WAN WAI HONG & OTHERS v. THE DIRECTOR OF LANDS

LDLR 4 OF 2002
& LDLR 7 OF 2002
(Consolidated)

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LANDS RESUMPTION APPLICATION NO. 4 OF 2002

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J U D G M E N T

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Background

1. This judgment covers two applications, case number LDLR 4 of 2002 and LDLR 7 of 2002, which were consolidated for hearing by order of HH Judge Chow on 10 October 2002. Although the applicant of one case was different from those of the other, the respondent was the same party, the Director of Lands. The properties in the two cases were closely situated and were both resumed under the same scheme. Also, the applicants of both cases were represented by the same firm of solicitors and counsel.

2. The applicants of the two cases ("Applicants") were the former registered owners of the following properties ("the Properties"):

(a) Portion A on Ground Floor, No. 3 Yeung Uk Road, Tsuen Wan, New Territories ("Yeung Uk Road Propety") for the application no. LDLR 4 of 2002 ("LDLR 4 of 2002"); and

(b) Ground Floor, No. 143 Tai Ho Road, Tsuen Wan, New Territories ("Tai Ho Road Property") for the application no. LDLR 7 of 2002 ("LDLR 7 of 2002").

3. Around 1997, the Urban Redevelopment Authority (formerly the Land Development Corporation) started negotiating with the Applicants to acquire the Properties for the purpose of comprehensive redevelopment. The Authority was unable to come to any agreement with the Applicants. Subsequently, the Properties were resumed and reverted to Government on 18 May 2000 under the Lands Resumption Ordinance ("the Ordinance"), Cap. 124, pursuant to a gazetted and published Government Notice No. 906 dated 28 January 2000.

4. The Applicants filed separate Notices of Application to the Lands Tribunal for the determination of the amounts of compensation to be paid in respect of the resumption of the Properties. The Respondent filed Notices of Opposition opposing the applications. Thereafter, the Applicants applied to list the two cases for hearing. The Lands Tribunal is empowered under Section 10(2)(a) of the Ordinance to assess the amount of compensation for the resumed Properties, i.e., the open market values of Yeung Uk Road Property and Tai Ho Road Property on the date of reversion, 18 May 2000.

5. The Applicants called for the evidence of a valuation surveyor, Mr. Wayne W. K. Lee ("Mr. Lee"), as an expert witness,. On the other hand, the Respondent, called for the expert evidence of another valuation surveyor, Mr. Lai Wah Chi ("Mr. Lai"). Prior to the hearing, the parties exchanged, under Rule 20 of the Lands Tribunal Ordinance, valuation reports and supplementary valuation reports for the Properties. In these reports, both experts carried out valuation of the Properties by the same 2-sliced, term and reversion approach. This involved the summation of (1) the capitalization of the term interests of the Properties and (2) the present values of the open market vacant possession values of the Properties, which were in turn obtained by the direct comparison method of valuation. The differences in the experts' term valuation of the Properties were very small. However, the parties could not agree on the values of the term interests. As for the estimation of the reversionary interests, Mr. Lee collected, analysed and used 4 comparables (referenced as "Comparable A1" to "Comparable A4") in support of his valuation whilst his counter-part chose 5 comparables (referenced as "Comparable R1" to "Comparable R5"). There were 2 common comparables. In the final analysis, the two experts stated in their reports that the Properties, on the then existing use basis but subject to the then existing tenancies, had the following open market values:

	Applicant's expert	Respondent's expert
Yeung Uk Road Property	$4,520,000	$1,946,000
Tai Ho Road Property	$15,980,000	$6,415,000

6. Subsequently, during the hearing, Mr. Lee revised his estimated unit rates for the valuation of the Properties on vacant possession basis, as follows:

 

	Respondent's revised unit rate	Revised values
Yeung Uk Road Property	$140,709 per sq.m.	$3,804,779
Tai Ho Road Property	$133,966 per sq.m.	$13,392,581

Agreement between the parties

7. Apart from the agreement on the methodology of valuation of the Properties, as set out above, the parties had agreements on various valuation matters. There was no dispute that the date of reversion of 18 May 2000 should be adopted as the relevant valuation date. The parties also agreed that the best use of the Properties were for commercial/retail purposes. In addition, they agreed on the details of the oral tenancies of the Properties, the base market yield of 8% for the Properties and that a period of 6 months would be required for obtaining vacant possession of the Properties although they had slight disagreements on the capitalization rates to be adopted in the valuation of the term interests.

