SNOWLAND LTD v. DIRECTOR OF LANDS

LDLR 2/2014

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND RESUMPTION APPLICATION NO 2 OF 2014

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J U D G M E N T

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Background

1.  This is an application by the applicant for determination of compensation pursuant to section 10(2)(a) of the Lands Resumption Ordinance, Cap 124 (“the LRO”).  The applicant is the former registered owner of a property known as Shop A2 on Ground Floor, No 78 Fa Yuen Street, Kowloon, Hong Kong (“the Property”), then being 60/212 of 2/12^th equal and undivided shares of and in the Remaining Portion of Kowloon Inland Lot No 3327 (“the Lot”) on which a 6-storey building (“the Building”) was erected.

2.  By virtue of an assignment dated 26 June 1997 registered in the Land Registry vide memorial UB7177913 (“the Assignment”), the applicant acquired the Property which was then subject to a tenancy agreement for 3 years dated 16 June 1997 and a Sub-Deed of Mutual Covenant dated also 26 June 1997. By reference to the plan attached to the Assignment (“the Assignment Plan”), a copy of which is shown as Appendix I hereof, the Property appears to be one of the four shops on ground floor of the same building.

3.  Although the Assignment Plan was signed by an architect, it was stated to be “for identification purpose only”.

4.  By reference to a witness statement dated 30 January 2015 made by Mr Lee Bing Fai, Stephen (“Mr Lee”), a director and shareholder of the applicant, the applicant’s major business is property investments and holdings. Excluding the Premises, the applicant holds 9 landed properties in Hong Kong, 7 of which are retail/shops and 2 of which are residential.

5.  The applicant acquired the Property for investment purpose and had it let out from time to time as a shop unit; the last tenancy of the Property was from 12 July 2010 to 11 July 2011 at a monthly rent of $155,000 exclusive of rates and management fee.

6.  Then in about the end of 2007, the Urban Renewal Authority (“URA”) began to implement Project K28 (“the Project”) which covered redevelopment of area in Mong Kok, Kowloon in which the Building was situated. According to a press release dated 21 December 2007, the project covered a site area of about 26,500 sq ft bounded by parts of Sai Yee Street, Nelson Street and Fa Yuen Street. Subsequently the URA made two offers to acquire the Property from the applicant which were all rejected.

7.  By a notice of resumption dated 27 January 2011 and published in GN 1102, the Government informed the applicant that the Property would be resumed for the Project after expiration of 3 months from the date of affixing of the notice.  The notice of resumption was affixed to the Premises on 18 February 2011 and therefore the Premises reverted to the Government at midnight on 18 May 2011.

8.  The Government made the offer of $55,141,000 on 10 June 2011 to the applicant, which includes the value of the Property at $53,485,000. By a letter dated 18 August 2011 issued by Savills Valuation and Professional Service Limited (“Savills”) acting on behalf of the applicant, the applicant accepted the provisional payment in the sum of $53,485,000 without prejudice to its right to refer the matter to the Lands Tribunal in accordance with the Ordinance.

9.  By a letter dated 1 March 2013, the Government made a revised offer to the applicant which was also not accepted. Then on 19 June 2014, the applicant filed a Notice of Application to Determine Compensation for Land Resumed under the LRO requiring the Lands Tribunal to determine the amount of compensation payable in respect of the resumption of the Property.

Applicant’s Entitlement to Compensation

10.  It is not in dispute that the Ground Floor of the Building was altered in that it was sub-divided into a number of units with the Property being one of them.  And it is also trite that no compensation is payable for any unauthorized or illegal structures.  The subdivision was inconsistent with the Approved Plan and the Occupation Permit which show that the Ground Floor should comprise only 1 single unit without any subdivision and should be used as 1 shop for non-domestic use.

11.  Mr Anthony Ismail (“Mr Ismail”), counsel for the respondent, submitted that the Property is the result of the sub-division which, being an alteration and addition to the Ground Floor not in line with the Approved Plan and in breach of the Occupation Permit, was an unauthorized or illegal structure. 

12.  In support of this contention, Mr Ismail highlights the partition wall, ie the thick black line as shown on the Assignment Plan dividing the Property from its adjoining Shop C and contends that it appears to be a solid wall when compared to the thick black line right next to the column (which is also in black). According to Mr Ismail, they are clearly permanent and fixed because they existed since the applicant purchased the Property on 26 June 1997 and the structures including the Property were used as shops for commercial gain.

13.  According to section 2(1) of the Building Ordinance (“BO”), “building works includes any kind of building construction, site formation works, ground investigation in the scheduled areas, foundation works, repairs, demolition, alteration, addition and every kind of building operation, and includes drainage works” (underline added). Mr Ismail submitted that the Property, being alteration and addition to the Ground Floor, constitutes “building works” which require the approval of the Building Authority (“BA”).  But there is no evidence showing that prior approval has been obtained for such partition under section 14(1) of the BO which provides that:

“(1) Save as otherwise provided, no person shall commence or carry out any building works or street works without having first obtained from the Building Authority—

(a) his approval in writing of documents submitted to him in accordance with the regulations; and

(b) his consent in writing for the commencement of the building works or street works shown in the approved plan.”

14.  Mr Ismail submitted therefore that the aforesaid sub-division of the Ground Floor and the alleged addition of a solid wall constituted a breach of the Occupation Permit and the Approved Plan of the Building as well as a contravention of section 14(1) of the BO which is a criminal offence under section 40(1AA) of the BO.  Hence, the Property was an unauthorized or illegal structure and no compensation should be awarded for such unauthorized/illegal structures pursuant to section 12(c) of the LRO which reads:

“no compensation shall be given in respect of any expectancy or probability of the grant or renewal or continuance, by the Government or by any person, of any licence, permission, lease or permit whatsoever:

Provided that this paragraph shall not apply to any case in which the grant or renewal or continuance of any licence, permission, lease or permit could have been enforced as of right if the land in question had not been resumed.”

15.  Mr Ismail also referred to the Government Lease in respect of the Lot. While the Government Lease is generally unrestricted save for the usual “offensive trades clause”, Mr Ismail submitted that any amendment to the Property must be done to the satisfaction of the Director of Public Works, ie the predecessor of the BA. In particular, Mr Ismail relied on the following of the Government Lease:

“... and keep the messuages or tenements and all other erections and buildings now or at any time hereafter standing upon the said piece or parcel of ground hereby expressed to be demised and all the Walls, ... Cuttings ... hereunto belonging and which shall in any-wise belong or appertain unto the same in by and with all and all manner of needful and necessary reparations cleansings and amendments whatsoever the whole to be done to the satisfaction of His said Majesty’s Director of Public Works ...” (underline added)

16.  Mr Ismail submitted therefore that the Property was an amendment to the Building that was not to the satisfaction of the Director of Public Works/ BA because the latter did not authorize it or permit the occupation of more than 1 shop on the Ground Floor. It was in breach of the Government Lease and under section 12(b) of the LRO, “no compensation shall be given in respect of any use of the land which is not in accordance with the terms of the Government lease under which the land is held.”

17.  Therefore, it is the stance of the respondent that the applicant has not proven that it is entitled to claim compensation because it has not adduced any evidence that the Property is authorized and/or is not in contravention of the Government Lease.

