot;

2)  Ms Anna SH Chow and Mr Anthony WK Chow, nominated by the applicant, be appointed the trustees (“the Trustees”) to discharge the duties imposed on them as trustees by the Ordinance in relation to the sale of the Lot;

3)  The Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Guantao & Chow dated 6 November 2020;

4)  For the purposes of the sale of the Lot by public auction: -

a)  the sale of the Lot be on the particulars and conditions of sale the same or substantially the same as those set out in the draft Particulars and Conditions of Sale to be approved and initialed by the tribunal; and

b)  the reserve price be set at $482,000,000;

5)  Subject to further extensions that the tribunal may subsequently allow upon the application of the purchaser of the Lot or its successor in title, the redevelopment of the Lot and the Building shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot becomes the owner of the Lot; and

6)  Liberty to the applicant, the respondents and the Trustees to apply to the tribunal for further directions.

COSTS

86.  Following Good Faith [1], I make a costs order nisi that the applicant do pay costs of these proceedings to the respondents on High Court scale, with certificate for 1 counsel to R5 and certificate for 2 counsel to R6, including any reserved costs, to be taxed if not agreed.  Unless any parties apply by summons to vary, the costs order nisi shall be made absolute upon expiry of 14 days from the date of this judgment.