8. In the Rule 20 reports, there were, between the experts, minor differences in the dimensions of the Properties. However, the experts agreed on the conversion factors for converting the yard areas to the saleable floor areas of the shops in arriving at the effective saleable areas of the Properties. They also agreed not to take into account the values of any unauthorized cockloft structures in the Properties or the comparables in their valuation. During the hearing, counsel for the Applicants submitted that in order to avoid minor disputes, the Applicants accepted the physical measurements of the Properties as provided by the Respondent's expert. Therefore, in this Judgment, the following measurements of the Properties, which were agreed by the parties, were adopted:

	Yeung Uk Road Property	Tai Ho Road Property
Saleable area -	26.47 sq.m	98.55 sq.m.
Yard area -	3.44 sq.m	8.5 sq.m.
Shop frontage -	4.04 m	5.15 m
Effective Saleable area -	27.04 sq.m	99.97 sq.m.

9. In addition, Mr. Lui, counsel for the Applicants summarized in paragraphs 12 to 18 of his written Final Submission that there were also some common grounds on the environment, the choice of comparables and their adjustments. His submission is reproduced below:

"(a) Transactions within the URA Scheme are ignored.

(b) R4/A2 and R5/A3 are common comparables.

(c) Location is the most important consideration for obtaining comparables.

(d) R1, R4/A2, R5/A3 and the 2 subject properties are within the same neighbourhood in terms of its nature and character. However, in terms of location, the subject properties are considered to be inferior when compared to R4/A2 and R5/A3. [35]

(e) Both R2 and R3 are commented by RW that they are "further away from the subject properties" during cross-examination and by AW that the "effective unit rates ...[are]... manifestly out of line with those of other comparables..." [176:at para 15] and therefore are not suitable comparables for the RV of the subject properties.

(f) The neighbourhood of the subject properties had already experienced some significant changes since the demolishing of the buildings in the area. Thus, it is not in dispute that the pedestrian flow in the area at the Relevant Date would be much higher than at the time of the site inspection on 3rd January 2003 (Friday).

(g) A bus terminus at the opposite side of Tai Ho Road Property was still in operation at the Relevant Date."

Issues before the Tribunal

10. The questions before the Tribunal are straight-forward valuation disputes, as follows:

(a) what are the suitable comparables;

(b) what are the suitable and appropriate adjustments; and finally,

(c) what are the open market values of the Properties.

The Properties

11. The two resumed Properties were ground floor shop units located near the junction of Yeung Uk Road and Tai Ho Road. Yeung Uk Road Property was located on the northeast side of Yeung Uk Road near its junction with Tai Ho Road whilst Tai Ho Road Property was located only a few shop units away, on the southeast side of Tai Ho Road near its junction with Yeung Uk Road in Tsuen Wan. After the reversion of the Properties to the Government, the buildings of which the Properties formed parts were demolished to form part of a large urban renewal site. It remained as a vacant site at the time of our site inspection made in the afternoon of 3 January 2003.

Occupation status of the Properties

For LDLR 4 of 2002

12. According to the applicant of this case, Yeung Uk Road Property was as at the resumption date occupied by one Ching Ming, the husband of the applicant, for carrying out the business known as Universal Motor Company under a monthly tenancy at a rent of $7,000 per month exclusive of Government rent, rates and management fee. This rent was equivalent to a monthly unit rate of about $259 per sq. m. There was no evidence from either expert as to the full market rental value of the property.

13. Mr. Lai stated in his valuation report that "as reported in the Property Review 2001 prepared by the Rating and Valuation Department, the average market rate of return prevailing around the date of valuation for commercial premises was about 8% p.a." After due consideration of this reported average rate of return, Mr. Lai considered that this rate of 8% represented the market rate of return of the Properties as at the date of valuation. This opinion was agreed by Mr. Lee.