 Discussion

18.  We are surprised that the respondent has taken the stance above as the Property is clearly registered in the Land Registry as comprising 60/212 of 2/12^th equal and undivided share of the Lot with the right to exclusive use, occupation and enjoyment of a space identified as Shop A2 on Ground Floor of the Building.[1] The existence of the space in question being a three-dimensional quantum cannot be denied by the presence or absence of the partition wall, irrespective of its legality or otherwise.  What the respondent had suggested is that the owner of the Ground Floor shop is entitled to compensation for the property as 1 shop but due to the adding of the partition walls sub-dividing the 1 shop into 4, the Government shall not be liable to pay any compensation on resumption.  This is ridiculous.

19.  Thus, we agree with the submission of Ms Nancy Ngai (“Ms Ngai”), counsel for the applicant, that the applicant being the former owner of the Property since June 1997, holding the legal and beneficial interests therein immediately prior to the reversion should be entitled to compensation under the Ordinance.

20.  As regards the allegation of erection of the partition wall in contravention of the BO, this would not affect the value to be attributable to the user of the space at all. This is in particular nothing to do with the entitlement of the applicant to compensation.  The applicant is being compensated for the Property and the added partition wall is just one of the walls of the Property.  It would be against the intention of the LRO, ie to provide fair compensation for a claimant whose land has been compulsorily taken from him, if the applicant is deprived of its entitlement to compensation for the Property just because of 1 added partition wall.  The Property itself is not an unauthorised structure and should be entitled to compensation.

21.  Turning to the “thick black line” shown on the Assignment Plan, it, by itself, is far short of evidence that it amounts to “building works” which require the approval of the BA.

22.  On the one hand, the Assignment Plan was stated to be “for identification purpose only”. As pointed out by Ms Ngai, there are other discrepancies that the Assignment Plan differs from the Approved Plan and it is unlikely that the Assignment Plan shows the true representation of the on-site situation.

23.  Save for the Assignment Plan, no evidence has been proffered by the respondent to show that the partition wall constituted an unauthorized or illegal structure as alleged. Under section 41(3) of the BO, “building works (other than drainage works, ground investigation in the scheduled areas, site formation works or minor works) in any building are exempt from sections 4, 9, 9AA, 14(1) and 21 if the works do not involve the structure of the building.”  We find the partition wall was obviously in the Building serving as a demarcation of the boundary of the sub-divided unit and unlikely to have involved the structure of the Building, hence likely to be exempted and no approval from the BA was required.

24.  Mr Ismail had invited this Tribunal to draw adverse inference against the applicant since the applicant has proffered no evidence on the issue. However we are hesitant to draw any adverse inference against the applicant. The relevant principles for drawing adverse inference was considered by the Court of Appeal in Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd, CACV 90, 91, 93, 94, 95 and 96/2012 (unreported, dated 17 September 2013). At §111 of the judgment, the Court of Appeal confirmed that “There must be a reasonable basis for some hypothesis in the evidence or the inherent probabilities, before a court can draw useful inferences from a party’s failure to produce a particular witness.” But here we take judicial notice that partition wall in or inside the premises particularly on Ground Floor like the Property is usually an exempt structure under the BO. See, for example, Octorich Limited v Liu Sin Ming & Another, HCMP 977/1992 (unreported, dated 1 June 1993) and Dei Chuen Ho Industrial Ltd v Leung Yin Por [1993] 2 HKC 495.

25.  In Wing Hong Investment Company Limited v Fung Sok Han & Others, [2016] 1 HKLRD 1, the defendants there also claimed that the plaintiff in that case had converted the ground floor carport into shops in contravention of the BO. Honourable Judge Chan of the High Court found there is no provision in the BO to suggest it is an offence to adopt a user of premises which is materially different from that stated in the Occupation Permit (at §235). Thus the allegation by Mr Ismail on the non-conformity of the Property with the occupation permit of the Building is a non-issue.

26.  Mr Ismail also refers to the Court of Final Appeal decision in Director of Lands v Yin Shuen Enterprises Ltd & Another, (2003) 6 HKCFAR 1 (“Yin Shuen”) which draws a distinction between licences etc which are capable of affecting the value of the interest taken and those which are not ( at §45).   

27.  We find the grant or refusal of the approval by the BA concerning the partition wall cannot affect the intrinsic value of the Property since the need to obtain building approval did not affect the value of the Property as the use for non-domestic purposes is allowed.  Section 12(c) of the LRO has no application under such circumstances.

28.  With regard to the breach of the Government Lease, we would similarly rule that, in case the construction of the partition wall has “to be done to the satisfaction of” the Director of Public Works, ie the predecessor of the BA, under the Government Lease, it does not fall within the scope of section 12(c) of the LRO, because it does not affect the right of the applicant to the construction if the condition is satisfied (See §48 of Yin Shuen). In addition, we agree with Ms Ngai that this general provision in the Government Lease must be distinguished from requiring the lessee or the applicant in this case to comply with the BO. Furthermore, we find section 12(b) is not applicable since the respondent is not alleging a breach of any use of the land.

29.  Thus, in view of the analysis above, we hold that the applicant is entitled to claim compensation under the LRO in respect of its ownership of the Property as at the date of resumption.

Interest and Professional Fees

30.  To the extent that the applicant’s entitlement to compensation has been determined, the applicant and the respondent have no dispute that under section 10(2)(a) of the LRO, the basis of compensation should be the market value of the Property as at the date of resumption, ie 18 May 2011. However, they cannot agree on the quantum.

31.  Initially, Ms Ngai, submitted that the Tribunal should also deal with and determine the issue of interest under section 17(3) of the Ordinance at the trial. This is however disposed of by our decision handed down on 14 April 2016. That is, we shall proceed to determine the amount of compensation payable in respect of the resumption of the Propertybefore the amount of interest and professional fees under section 17(3) and 10(2)(e)(ii) respectively of the LRO being also claimed by the applicant could be settled.

The Evidence

32.  For the purpose of the present application, the applicant 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 21 November 2014 by Mr Patrick Lai (“Mr Lai) for the respondent;

(2) Valuation Report dated 30January 2015 by Mr Charles Chan (“Mr Chan) for the applicant;

(3) SupplementalReport dated 27February 2015 by Mr Lai;

(4) Rebuttal Report dated 28 April 2015 by Mr Chan;

33.  Mr Chan and Mr Lai have also prepared a joint expert statement and supplemental joint statement dated 11January 2016 and 31 March 2016 respectively setting out the areas of agreement and disagreement. More particularly, by virtue of the latter, the two experts agree that the market value of the Property would be assessed by direct comparison of sales comparables on the basis of vacant possession despite that, as at the date of resumption, the Property was subject to a tenancy agreement with less than 2 months unexpired.

34.  However, dispute between the parties arose when on 11 April 2016 the applicant sought leave to produce Mr Chan’s amended assessment of open market value of the Property with support of an additional letting of a shop unit situated opposite to the Property (hereinafter referred to as Comparable T9) and a so-called cross checking of the market value by Income Capitalisation Method.

35.  The respondent objected to the production because it was too late and the Income Capitalisation Method took the respondent by surprise.

36.  Clearly this is a late application. However, having heard the submissions of the parties and reviewed the various valuation reports submitted by the experts, we granted leave for the applicant to produce the new evidence which has been inserted into the hearing bundle (Bundle B/84(a)-84(d) refers). We have indicated that reasons for this ruling would be included in the final judgment. This we now do.

37.  Firstly, having regard to the underlying objectives in Order 1A of the RHC, the pertinent consideration is “the court shall always recognize that the primary aim in exercising the powers of the Court is to secure the just resolution of disputes in accordance with the substantive rights of the parties” (Order 1A rule 2(2) RHC).

