SUEN PING FAT also known as SUN PING FAT v. THE DIRECTOR OF LANDS

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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 compensation in respect of the property known as Shop A on Ground Floor of Nos. 7A & 7B Cross Street, Hong Kong (“the Property”) which was reverted to the Government on 5 November 2005 under the Lands Resumption Ordinance, Cap. 124 (“the Ordinance”) for implementation of Development Proposal H15 by the Urban Renewal Authority at Lee Tung Street / McGregor Street, Wan Chai, Hong Kong pursuant to a gazetted Government Notice G.N. No. 3739 dated 1 August 2005.

2. Immediately before the resumption, the Applicant, being the registered owner of the Property, was entitled to compensation.  Under Section 6(1)(a) of the Ordinance, the Government offered the Applicant a sum being the assessed value of the Property as assessed by the Government together with interest.  The Applicant did not accept the offer but received a sum of $8,611,000 as a provisional payment under Section 16A of the Ordinance, being the sum of the Government’s assessed value of the Property together with interest thereon from the date of resumption to the date of receipt of the said sum.

3. The Applicant submitted to the Lands Tribunal on 13 September 2007 under Section 6 of the Ordinance the present application for the determination of the amount of compensation payable.  The Applicant claimed the sum of $13,500,000 as the value of the Property, together with interest and expenses, costs or remuneration referred to in Section 10(2)(e) of the Ordinance, as well as the costs of the application.  The Respondent opposed the application, denying that the claimed amount was properly assessed and the said claim was considered to be excessive.

4. By way of a consent summons, the parties filed and exchanged their respective expert reports and supplemental expert reports by 14 January 2008 and 14 March 2008 respectively.  These reports, prepared by Mr. Wayne W. K. Lee (“AW”) and Mr. Ng Yiu Wah, James (RW), were included in the agreed bundle, Exhibit AR-2, as follows:

		AW	RW
(i)	Valuation Reports -	dated 10 Jan. 2008	dated 28 Dec. 2007
(ii)	Supplemental Reports -	dated 12 March 2008	dated 11 March 2008

5. Both experts were called to give evidence in the hearing.  Both parties accepted AW and RW as expert witnesses.  They elaborated their valuations, produced several Exhibits and were in turn examined in chief and cross-examined.  In the final analysis, AW opined in his valuation report that the open market value (“the OMV”) of the Property was, at the relevant date, in the sum of about $13,500,000.  He maintained in his supplemental report his previous opinion, save and except that his valuation would have to be amended in the light of the changes he agreed or conceded in respect of certain measurements in the Property or in the comparable properties.  On the other hand, RW opined in his supplemental report that the OMV of the Property was, at the relevant date, in the sum of $7,467,000.  This was reduced from his previous opinion of $7,926,000 as set out in his earlier valuation report.  This reduction was mainly due to the difference in the adoption of comparables by RW in his 2 valuation reports.  I will go back to this issue later below.  Therefore, although the parties had common grounds on many matters pertaining to the present valuation, there was still a difference of about 80% between the final outcome of the OMV valuations undertaken by AW and RW.  Nevertheless, the parties, through their experts, managed to resolve many differences, in particular the differences in some of the physical dimensions of the Property and the comparables.

The Issues

6. The parties identified in their final written submission the following issues that would have to be determined by this Tribunal:

(a) What should be the suitable method of valuation (i.e. direct comparison or term and reversion) for the Property when the expired term of the tenancy was only one month?

(b) What should be the appropriate comparables?

(c) What should be the appropriate quantum of adjustments for the factors of location, size, frontage, obstruction to shop front, layout and building age?

(d) Finally, what should be the OMV as at 5 November 2005?

Common grounds between the parties

7. In their final written submission, the parties confirmed that they had reached the following common grounds:

(a) The date of valuation should be 5 November 2005.

(b) The basis of valuation should be the amount which, the Property “if sold by a willing seller in the open market, might be expected to realize” (section 12(d) of the Ordinance).

(c)  The method of valuation (subject to the issues as defined above) should be the Direct Comparison Method.

(d) The particulars of the Property were agreed as follows: -

(i) Situated at the ground floor of a 6-storey tenement building completed in 1974.

(ii) The Property was sub-divided into three shops and leased to different tenants on monthly basis at the time of resumption.