14. Mr. Lai further added that, in the valuation of the term interests of Yeung Uk Road Property, he applied "a relatively lower rate of return of 7% p.a. in order to reflect the relatively better security in the receipt of the term rent." Mr. Lee disagreed, pointing out that there was no evidence as to the level of market rents for the property as at the relevant valuation date. As a rough check, I find that using the two experts' estimates of the open market value of the property, the existing rent of $7,000 per month only represents a return of between 2.0% to 4.4%. Hence, on the basis of these estimates, I find that the then passing rent for Yeung Uk Road Property was substantially lower than the market rental level. As a result, I agree with Mr. Lai and decide to adopt an even lower capitalization rate of 6% for the estimation of the term interest, in accordance with the traditional method of valuation.

For LDLR 7 of 2002

15. Based on the information provided by the applicants of this case, Tai Ho Road Property was, at the date of resumption, occupied by Wan Wai Hong and Wan Wai Shing of the applicants for carrying out the business known as Wai Kee Machinery Workshop under a monthly tenancy at a rent of $60,000 per month exclusive of Government rent, rates and management fee. This rent was equivalent to a monthly unit rate of about $600 per sq.m.

16. Notwithstanding the lack of market rental evidence from either expert as to the full market rental value of the property, Mr. Lai stated in his report that he had studied the level of rent payable under the monthly tenancy of the property. He found the rent reserved under the tenancy to be well above the market rent of the property prevailing at the date. Therefore, Mr. Lai said that in the valuation of the term interest of Tai Ho Road Property, he applied "a relatively higher rate of 10% p.a. in order to reflect the relatively high risk in the receipt of the term rent."

17. This was likewise not agreed by Mr. Lee as there was no evidence to support Mr. Lai's opinion that the rent passing was well above the market rent level. Mr. Lee also pointed out that according to Hong Kong Property Review 2001, "average rents of private retail premises in New Territories" was reported to be $739 per sq.m., which was well higher than the existing rent of the subject property. He further added that, "any such risk, even if existed, would be reduced to an insignificant level by the short unexpired term assumed in the present term valuation."

18. I find that when Mr. Lai opined that a higher rate should be adopted in the capitalization of the reserved rent so as to reflect the high risk nature of the reserved rent, he should have meant to compare the said reserved rent with the then market rent of Tai Ho Road Property. Therefore, a comparison of the said reserved rent with any other rent, including the average rents of "private retail premises in New Territories" quoted by Mr. Lee above is irrelevant. Whilst the open market value of Tai Ho Road Property is still not yet determined at this early stage of valuation, I find that the reserved rent of $60,000 for Tai Ho Road Property represents a return of between 4.6% and 11.9%, based on the experts' estimated open market values. Therefore, at this stage, I cannot decide whether to accept Mr. Lee's opinion that this reserved rent was well above the market level bearing in mind that the agreed yield for the property was 8%. This decision will be deferred after the determination of the open market vacant possession value of Yeung Uk Road Property by the Tribunal.

19. Therefore, instead of embarking on the process of estimating the value of the term interests, the valuation of the reversionary interests will be considered first. And, in the valuation of the reversionary interests, which are the open market value of the Properties on the basis of vacant possession, it is of utmost importance to decide on the choice of the most appropriate comparables for the Properties. This will be considered below.

Summary of the experts' choice of the most appropriate comparables

20. Mr. Lee analyzed 4 comparables and used them for the valuation of the Properties. On the other hand, Mr. Lai used 2 of Mr. Lee's comparables and added 3 other comparables, making a total of 5 comparables in his list of best comparables. A summary of the property and rental particulars of these comparables and the experts' adjustments to the comparables has been summarized in page 447A of the hearing bundle. In the outline closing submissions of the counsel for both parties, several comparison tables have also been prepared and submitted.

21. In the course of valuing the Properties, the two experts had the following major differences, which centred on the choice of suitable comparables and their adjustments.