38.  The Tribunal considered that the valuation result would highly likely be influenced by the introduction of the new comparable or the justice in the present case could not be up-held because some useful evidence was barred from being disclosed.

39.  In the present case, this Comparable T9 is not totally new as Mr Lai later pointed out in his Rebuttal Report dated 13 April 2016 which we granted leave to produce that it is in fact the Reference Shop submitted in the Table at Para 3.3 in the Rebuttal Report by Mr Chan. What is new are the particulars of its letting ranging from the offer letter to the landlord dated 13 July 2011 to a former tenancy agreement dated 16 September 2011.

40.   And as explained by Ms Ngai, this comparable is situated at close proximity to the Property and the letting occurred very close to the date of resumption. We consider this comparable has a high probative value and probably has an important influence on the result of the case.

41.  As regards the inclusion of the Income Capitalisation Method, we consider this is not new and do not agree that the respondent should be taken by surprise. In the Valuation Report dated 30 January 2015, Mr Chan, while at §7.3 resorting then to the term and reversion method in arriving at his valuation of the market value of the Property at $89,900,000, added in the end that “(b)y applying a 2.5% yield on the reversionary value (which was derived by the Direct Comparison Method), the market rent would be about $187,292/month ....” We consider this latter would be just an application of the Income Capitalisation Method in reverse for checking purpose.

42.  A fortiori, in the supplemental joint statement dated 31 March 2016, there is a section called “Cross Checking of Open Market value by Income Capitalisation Method”. In this section, Mr Chan had already indicated that he would make referenceto rental comparables (T1-T5) [2] for cross checking valuation while Mr Lai remarked that “(t)he rental evidence served no useful purpose in the valuation analysis since the market value of the Property as assessed using the Direct Comparison Method was adopted in assessing the value of the reversionary interest.”.

43.  Thus, we are satisfied that the respondent or his expert, Mr Lai, should have been alerted of the application of Income Capitalisation Method by Mr Chan for cross checking purpose; the introduction of, for instance, Bundle B/84(d) only differs from the original application at §7.3 of the Valuation Report dated 30 January 2015 in presentation. Of course, where Comparable T9 is allowed to be added, Mr Chan should be at liberty to make the necessary consequential amendments.

44.  In Lingrade Development Limited v Secretary for the Environment, Transport and Works, CACV 295/2008 (unreported, 26 June 2009), Mr Ismail who happened to appear for the same respondent here argued successfully before the Court of Appeal that the Tribunal was entitled to "...award damages based on its own valuation method..." based on the evidence placed before the Tribunal. Thus, even if Mr Chan has not taken the trouble to introduce Bundle B/84(d) and other consequential amendments resulted from the addition of Comparable T9, the Tribunal would be in the position to award damages on its own valuation method based on the evidence submitted.

45.  Indeed, such an approach has been consistently applied by the Tribunal (See Hongda Container Limited v The Secretary for Transport, LDMR 7/2000 (unreported, 4 June 2002) and Dr Lui Tat Hing v The Director of Lands, LDLR 1/1998 (unreported, 14 January 2000).

46.  Thus, after hearing submissions, we were satisfied that allowing the late application would cause no prejudice to the respondent provided that we gave a further day to allow Mr Lai to prepare a Rebuttal Report which he did on 13 April 2016.

47.  At the beginning of the trial on 11 April 2016, Mr Chan, after the amendments as allowed by us above, revised his opinion of market value of the Property to $92,000,000 instead of $89,900,000. His valuation based on the Income Capitalisation Method was $112,163,238. On the other hand, Mr Lai has not revised this valuation at $58,692,000 in spite of the preparation of a joint expert statement and supplemental joint statement dated 11 January 2016 and 31 March 2016 respectively. But at the beginning of the trial, Mr Lai saw fit to revise his valuation to $57,852,000.

48.  It is deplored that when Mr Chan began to give evidence on 14 April 2016, he revised his valuation again to $105,132,852 on the excuse that he had reviewed his valuation particularly on seeing the comments on location by Mr Lai in his Rebuttal Report of 13 April 2016 and taking into account the new evidence of Comparable T9. Mr Chan had submitted his revised assessment and marked as Exhibit A2 and A3 respectively. 

49.  Mr Ismail criticised that the latter was only a pretext of Mr Chan because when he introduced new evidence of Comparable T9, he maintained that this comparable and the Income Capitalisation Method were only used for cross-checking his valuation arrived by the Direct Comparison Method as agreed in the joint expert statement and supplemental joint statement dated 11 January 2016 and 31 March 2016.

50.  In the present case, Mr Chan’s revised valuation as at 11 April 2016 was $92,000,000 based on the Direct Comparison Method but his valuation based on the Income Capitalisation Method was $112,163,238, ie a difference of about 22%. This should be a matter of concern for the valuer though it may not necessarily lead to that the value arrived at by direct sales comparison was not reliable and should be abandoned.

51.  Be that as it may, we do not see any reason to bar an expert from changing his opinion upon trial bearing in mind the underlying objective under O.1A r.2(2) RHC. In particular, we have to accept the change in opinion as produced at Exhibits A2 and A3. In any event, when we discuss the location adjustment for the comparables below, we find the revision by Mr Chan is justifiable in seeing the comments/ criticism made by Mr Lai in his Rebuttal Report of 13 April 2016.

Particulars of the Property

52.  As said, the Property comprised one of the four shop units on ground floor of the Building which is situated at the junction of Fa Yuen Street within the busiest hub of the Mong Kok shopping district. Indeed, it is not disputed that this portion of Fa Yuen Street is famous for selling sportswear, sports shoes etc gaining its fame as “the Sneakers Street”. According to the homepage of the Hong Kong Tourism Board, “Fa Yuen Street is where Hong Kong’s image-conscious youth have come to get their statement-making footwear since the 1980s. They come for the latest designs and limited-edition releases from all over the world...” According to the photo included in the Valuation Report dated 30 January 2015 by Mr Chan, the Property was occupied for selling Nike’s sports shoes as at the date of resumption.

53.  Nevertheless, the Property was not exactly situated at the corner of the streets after the sub-division though, by reference to the photos and floor plans exhibited, its frontage to Fa Yuen Street should have been readily visible by pedestrians walking east along Nelson Street[3], for instance from a popular exit of the Mong Kok station of the Mass Transit Railway.

54.  The other particulars of the Property, inter alia, are agreed, between the parties as per the supplemental joint statement dated 31 March 2016 as follows:

	Saleable Area	:	29.16 sq m
	Full Frontage	:	3.30 m
	Floor to Floor Headroom	:	5.00 m
	Clear Frontage	:	2.49 m
	Clear Headroom	:	4.90 m

Comparables for Direct Comparison Method

55.  Pursuant to the supplemental joint statement, the two experts agree the following comparables to be adopted for valuation on direct sales comparison basis:

Ref No	Address	Date of Transaction	Consideration	Saleable Area (sq m)	Full Frontage (m)	Clear Headroom (m)
AC1/RC2	Unit 6, G/F, Hung Tat Building, 55 Dundas Street	24 Mar 11	$24,800,000	9.44 + Cockloft: 7.89	1.80	5.22 From G/F to ceiling Cockloft
					Return Frontage 5.3m to a service lane
AC2	Shop 5, G/F, 60 Sai Yeung Choi Street South	1 Mar 11	$71,800,000	13.17	2.70	2.52
AC4/RC4	Unit 72, G/F, Hong Lok Mansion, 90-92 Sai Yee Street/ 72-78 Argyle Street	30 Sep 10	$76,800,000	35.41	7.7 to Sai Yee Street	3.82
					Return Frontage 4.7m to Argyle Street
RC1	Shop G7, G/F, Sincere House, 83 Argyle Street	14 Oct11	$34,500,000	18.16	2.46	3.96
RC3	Shop 6, G/F, Golden Hill Commercial Building, 39-41 Argyle Street	8 Mar 11	$35,400,000	17.64	4.04	5.36

* The comparables with the prefix “AC” are those adopted by Mr Chan whereas the comparables with the prefix “RC” are those adopted by Mr Lai.