(a) whether Comparable R1 should be rejected as a comparable on the ground that it was not an arms length transaction;

(b) whether valuation of the Properties should be based on one single comparable (i.e. Comparable R1) as proposed by Mr. Lai;

(c) whether Comparables A1 and A4 should be rejected on the ground that they occupied much superior locations than the Properties;

(d) whether Comparables R2 and R3 should be rejected on the ground that they were further away from the Properties;

(e) whether comparables which were substantially different in size from the Properties should be rejected as comparables;

(f) In the adjustments, whether the factors of "building age" and "layout" should be separately adjusted in the adjustments of the comparables

22. Although both properties and their comparables have been considered in details by the two expert surveyors, similar comparable properties (including two common comparables) and similar factors of adjustments have been made, the surveyors have reached very substantially different conclusion of values. This may be partly explained by the consensus view of both experts that despite of much effort by both of them, there was on the whole not enough good comparable available for the valuation of the Properties. Also, this may be due to the large differences in the unadjusted unit rates as well as the size of the comparables.

23. In fact, the range of unadjusted rates of all 7 comparables considered by the two experts may suggest that they actually belong to different sub-markets of retail ground floor shops in Tsuen Wan. The unadjusted unit rates of all the comparables appear to form two entirely separate clusters of values, with the unit rate of the highest priced comparable (Comparable A2/R4) being over 4 times that of the lowest priced comparable (Comparable R2).

24. Similarly, the sizes of these 7 comparables range very widely, with the largest sized comparable (Comparable R3) being almost 5 times that of the smallest sized comparable (Comparable A3/R5). What is even more important, from a valuation point of view, is that the size of Tai Ho Road Property is 6.7 times the size of two comparables (Comparables A2/R4 and A3/R5). Also, the size of Tai Ho Road Property is about 3.7 times that of Yeung Uk Road Property. For ease of reference, one of the tables in "Table C" attached to the outline submission of the counsel for the Respondent is reproduced below:

25. Mr. Lee gave evidence that, since location was the most important factor, the most suitable comparables should be Comparables R1, A2/R4 and A3/R5. However, Mr. Lee considered that since Comparable R1 was not an arms-length transaction, it should not be taken as a suitable comparable. As for the remaining 4 comparables, Mr. Lee commented that Comparables R2 and R3 were not suitable as they were further away from the Properties. On the other hand, Mr. Lee did not consider that Comparables A2 and A4 could not be used as suitable comparables although they were situated in a much better locality in terms of retail potential and pedestrian flow and were also some distance away from the Properties, though as not further away as Comparables R2 and R3.

26. Therefore, it was Mr. Lee's primary view that Comparables A2/R4 and A3/R5 were the best comparables. This opinion was however dismissed by the Applicant on the ground that these 2 comparables happened to be the comparables with the smallest saleable floor areas. The Applicant submitted, "The two tables presented at Table C demonstrate the near linear relationship between increasing size and decreasing unit rate for the relevant comparable properties." Therefore, these 2 common comparables are, submitted the Applicants, "unsuitable for consideration in a valuation of LDLR 7 (Tai Ho Road) simply by virtue of their size. The other two small shops (A-1 and A-4) were, in effect, rejected by Mr. Lee himself."

27. Counsel for the Respondent in his final submission further criticized Mr. Lee's valuations by asking the Tribunal to look at the matter overall by comparing Mr. Lee's valuation of $13.4 million for Tai Ho Road Property with the adjusted consideration of all the Comparables, in the range of $4 to $5.5 million; and by comparing Mr. Lee's valuation of $3.8 million for Yeung Uk Road Property with the adjusted consideration of all the Comparables in the range of $2 to $3.2 million. The question posed to the Tribunal is, submitted the Respondent, whether it is appropriate to arrive at the valuation figures of $13.4 million and $3.8 million for the two Properties in these 2 cases when the adjusted consideration of all the comparables considered by Mr. Lee for the Applicants were of much lower order range.

28. On the other hand, although Mr. Lai in his valuation report used, analyzed and adjusted all his 5 comparables in arriving at the adjusted unit rates, he agreed during the hearing that since size was a significant factor in the pricing of comparable shop properties, Comparable R1, being located in close vicinity to the Properties and having a size in between the Properties, should be the best comparable for both. Mr. Lai disagreed entirely with Mr. Lee on the latter's opinion that Comparable R1 should be rejected on the ground that it was not an arms length transaction.