56.  Thus, while two parties have altogether 5 comparables, the two experts have only two comparables in common, being AC1/RC2 and AC4/RC4.

57.  The two experts have also set out the adjustment factors that they agreed to be relevant for the purpose of valuation as follows:

Adjustment Factors	Mr Chan	Mr Lai
Time	Private Retail Price Index of Rating and Valuation Department (“RVD”)	Private Retail Price Index of RVD
Location	-35% to 25%	-5% to 5%
Age	0%	Not Applicable
Quantum/Size	2% for every 5 sq m for the first 50 sq m then 1% for 10 sq m after the first 50 sq m	1% for every 2 sq m difference
Layout	0% to 10%	Not Applicable
Return Frontage	-20% to 0%	Not Applicable
Frontage	Not Applicable	4% for every 1 m difference in clear frontage
Headroom	1% for every 0.3m difference in clear headroom	2% for every 1 m difference in clear headroom
Total Adjustments	The total adjustments are multiple of the adjustments for each of the factors	The total adjustments are sum of the adjustments for each of the factors

58.  Thus, prior to the amendment by Mr Chan on 14 April 2016, his adjustments proposed and those of Mr Lai (in parentheses) are as follows (as extracted from B/84c and B/123A):

Ref No	Unit Price (/sq m)	Adjustments								Adjusted Unit Price (/sq m)
		Time	Location	Quantum	Layout/ Return Frontage	Frontage	Head-room	Cock-loft	Total
AC1/RC2	$2,627,119* ($2,173,532)	3.4% (3.4%)	10% (0%)	-8% (-8.9%)	10% (0%)	0% (3.1%)	-1% (1.4%)	-3% (0%)	10.5% (-1.0%)	$2,902,966 ($2,151,797)
AC2	$5,451,784	3.4%	-35%	-6%	0%	0%	8%	0%	-31.8%	$3,718,117
AC4/RC4	$2,168,879	19.9% (19.9%)	25% (5.0%)	3% (3.1%)	-20% (0%)	0% (-28.8%)	4% (2.2%)	0% (0%)	28.4% (1.4%)	$2,784,841 ($2,199,243)
RC1	($1,899,780)	(-5.7%)	(-5%)	(-5.5%)	(0%)	(1.9%)	(1.9%)	(0%)	(-12.4%)	($1,664,207)
RC3	($2,006,803)	(3.4%)	(5%)	(-5.8%)	(0%)	(-6%)	-0.9%	(0%)	(-4.3%)	($1,920,510)

* Mr Chan, in his analysis, disregarded the area or more particularly the presence of the cockloft but by including the full headroom from G/F to ceiling of the Cockloft, Mr Chan allowed corresponding adjustment for the high headroom and the advantages of the cockloft.

Rental Comparables

59.  Included in the supplemental joint statement are also the following rental comparables (including T9) which Mr Chan submits are useful for cross-checking the valuation of the market value of the Property arrived at on the basis of direct comparison:

Ref No	Address	Instrument Date (Tenancy Commencement Date)	Monthly Rent (effective)	Saleable Area (sq m)	Full Frontage (m)	Unit Effective Rent (/sq m)
T1	Shop 3, G/F, Grandview Building, 49-69 Fa Yuen Street/ 8-8A Nelson Street	13 Jul 11 (20 Aug 11)	$310,000	22.92	6.22 to Fa Yuen Street	$13,525
					Return Frontage 3.74 to Nelson Street
T2	Unit 6, G/F, 43 Dundas Street	8 Feb 11 (1 Dec 10)	$300,000	46.45	3.81	$6,459
T3	Shop 2, G/F, 60 Sai Yeung Choi Street South	31 Dec 10  (8 Jan 11)	$144,574	14.63	3.05	$9,882
T4	Shop 1, G/F, Tat Lee Commercial Building, 43A-G Dundas Street/ 2Y Sai Yeung Choi Street South	25 Oct 10 (25 Sep 10)	$128,194	10.31	2.74	$12,434
T5	Shop 2, G/F, Pakpolee Commercial Centre, 1A Sai Yeung Choi Street South	11 Oct 10 (1 May 11)	$215,000	37.04	3.04	$5,805
T9	Shop 4, G/F, Grandview Building, 49-69 Fa Yuen Street/ 8-8A Nelson Street	13 Jul 11* (19 Sep 11)	$281,944	27.03	3.40	$10,431

* This is the date of the offer letter instead of the date of the tenancy agreement.

60.  Also, according to Mr Chan, when he saw the Rebuttal Report of 13 April 2016 by Mr Lai together with his analysis of T9 vis-à-vis the other rental comparables, he found it necessary to revise the adjustments for location in respect of the comparables for Direct Comparison Method as contained in Exhibit A3. Thus, we shall proceed with our comment on other adjustment factors before we consider the location adjustments for the various comparables.

Adjustments of Comparables

Multiplication/Summation of Adjustments

61.  There is a dispute between the two experts on the application of the adjustment process: Mr Chan applies the adjustment through the multiplication process whereas Mr Lai adopts the summation process. The Tribunal in Cheer Capital Limited v Unibase Investment Limited & Others, LDCS 5000 & 6000/2013 (unreported, 12 June 2015) came across the same issue and had explained at §§90-94 the reasons why the multiplication process should be preferred when any discrepancy arises.

62.  For the sake of elucidating our view, we repeat the opinion of the said Tribunal at §§92-93 as follows:

“92. Indeed, in arriving at the market value, a comparable needs to be compared with the subject property for the similarities and the dissimilarities. If a comparable property is superior to the subject property to which it is being compared, then a negative or minus adjustment is made to take the comparable property from that superior position down to a level equal to the subject property; if a comparable property is inferior when it is being compared to the subject property, then a positive adjustment is made. The amount of dollar adjustment for each element should arise independently as observation from the market reflecting the dissimilarities that affect value, and they are simply added together. The total of the adjustments is then added to or subtracted from the comparable’s sale price to make the comparable equal to the subject as of the date of valuation.

93. When percentage adjustments are applied, the result must be mathematically equal to dollar adjustment that is obtained separately from the market. However, adding and subtracting the percentage adjustments gives an answer that is different from that derived by the principle of adjusting using dollars; this adding the several percentage adjustments together and then applying the end result to adjust the comparables sales would be theoretically and mathematically incorrect because this does not result in moving from basis to basis though we appreciate that such summative percentage adjustments are most commonly used by the valuation profession in Hong Kong perhaps for the reason that this approach is simpler to apply and easy to be understood.” (underline added)

63.  As said in the end of the paragraph cited above, we agree that summative percentage adjustments are most commonly used but we do not agree that this summation approach is a conventional approach as suggested by Mr Lai. The summation approach is never recommended in any valuation textbook. We would only comment that the summation approach was easier to apply before the use of computers becomes common but we venture to say that when the application of the computers has entered into our daily life and become more and more user friendly, we shall resort to a calculation that is theoretically and mathematically correct, ie the multiplication process wherever it is convenient to do so.