29. Mr. Lee did not agree with Mr. Lai's approach of relying on the single, "best" comparable, Comparable R1. In the final submission, counsel for the Applicants submitted, "RW's view of using just a single comparable in the final valuation calculation is unsafe, risky and unreliable." Also, it was submitted that although Mr. Lai accepted that averaging a few suitable comparables after adjustment was a common practice and could "even out' some judgmental errors, he did not follow this common approach.

Whether Comparable R1 should be rejected as a suitable comparable?

30. Mr. Lee opined that Comparable R1 should not be accepted as a suitable comparable for the following reasons:

(a) the purchaser was a sitting tenant, who was therefore considered to be a special purchaser since a sitting tenant would have special knowledge about the property which an ordinary purchaser would not have;

(b) the sale and purchase of the comparable property was subject to an unknown number of tenancies which might have significant effect to the value of the property; and

(c) the transacted price was below the market value level as assessed by Mr. Lee.

31. Therefore, the Applicant submitted that even if the Tribunal would not accept the opinion of Mr. Lee, the transaction of Comparable 1 should be appropriately adjusted to reflect the uncertainties caused by the unknown number of tenancies that affected the cockloft portion of the property.

32. Mr. Lai took very different view from those of Mr. Lee. Mr. Lai considered that even if Mr. Lee was right, that the purchaser of Comparable R1 was the sitting tenant, it did not follow that the transaction was not at arms length. He said from his experience, quite a high percentage of ground floor shop transactions were between the owners and their sitting tenants. He did not think that the sitting tenants per se should be treated as special purchasers.

33. After careful consideration of the different opinion of the 2 experts, I agree with Mr.Lai's view on the possible sitting tenant transaction of Comparable R1. Also, I do not agree that the existence of tenancies in the cockloft of the property would have any significant effect on the price of the property and the analyzed unit rate. Finally, I disagree that the transacted price was apparently out of line with the other comparables. Therefore, I decide that Comparable R1 should not be rejected on the outset. On the contrary, having regard, in particular, to the closeness in location of Comparable R1 and the Properties, as well as the moderate size of Comparable R1, compared with the Properties and all the other comparables, I find that Comparable R1 should be one of the best comparables, if not the only best.

A summary of the choice of the best comparables by the Tribunal

34. Firstly, I find that after careful consideration of the location of the comparables, I agree with Mr. Lai that Comparables A1 and A2 should be rejected as they are situated in a much superior location in terms of pedestrian flow and trade potential.

35. Then, I also ask myself if Comparables R2 and R3 should be rejected because of their distances from the Properties. I find that, unlike that of Comparable A1 and A2 the character of the area of these two comparables is not too dissimilar to the area of Tai Ho Road and Yeung Uk Road. Therefore, I agree to retain these two comparables.

36. Next, I find that in valuing shop premises, very substantial difference in size must be an important factor that cannot not be sufficiently taken care of by adopting a certain adjustment percentage. This is because for shops with a substantial difference in size, they are very likely to be suitable for uses and particular types of trades requiring different pedestrian flow and retail trade potential. Sometimes, these differences may also reflect the fact that the shops are more suitable for certain higher order trades or not. Therefore, I decide that for Tai Ho Road Property, the small size shops of A1, A2/R5, A2/R4 and A4 should be excluded as suitable comparables.

For LDLR 4 of 2002

37. Based on my findings above, after eliminating Comparables A1 and A4, the remaining comparables, Comparables A2/R4, A3/R5, R1, R2, R3 will be analyzed and adjusted.

For LDLR 7 of 2002

38. Because of the large size of Tai Ho Road Property, in addition to the elimination of Comparables A1 and A4, the other small sized comparables, Comparable A2/R4 and A3/R5 will also be discarded, thus leaving Comparables R1, R2 and R3 for analysis and adjustments only.

Adjustments of the adopted comparables for the Properties

For LDLR 4 of 2002

39. I set out below the various adjustments to the comparables I adopt for the purpose of arriving at an appropriate unit rate for each of Yeung Uk Road Property.

40. Hence, the unit rates of the adopted comparables are adjusted using the above total adjustment percentages, as follows:

41. The above analysis shows that, notwithstanding the adoption of very large total adjustments of some comparables, the end results of the chosen 5 comparabes still fall into two ends, though not as wide apart as before. However, in view of the closeness in location of Comparables A2/R4 and A3/R5 to Yeung Uk Road Property and the overall limited number of comparables overall, I decide that instead of discarding these 2 comparables as opined by Mr. Lai and submitted by the Respondent, an average of the adjusted unit rates of all the above 5 comparables should be adopted for the valuation of Yeung Uk Road Property. This I calculated to be be $89,824 per sq.m.

For LDLR 7 of 2002

42. Similarly, the adjustments of the comparables adopted for Tai Ho Road Property are made and set out below.

43. Hence, the unit rates of the adopted comparables for Tai Ho Road Property were adjusted using the above total adjustment percentage, as follows:

44. The adjusted unit rates of the adopted 3 comparables fall within a narrow range with an average of $68,889 per sq.m. This will be used below in the valuation of the open market value of Tai Ho Road Property on vacant possession basis. Before that, I sum up below the various factors of adjustments for the comparables and the levels adopted by the Tribunal.

Adoption of the factors and levels of adjustments to the comparables chosen by the Tribunal

45. With the exception of the factors of building age and layout, the 2 experts agreed on the other factors for which adjustments should be made to the comparables in the valuation.

Building Age

46. This is a major area of dispute between the experts as to whether an adjustment to the comparables should be made. They differed in their opinion as to whether building age should be a relevant factor in making adjustment for ground floor retail shop space. Having read their reasons in their valuation reports supplemented by their oral evidence, I decide that for shops of the nature of the resumed Properties in Tsuen Wan district, vis-à-vis the comparables, there would not be any need to discount for the differences in the age of the buildings of which the shops in question formed parts. In my view, the values of these shops were not dependent on the age of their buildings.

Location

47. Another area of even greater differences is the factor of location between the Properties and the comparables adopted by the parties. Although the two experts basically agreed, for each of their analysed comparables, on the direction of adjustments, they differed much in opinion in the extents of the adjustments. Also, more fundamentally, they had disputes as to whether Tai Ho Road Property enjoyed a better location than Yeung Uk Road Property, or vice versa. This is a difficult area for me to adjudicate, especially notwithstanding that we had a joint site inspection in the beginning of the hearing held in January 2003, the Properties have been demolished sometimes ago and the entire area designated for urban renewal was left vacant as at the date of valuation. In the circumstances, I am therefore conscious of the evidence by both experts that the state of pedestrian flow as observed during our site inspection did not necessarily reveal the situation at the relevant valuation date.

48. Having considered all the evidence, I find that it is more likely than otherwise that Tai Ho Road Property was at the relevant valuation date enjoying a more or less the same location attributes as Yeung Uk Road Property in so far as the pedestrian flow and retail potential were concerned. I agree and adopt Mr. Lai's adjustments for Yeung Uk Road Property and apply the same percentage of adjustments to the comparables for Tai Ho Road Property.

Time

49. Regarding the time adjustments to the comparables, the adjustments by the two experts were close. I agree with the Applicant's submission that since Mr. Lee's adjustments were based on the index provided by the Rating & Valuation Department whilst Mr. Lee's adjustments appeared to be based on his experience, Mr. Lee's figures were preferred.

Headroom

50. Similarly, whilst the adjustments for this factor were close and within reasonable range between the two experts, I accept Mr. Lee's figures because I find that given the large full headroom (i.e. including the unauthorized cocklofts) difference between Yeung Uk Road Property and Tai Ho Property, there was no difference in Mr. Lai's adjustments to the comparables he analysed.

Frontage

51. The experts' estimated figures were quite close. I adopt Mr. Lee's figures as they appear to be more reasonable.

Size

52. The experts' adjustments were in the same direction but different in extents. I adopt Mr. Lai's adjustments for Comparables R1, R2 and R3 for Tai Ho Road Property. As the differences between the comparables and Yeung Uk Road Property are more profound, I consider that higher adjustments should be made. On the contrary, I find that Mr. Lai's adjustments for Comparables A2/R4 and A3/R5 should be reduced. I allow a similar proportional level of adjustments for these 2 comparables, based on the adjustments adopted for other comparables in both cases.