Quantum

64.  It is agreed by the parties that the saleable area of the Property is 29.16 sq m. For the comparables, Mr Chan suggests that 2% for every 5 sq m for the first 50 sq m, ie 1% for every 2.5 sq m whereas Mr Lai suggests 1% for every 2 sq m difference; this means Mr Lai considers more sensitive adjustment is required when the shop area is small.  Taking into consideration the Property is situated at a very busy and popular district of Mong Kok, we prefer Mr Lai’s approach though we would retain Mr Chan’s application of 1% for 10 sq m after the first 50 sq m.

Frontage

65.  Mr Chan makes no allowance for frontage difference whereas Mr Lai allows 4% for every 1 m difference in clear frontage.

66.  In the case of 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 Limited v Director of Lands, LDLR 1/2013 (unreported, dated 8 December 2014) (“Tai Ping Restaurant Limited”) 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 proposed by Mr Lai who happened to be one of the valuation experts thereof.

67.  Also, in Tai Ping Restaurant Limited, the Tribunal preferred the adjustment for full frontage to the adjustment for clear frontage because the former would not miss the effects of columns on the frontage if any in the frontage adjustment. As explained at §38 thereof:

“38. I consider columns on the frontage of a shop are valuable, but the weight of such columns in an assessment is generally less than that of clear frontage. Subject to the availability of information, different weights should be attached to columns on the frontage and clear frontage respectively in an assessment. Nevertheless, in the absence of detailed assessment, there is no material difference between these two approaches if each could be applied consistently in the valuation. ”

68.  Earlier in Good Faith Properties Limited and Others v Cibean Development Company Limited, LDCS 42000/2011 (unreported, dated 31 May 2013) (“Good Faith Properties Limited”), a differently constituted Tribunal also gave its view on the dispute on such frontage issue and agreed with the expert in that case that the columns in shops do have potential to attract customers.

69.  In this connection, we appreciate that the respondent had relied on Lee Yun v Director of Lands, LDLR 12/2006 (unreported, 22 December 2010) (“Lee Yun”) and said that it supports Mr Lai’s clear frontage approach. Nevertheless, this case has already been considered in Good Faith Properties Limited above and in the present case, we  find there is no evidence that decorations put on the columns and walls to attract customers in the comparables and the Property would constitute unauthorised encroachment on government pavement. Lee Yun should be distinguished on the particular fact of that case.

70.  During cross-examination by Ms Ngai, Mr Lai emphasized that his clear frontage approach would take into account the clear passage of the shop front. We consider Mr Lai’s approach having merit if the shop front is very narrow but this is not the case here either for the Property or the comparables. In this regard, we agree that full frontage should be preferred in dealing with frontage adjustments where appropriate.

71.  In the present case, the two valuation experts agree that the Property enjoyed a clear frontage of 2.49 m. Apart from AC1/RC2 and AC4/RC4 which both enjoy a return frontage which we shall consider later, AC2 and RC1 have clear frontages of about 2.7 m and 2.46 m respectively which are not significantly different from that of the Property. We are content to adopt 2% for every 1 metre difference as per Tai Ping Restaurant Limited.

Layout/ Return Frontage

72.  Mr Chan applies an upward adjustment of 10% for comparable AC1/RC2 for the reason that it has a very (inferior) narrow frontage of 1.8 m. On the other hand, Mr Lai considers that both the Property and this comparable are of rectangular shape and therefore there should be no difference in layout, ie such an adjustment is not necessary. However, Mr Lai allows an upward adjustment of 3.1% taking into consideration the difference in clear frontage.

73.  By our joint inspection on 14 April 2016, however, we find that this comparable enjoys a return frontage of about 5.3 m to a service lane. In this regard, we consider the frontage enjoyed by this comparable is not so narrow.  We consider an upward adjustment of 3.1% as allowed by Mr Lai (though for a different reason) is more appropriate.

74.  On the other hand, Mr Chan considers AC4/RC4 superior in layout because it enjoys a frontage to Argyle Street (4.7 m) and a frontage to Sai Yee Street (7.7 m). He applies therefore an adjustment of -20%. Mr Lai adds up the total clear frontage onto both street (3.75 m to Argyle Street and 5.93 m to Sai Yee Street) and applies 4% for every difference of 1 m when compared with the Property (2.49 m), resulting in -28.8%.

75.  This approach of Mr Lai must be wrong in principle. Not to mention that we have hesitation to adopt the frontage adjustment of 4% for every difference of 1 m as explained above, this approach of Mr Lai assumes that the frontages to both street would have equal advantage (attraction) which should not be the case in real life. In the present case, we consider the frontage of Argyle Street would enjoy better exposure or attraction than that of Sai Yee Street. In addition, this approach of Mr Lai would have double counted the value of the floor space that lies at the corner; it is the higher value for the floor space that counts in the captioned analysis instead of the mere frontage.

76.  In view of the above, we prefer the -20% applied by Mr Chan to the -28.8% by Mr Lai though we would allow another -2.8% to account for the frontage adjustment as discussed in the preceding paragraph.

Headroom

77.  Mr Chan applies an adjustment of 1% for every 0.3m difference in clear headroom whereas Mr Lai adopts 2% for every 1 m difference which is equivalent to 1% for every 0.5 m; the difference in opinion is not significant when difference in headroom is small.

78.  We note in the present case, the clear headroom of the Property is agreed at 4.90 m whereas the headrooms for the comparables (except AC1/RC2 and AC2) lie between 3.82 m to 5.36 m. While we do not intend to lay down any formula for adjustment, we consider 1% for every 0.5 m would be applicable; but for AC1/RC2, AC2 (and T3) which have headroom significantly smaller, we are prepared to adopt a higher adjustment at 1% for every 0.3 m.

Cockloft

79.  Save for AC1/RC2, neither the Property nor the other comparables comprise a cockloft. Applying the adjustment for AC1/RC2, however, Mr Chan disregarded the area or more particularly the presence of the cockloft; instead he assumes the full headroom from G/F to ceiling of the cockloft saying that the occupier had abandoned the use of the cockloft. Mr Chan then allows -3% perhaps to reflect the reality or advantage of this comparable having a cockloft.

80.  Upon our joint site inspection on 14 April 2016, we did find that the staircase which, by reference to the floor plan of the premises, used to lead up to the cockloft had been removed. However, we consider this approach of analysis by Mr Chan unorthodox and not pertaining to the reality; there is no evidence that the cockloft had been demolished or unused. More particularly, the fact is that the occupier does not make use of the full headroom from G/F to ceiling of the cockloft as opposed to Mr Chan’s assumption.

81.  We shall adopt Mr Lai’s more conventional approach by taking the unit value of the cockloft as 25% of that of the ground floor in the analysis.

Adjustment for Location and the Choice of Comparables

82.  Next we come to the area of difference between the two experts, ie the adjustment for location which is farthest apart.Both parties agreed that since the inspection of this Tribunal only took place many years after the date of resumption, many of our observation during the site visit may not reflect the reality at the relevant time. With the above in mind, we are entitled to look at the objective evidence including the photographs, survey sheets and, subject to the limitation above, our own observation of the area, to draw any reasonable inference from them and to decide whose opinion should be preferred.

83.  Firstly, we share the view of Mr Chan that RC3 should not be taken as a comparable. It is situated on the other side of Nathan Road, the busy thoroughfare running from north to south that has divided Mong Kok to a certain extent into two districts of different characters. This RC3 is situated on Argyle Street close to its junction with Portland Street where shops in the vicinity are mainly selling building or decoration materials. That can hardly be comparable to the Property either in pedestrian flow or in fame as a popular shopping area. We totally disagree that as small as +5% adjustment applied by Mr Lai would make up the difference.