Layout

53. The Properties and all the comparables were all roughly rectangular in shape. I agree with Mr. Lai that no separate adjustment to the layout factor is warranted.

Estimation of the open market values of the Properties on the basis of vacant possession

For LDLR 4 of 2002

54. Applying the average adjusted unit rate of Comparables A2/R4, A3/R5, R1, R2 and R3 for Yeung Uk Road Property, in the sum of $89,824 per sq.m. to the agreed effective saleable area of the property, the open market value of the property on vacant possession basis is calculated, as follows:

= 27.04 sq.m. x $89,824 per sq.m.

= $2,428,841

For LDLR 7 of 2002

55. . Similarly, applying the average adjusted unit rate of Comparables R1, R2 and R3 for Tai Ho Road Property, in the sum of $68,889 per sq.m. to the agreed effective saleable area of the property, the open market value of the property on vacant possession basis is calculated, as follows:

= 99.97 sq.m. x $68,889 per sq.m.

= $6,886,833

Valuation for the term interests of the Properties

56. The valuation of the term interests by Mr. Lai of (a) Yeung Uk Road Property was $41,308; and (b) Tai Ho Road Property was $354,066 whereas those of Mr. Lee of (a) Yeung Uk Road Property was $39,916; and (b) Tai Ho Road Property was $335,088. Despite of the small and insignificant differences, the experts could not agree on their valuation.

39. The differences between the experts on the capitalization rates of the term interests of the Properties have been discussed in an earlier section on the Occupational Status of the Properties. For Yeung Uk Road Property, I find that since the level of the rent reserved is very much lower than the market yield of 8%, a capitalization rate of 6%, which is even lower than Mr. Lai's suggested 7%, should be used.

57. As for Tai Ho Road Property, since its open market value has been estimated to be about $6.9 million, the monthly rent reserved of $60,000 per month was equivalent to about 10.4%. This, when compared with the market yield of 8% confirms that the said reserved rent was higher than the market level, though not substantially higher than the market rent, as opined by Mr. Lai. In the circumstances, I find that a rate of 9%, which is higher than the market rate of 8% but less than Mr. Lai's adopted rate of 10%, should be used for the capitalization of the term interest of Tai Ho Road Property.

58. In addition, Mr. Lee stated that although Mr. Lai's valuation were calculated on the assumptions that "the monthly rents were receivable in arrears at the end of each month whereas in reality they were conventionally received in advance at the beginning of each month." However, since the results of the valuations were insignificant, Mr. Lee said that Mr. Lai's assumption was not disagreeable.

59. Therefore, using the above adopted capitalization rates for the Properties and the more simple method of Mr. Lai, the value of the Properties' term interests for the first 6 months were estimated below, as follows:

Estimation of the open market values of the resumed Properties, on the basis of subject to tenancy

60. Based on the above estimates of the open market values of the Properties on vacant possession, and the agreed discounting rate of 8% p.a., the agreed discounting period of 6 months, the present value of the reversionary interests of the Properties are calculated below. After adding the estimated values of the term interests of the Properties to the present values of the reversionary interests of the Properties, the open market values of the Properties on the basis of subject to the existing tenancies at the relevant valuation date are obtained, as follows:

Orders

For LDLR 4 of 2002

61. Accordingly, I order that the Respondent do pay the Applicant compensation for Yeung Uk Road Property in the sum of $2,378,000 (Hong Kong Dollars Two Million Three Hundred Seventy Eight Thousand). The matters of professional fees, interest and costs be adjourned to a date to be fixed by the Assistant Registrar, with liberty to apply for any other ancillary and consequential matters.

For LDLR 7 of 2002

62. Accordingly, I order that the Respondent do pay the Applicant compensation for Tai Ho Road Property in the sum of $6,965,000 (Hong Kong Dollars Six Million Nine Hundred Sixty Five Thousand). The matters of professional fees, interest and costs be adjourned to a date to be fixed by the Assistant Registrar, with liberty to apply for any other ancillary and consequential matters.