84.  Thus having RC3 excluded, we proceed to look closely at the difference in adjustments for location applied by two experts:

Comparable Reference  No	Adjustment for Location
	By Mr Chan		By Mr Lai
	as at 7 April 16	as at 14 April 16
AC1/RC2	+10%	+20%	0%
AC2	-35%	-15%	-50%*
AC4/RC4	+25%	+25%	5%
RC1	+ (unspecified)	+ (unspecified)	-5%

* This -50% was only disclosed by Mr Lai in his Rebuttal Report of 13 April 2016 at §2.19.

AC1/RC2

85.  Although AC1/RC2 is also situated on Fa Yuen Street, it is located much further away from the hub of the busiest shopping area or “the Sneakers Street”. There should be an upward adjustment despite we agree that this immediate area has become a popular spot for eateries.

86.  Having said that, we cannot appreciate the reason why Mr Chan has changed his view from +10% to +20%. Nevertheless, having carried out the on-site inspection, we agree +20% is appropriate.

AC2

87.  Notwithstanding its address at Sai Yeung Choi Street, AC2 fronts indeed onto Nelson Street which is a popular passageway or more popularly a pedestrian precinct leading from Nathan Road or according to Mr Lai, a primary exit of the Mong Kok MTR station. Also, according to Mr Lai, the adjustment of -35% originally proposed by Mr Chan was not adequate.

88.  At trial, however, Mr Chan referred to T3, ie Shop 2, G/F, 60 Sai Yeung Choi Street which lies only two shops away from AC2, the latter being Shop 5 of the same building. He compared the unit rental of T3 at $9,882/sq m with $10,431/sq m for T9 which lies across the corner of the Property; he carried on with his own analysis and found, against his initial opinion, the unit rental for T9 is higher than that of T3.

89.  Mr Chan finds support of the above analysis from the unit rental of T1 which is a corner shop next to T9; even after allowing for his adjustments, when compared with T9 or otherwise, its unit rental is similar to that of T3.

90.  According to Mr Chan, similar finding is supported by the rateable value of the premises for the year 2015-2016, the relevant date for which is 1 October 2014, as follows:

Ref No	Rateable Value	Saleable Area (sq m)	Rateable Value/sq m per month
T9	$3,780,000	27.03	$11,654
T1	$5,100,000	22.92	$18,543
AC2	$1,632,000	13.17	$10,326

By reference to the above, Mr Chan stated at §3.3.2 of his Rebuttal Report of 28 April 2015 that “the retail potential of (T9) and the Property is more similar to those of (AC2)...” (emphasis added)

91.  In the Rebuttal Report of Mr Lai prepared on 13 April 2016, Mr Lai pointed out the inconsistency when Mr Chan then applied -35% to AC2 in valuing the Property. Further Mr Lai stated:

“Comparable T1 and T9

....

2.7 Though I agree that Comparable T9 was situated in a superior location relative to the Property, I cannot agree that it was similar to Comparable AC2 ... in terms of location.

2.8 In my opinion, I consider the appropriate location adjustment for Comparable T9 should be -25%.

2.9 Based on the above, I consider the downward adjustment of 10% applied by (Mr Chan) for Comparable T9 should be rejected.

2.10 I note that the location adjustment for Comparable T1 was the same as Comparable T9 at the rate of -10% as submitted by (Mr Chan).

2.11 Comparable T1 was situated on a corner site fronting onto both Nelson Street and Fa Yuen Street and in particular that section of Nelson Street fell into the scheme of part-time pedestrian streets. ...

2.12 In my opinion, there should be at least 5% difference in terms of location between Comparables T1 and T9 to reflect the better location of Comparable T1.

Comparable T3

2.13 Comparable T3 was situated in close proximity to Comparable AC2...

2.14 I submitted at Para 6.2-6.11 of my Supplementary Rule 20 Document that Comparable AC2 was situated in a very superior location.

......

2.17 Therefore, I consider the downward adjustment of 35% applied by (Mr Chan) for the Comparable AC2 is not adequate.

2.18 The above submission in respect of Comparable AC2 is applicable to Comparable T3 since they were situated in close proximity.

2.19 In my opinion, the appropriate adjustment for location in respect of Comparable T3 should be -50%.

2.20 Based on the above, I consider the statement in Note (1) under Table B attached to the Letter Report (ie B/84(d)) that “... Comparables ...T3 which are most similar to the subject property in terms of location” should be rejected.”

92.  Firstly, we do not agree that the location of T9 is superior to the Property by as much as -25% when T9 is just situated across the junction of Nelson Street and Fa Yuen Street on the opposite side of Fa Yuen Street. This section of Fa Yuen Street is not very wide and jaywalking across the street is not uncommon. In this regard, we share the opinion of Mr Chan as per B/84(d) or Exhibit A3 that the adjustment should be about -10%.

93.  In making his remark cited above, Mr Lai failed to observe that when Mr Chan applied the same -10% location adjustment for both T1 and T9, Mr Chan made an additional allowance of -25% on return frontage for T1; this is much higher than the minimum of -5% suggested by Mr Lai “to reflect the better location of Comparable T1”[4].

94.  We do not agree that T9 is similar to Comparable AC2 in terms of location but consider the latter about 15% better. As submitted by Mr Ismail, the reference to the rateable values as at October 2014 might not be so appropriate and also we cannot assume the rateable values arrived at by RVD for inclusion in the valuation list are correct.  For example, we note the monthly rental as reserved for AC2 since December 2009 was $140,000 per month or $10,630/sq m per month. If the Private Retail Rental Indices of RVD at 117.3 and 133.6 as at December 2009 and May 2011 respectively are abided by, the market rent for AC2 as at the reversion date may be equal to:

which is much higher than $9,882/sq m for T3 as at December 2010 or its rateable value as at October 2014.

95.  Therefore, if T9 is better than the Property by 10% and AC2 is better than T9 by 15%, the -15% adjustment applied by Mr Chan to either T3 or AC2 appears to be too small; it should be some -23.5%[5] instead. Then, following our discussion of the various adjustment factors above, the adjusted unit rental for the Property appears to be as follows:

Ref No	Unit Rental (/sq m)	Adjustments							Adjusted Unit Rental (/sq m)
		Time	Location	Quantum	Layout/ Return Frontage	Frontage	Head-room	Total*
T1	$13,525	-1.0%	-10.0%	-3.1%	-25.0%	-5.8%	-0.5%	-39.3%	$8,210
T3	$9,882	4.0%	-23.5%	-7.3%	0%	0.5%	7.9%	-20.0%	$7,906
T9	$10,431	-1.0%	-10.0%	-1.1%	0%	-0.4%	-0.5%	-12.7%	$9,106
Average:									$8,407
Sample Standard Deviation:									623.86**

* By multiplication

** The variance would be even smaller if the adjustment for return frontage for T1 is smaller than -25%.

96.  Conversely, if we follow Mr Lai’s suggestion of -25% for T9 when compared with the Property and -50% for T3 when compared with the Property (ie T3 is superior to T9 by some 33%[6]), the analysis becomes as follows:

Ref No	Unit Rental (/sq m)	Adjustments							Adjusted Unit Rental (/sq m)
		Time	Location	Quantum	Layout/ Return Frontage	Frontage	Head-room	Total*
T1	$13,525	-1.0%	-25.0%	-3.1%	-25.0%	-5.8%	-0.5%	-49.4%	$6,844
T3	$9,882	4.0%	-50.0%	-7.3%	0%	0.5%	7.9%	-47.7%	$5,168
T9	$10,431	-1.0%	-25.0%	-1.1%	0%	-0.4%	-0.5%	-27.2%	$7,594
Average:									$6,535
Sample Standard Deviation:									1,242.11

* By multiplication

The resultant figures come at larger variances and the adjusted rental derived from T3 at $5,168/sq m is even lower than the rental for the Property reserved on 7 May 2010 at $5,316/sq m[7]. Mr Lai’s suggested adjustments for location appear not to be supported.

97.  At trial, Ms Ngai also tried to test Mr Lai’s location adjustment by inviting Mr Lai to take the unit rental of T1 and T3 as they were and work backwards from his other adjustments, assuming T1 is the reference unit. Mr Lai worked out the adjustments as follows:

Unit Rental of T1/T3	Adjustments
	Time	Location	Quantum*	Frontage	Head-room	Total by addition	Total by multiplication
1.36865	7.5%	?	-8.29%	21.64%	5.24%	26.09% + ?	1.2621% x (1 + ?)

*   Mr Lai suggests that rents are more sensitive to size differences relative to price and therefore applies an adjustment of 1% per 1 m instead of 1% per 2 m difference though we find no evidence to support such a distinction.

Thus, the implied adjustment for location ? = 10.81% or 8.44%

98.  Likewise, similar exercise is invited by Ms Ngai as regards T3 and T9, taking this time T9 as the reference unit. Mr Lai worked out the adjustments as follows:

Unit Rental of T9/T3	Adjustments
	Time	Location	Quantum*	Frontage	Head-room	Total by addition	Total by multiplication
1.05556	8.9%	?	-12.4%	1.52%	5.24%	3.26% + ?	1.0192% x (1 + ?)

*   Mr Lai suggests that rents are more sensitive to size differences relative to price and therefore applies an adjustment of 1% per 1 m instead of 1% per 2 m difference.

Thus, the implied adjustment for location ? = 2.3% or 3.57%

99.  By this backward induction, Ms Ngai demonstrates Mr Lai’s suggested location adjustment around 25% between T3 and T1 or between T3 and T9 has been exaggerated. We agree.

100.  In the analysis at §98 above, Mr Lai suggests that the commencement date for T9 at 19 September 2011 should be adopted despite the offer for acceptance was made on 13 July 2011. As such, Mr Ismail had challenged Mr Chan’s adoption of the date of offer for T9 as the relevant date of the deal. We note the offer was made with a cheque for $290,000 (which is equivalent to 1 month’s rent) as deposit payable to the landlord. We believe, in all probabilities, the acceptance was envisaged within a very short period if not on the same day. However, we agree with Mr Lai that landlord or tenant would speculate, on 13 July 2011, upon the increase in rental that would occur in September 2011; nevertheless, the two dates were so close that the difference should not be significant[8].

101.  Notwithstanding the above, Mr Ismail also took issue that the letting for T1 or T9 took place after the relevant date of 18 May 2011, citing the common law Pointe Gourde principle that any increase or decrease in value wholly due to the resumption should be disregarded.[9]  However, when applying this principle, it must always be borne in mind that, as Lord Denning MR observed in Wilson v. Liverpool City Council [1971] 1 WLR 302 at 309:

"A scheme is a progressive thing. It starts vague and known to few. It becomes more precise and better known as time goes on. Eventually it becomes precise and known to all."

102.  As stated in §6 above, URA’s intention to implement the Project was announced to the public in December 2007. We are advised by Mr Ismail at trial that by the time resumption took place in May 2011, only 3 outstanding cases on retail shops were still outstanding requiring the appointment of Mr Lai. That is, if removal was considered, most had already taken place before the relevant date and this is further evidenced by the photographs taken by the respondent on the date of resumption[10] which shown the adjoining units had fallen vacant and had been taken over by URA. The effect of the resumption should not have increased the value of T9.

103.   In the present case, even Mr Lai for the respondent is content to adopt comparable RC1 that occurred in October 2011, ie some 5 months after the relevant date. We are of the opinion that the resumption would not affect T9’s probative value as indication of market rent as at the relevant date. 

104.  Mr Lai also suggests that the transaction price of AC2 was unreasonably high, particularly when compared with a comparable at Nathan Road (which has been however abandoned by Mr Chan). Here Ms Ngai draws to our attention that the transaction was indeed subject to a tenancy for a term of 3 years from 28 December 2009 at $140,000 per month. Even allowing for time movement for rental from December 2009 to March 2011 (ie the date of sale of this comparable), there would be about 10% increase by reference to the Private Retail Rental Index of RVD. Then the initial yield of this transaction was only 2.58% which does not fall out of the range to which we shall revert later.

105.  In the above regard, we consider a -23.5% location adjustment would be reasonable for this comparable and it falls somewhere in the middle between the original adjustment of -35% and the -15% as revised by Mr Chan.

AC4/RC4

106.  Mr Chan has not revised his location adjustment which has remained at +25% ever since his Valuation Report dated 30 January 2015.

107.  Mr Lai’s proposed adjustment is +5% and stated at §6.15 of his Valuation Report of 21 November 2014 that this comparable “was situated slightly away from the commercial hub where the Property was situated”. Having carried out the joint site inspection, however, we opine that the difference in pedestrian flow would not have been “slightly” as at the date of resumption. We agree with the +25% adjustment as proposed by Mr Chan when we are persuaded that the Property was situated at the hub of the Sneakers Street.

RC1

108.  RC1 is situated at Sincere Plaza which is well known for selling mobile phones and their accessories. The location also differs in character from the Sneakers Street.

109.  Mr Chan considers the location of RC1 is inferior to the Property because the latter enjoyed the synergy effect of the Sneakers Street and the Mong Kok Pedestrian Precinct; however, Mr Chan has not proposed any upward adjustment percentage.

110.  Mr Lai, on the other hand, considers this comparable is in a better location relative to the Property: he proposes a minor downward adjustment (as opposed to the upward adjustment).

111.  Having regarded to the proximity of this location to another popular MTR exit, the presence of many mini-bus terminal nearby and the various bus stops in front of it, we agree with Mr Lai at -5%.

The Valuation on Direct Comparison Method

112.  Thus we have altogether four comparables as follows:

Ref No	Unit Price (/sq m)	Adjustments							Adjusted Unit Price (/sq m)
		Time	Location	Quantum	Layout/ Return Frontage	Frontage	Head-room	Total*
AC1/RC2	$2,173,532	3.4%	+20%	-8.9%	0%	3.1%	6.9%	24.6%	$2,708,221
AC2	$5,451,784	3.4%	-23.5%	-8%	0%	1.2%	8%	-20.5%	$4,334,168
AC4/RC4	$2,168,879	19.9%	+25%	3.1%	-20%	-2.8%	2.2%	22.8%	$2,663,383
RC1	$1,899,780	-5.7%	-5%	-5.5%	0%	1.7%	1.9%	-12.3%	$1,666,107
Average:									$2,842,970

 * By multiplication

113.  By reference to the land registration record for AC1/RC2, however, we have pointed out at trial that there appears to be another sale of AC1/RC2 at a much higher value of $35,800,000 on 20 March 2012 when the existing tenancy was due to expire on 13 June 2012 (according to supplemental joint statement dated 31 March 2016). Applying the RVD index as agreed by the two experts, the unit price adjusted for time is $2,703,213/sq m which is substantially higher than $2,173,532/sq m which is unreasonable within such a short period (of one year). On balance of probabilities, it is likely that the sale in March 2011 was underpriced. If this be the case, with other adjustments remaining the same, the adjusted unit price for AC1/RC2 should be $3,368,203/sq m instead of $2,708,221/sq m and the average of the four comparables would become $3,007,965.

114.  Then market value of the Property assessed by Direct Comparison Method is assessed as follows:

29.16 sq m x $3,007,965/sq m =	$87,712,259
Say	$87,712,000

Cross Checking by Income Capitalization Method

115.  Although Mr Chan has put forward a total of 6 rental comparables as shown in §59 above for the purpose of cross checking the valuation by the Income Capitalization Method, it is obvious from B/84(d) or his Exhibit A3 that he has not relied on comparable T2, T5 or T6. We consider this reasonable as T2, T5 or T6 all lie far away on Sai Yeung Choi Street where the location adjustment would be subjective, arbitrary and subject to dispute.

116.  We have at §95 above found that the average rental for T1, T3 and T9 which lie closest to the Property is $8,407/sq m.

Ref No	Date of Transaction	Consideration	Monthly Rent Provided in Lease	Lease Commencement Date	Agreed Analyzed Yield
AC1/RC2	24 Mar 11	$24,800,000	$52,500	14 June 10	2.54%
AC2	1 Mar 11	$71,800,000	$140,000	28 Dec 09	2.34%
AC4/RC4	30 Sep 10	$76,800,000	$128,000	20 Sep 10	2.00%
RC1	14 Oct11	$34,500,000	$80,000	6 May 11	2.78%
RC3	8 Mar 11	$35,400,000	$80,000	1 Feb 11	2.71%

117.  We also note from the supplemental joint statement dated 31 March 2016 that the two experts have agreed the yields resulted from the 5 direct comparison comparables range from 2.0% to 2.78% as follows:

118.  Firstly we find the sale of AC1/RC2 and AC2 took place more than 6 months after the rent commencement date and the analyzed yields therefore do not represent the market yield as at the date of the transaction. At §104 above, we have found that after adjustment for time, the yield for AC2 would be about 2.58%.

119.  Secondly, we find the yields for RC1 and RC3 are very consistent and it is obvious that the transaction prices of these two comparables were highly influenced by the yield obtained rather than their respective location. In other words, if the rent of these comparables at $80,000 was for any reason below market rent, the resultant price paid would be heavily depreciated. We are prepared to adopt 2.75% as the market yield.

120.  Thus, by the Income Capitalization Method, we arrive at the following:

$8,407/sq m x 29.16 sq m  x 12 ÷ 2.75%	=	$106,973,725
Say		$107,000,000

121.  This value derived from the Income Capitalization Method for cross-checking need not be identical to that produced by the Direct Comparison Method at $87,712,000 but the result derived by this cross-checking at $107,000,000 is higher by some 22% which lies beyond the usual reasonable range of valuation of 10% to 15%.

Reconciliation

122.  There was no dispute that the Direct Comparison Method is the primary method of valuation in usual circumstances. In principle, it is not required to have more than one method for the valuation of a property when there is a high degree of confidence in the accuracy and reliability of a single method. However, more than one valuation approach or method may be used to arrive at an indication of value, particularly when there are insufficient factual or observable inputs for a single method to produce a reliable conclusion.

123.  As we stated at §50 above, a difference in indication of values of about 22% arrived by two valuation methods for cross-checking or otherwise should be a matter of concern for the valuer and such a difference must be reconciled.

124.  This Tribunal has on many occasions indicated that the Direct Comparison Method of valuation based on market evidence should be preferred but this is the case so long as suitable comparables are available and reliable. In the present case, substantial number of adjustments required under the Direct Comparison Method reduced the quality of the valuations.

125.  We have in §§112-114 above found the result of Direct Comparison Method based on wide discrepancy in values, for instance, with RC1 at $1,666,107/sq m and AC2 at $4,334,168/sq m. The other two comparables also suffer to a great extent from a subjective adjustment on location and difference in layout or configuration.

126.  In this regard, we consider the adoption of an alternative valuation method, in this case the Income Capitalization Method, is highly appropriate. We also consider T1 and T9 which are situated so close to the Property provide reliable information on the market rent of the Property because much of the subjective adjustment on location can be reduced.

127.  Also, we are of the opinion that the yield of 2.75% derived falls within a close range and is reliable as a unit of comparison used to value property investment. In comparison, this is much better than the yield of 3% tended to be adopted by Mr Lai based on RVD’s information. Of the greatest problems of the latter is that it is not location specific.

128.  This Income Capitalization Method is particularly appropriate when the income-producing ability of the Property is the critical element affecting value, bearing in mind for instance the applicant’s major business is property investments and holdings[11].

129.  In view of the above and since this Tribunal is entitled to award damages based on its own valuation method from the evidence adduced (§44 above), we are prepared to attach equal weight to the two valuation methods in the present case and adopt the average arrived by the Direct Comparison Method and the Income Capitalization Method as the market value of the Property, ie:

130.  Standing back, we find this ultimate value conclusion of $97,356,000 is just 11% higher than that of $87,712,000 derived by the Direct Comparison Method. We are satisfied that this ultimate value conclusion of $97,356,000 is reasonable and acceptable.

Conclusion

131.  We have determined the value of the Property, for the purpose of section 10(2)(a) of the LRO, in the sum of $97,356,000.

Orders

132.  Accordingly, I order that the respondent do pay the applicant compensation for the Property in the sum of $97,356,000. The matters of professional fees, interest and costs shall be adjourned to a date to be fixed, with liberty to apply for any other ancillary and consequential matters.

 

 

Deputy Judge KOT	Mr Lawrence PANG
Presiding Officer	Member
Lands Tribunal	Lands Tribunal

Ms Nancy Ngai, instructed by Messrs Deacons, for the applicant

Mr Anthony Ismail, instructed by the Department of Justice, for the respondent

Appendix I

[1] See Exhibit A1.

[2] We agree with Ms Ngai that Mr Lee is one of the shareholders of the owner and landlord of T1 is neither here or there so long as prima facie the tenant is not related and the parties are at arm’s length. By reference to the company search produced as Exhibit A10, Mr Lee owns just 600,000 out of the total of 5,820,000 issued shares (approximately 10%).

[3] This section of Nelson Street ie between Sai Yeung Choi Street South and Fa Yuen Street had been made a permanent pedestrian street since December 2000.

[4] By having a return frontage to Nelson Street, T1 enjoys “at least 5% difference” as suggested by Mr Lai.

[5] (1-10%) x (1-15%) = (1-23.5%)

[6] If T9/Property = 1/(1-25%) and T3/Property = 1/(1-50%), then T3/T9 = (1-50%)/(1-25%) = 1-33.3%.

[7] The monthly rent of $5,316/sq m ($155,000) is not excessive or unreasonable when that for the Property as at 13 March 2007 (ie prior to the announcement of the Project by URA in 21 December 2007) was $140,000.

[8] By reference to the RVD’s index, the indices for the two months were 135.0 and 138.3 respectively, showing an increase about 2.4%.

[9] This principle obtains its nomenclature from the Privy Council decision in Pointe Gourde Quarrying and Transport Company Limtied v Sub-Intendent of Crown Lands [1947] AC565.

[10] See Bundle B/105.

[11] See Bundle A/97.