(iii) The best use of the Property was for retail purposes.

(iv) For the purpose of the present proceedings, AW and RW agreed that the effective area, after adjustment for the area underneath the staircase, was 33.83 m².

(v) Similarly, for valuation purpose, AW and RW managed to agree on the effective areas and frontages of the comparables.

(vi) AW and RW reached agreements as to the quantum of adjustments to the comparables for the factor of “time” and “headroom”.

(vii) The adjustments that were still in dispute included: “location”, “obstruction to shop front”, “size”, frontage”, “layout” and “building age”.

The suitable method of valuation (i.e. direct comparison or term and reversion)

8. AW opined that as the three existing tenancies for various parts of the Property were all monthly tenancies, there was no need to carry out a term and reversion (to vacant possession value) valuation.  AW agreed that although the latter approach was right in principle, it was not in the circumstances practical and necessary.  The adoption of the OMV on vacant possession basis instead would also mean that there would no longer be any need to determine the various parameters used in discounting the vacant possession value and the yield in capitalizing the term interest.  Lastly, AW opined that in practice, it would be in any event usual for the vendor and purchaser to agree to allow one month or even longer for the transaction to complete.  Hence, there should not be any difference between a property that was sold on vacant possession basis or subject to a tenancy with an unexpired term of one month or less.

9.  Similarly, the Applicant submitted that since the expired terms of the tenancies were all one month or less and the rent was paid in advance, it was not necessary to carry out a term and reversion valuation.  It would be more appropriate to just apply the direct comparison method on the basis of vacant possession.  The Applicant supported his submission by citing 2 previous cases in which the Lands Tribunal had adopted a similar practice in the past under similar situations:  Ngai Kai-suen v Director of Lands [1994] HKDCLR 123 and Gaininn Company Limited & Another v Director of Lands (unreported, LDLR 5 and 10 of 2006).   Nevertheless, the Applicant submitted that if the Tribunal were to agree with the Respondent, the Applicant chose not to dispute the capitalization yield and the YP factor adopted by RW.

10.  RW concurred with AW that the differences between the OMV of the Property on vacant possession basis and existing tenancy basis would be very small in the present case.  However, RW was of the view that the Property should be valued on existing tenancy basis as a matter of principle.  The Respondent submitted that the Applicant and his expert had not provided sufficient ground that the normal principle of valuation should not be adhered too.

11.   As a matter of fact, the parties did agree that the Property was subject to three tenancies, at a total rent of $25,000 per month, inclusive of rates, as at the date of reversion.

12.  Having considered the experts’ opinion and the parties’ submission, I agree with RW that his approach should be adopted.  Since the Respondent took the stand of not disputing the valuation parameters (apart from the estimated OMV on vacant possession basis) adopted by AW.  I will use AW’s estimated valuation parameters, which are also considered to be reasonable, in the valuation set out below.

The choice of the best comparables by the experts

13.  I have set out in Table 1 below the best comparables adopted by the two experts (AW and RW), their unadjusted unit rates, the experts’ total adjustments to the comparables and the resulting adjusted unit rates of the comparables: -

Table 1 – Summary of comparables and the expert’s adjusted unit rates

14.  AW adopted 5 comparables (i.e. AC1/RC3, AC2/RC4, AC3/RC5, AC4 and AC5/RC10) as the best comparables to be used in this valuation.  They consist of 3 groups: (1) two shops at Luckifast Building, 1 Stone Nullah Lane (AC1/RC3 and AC3/RC5), (2) two shops at opposite sides of Wanchai Road (AC2/RC4 and AC4) and (2) one shop at Tai Yuen Court, 38 Tai Yuen Street (AC5/RC10).  As for the other shop comparable at Tai Yuen Street (RC9), AW opined that that should be discarded. 

15.  On the other hand, although RW assembled in his valuation report dated 28 December 2007 a total of 10 comparables in Wanchai, he agreed in his supplemental report to concentrate on the comparables situated to the east of Spring Garden Lane and discard the other 5 comparables located at Tai Wong Street East, Ship Street and Queen’s Road East (at the junction with Ship Street).  This obviously helps to minimize the differences between the two experts in respect of the choice of comparables.  However, RW then further opined that the 2 comparables at Wanchai Road adopted by AW should be discarded whilst the larger shop comparable at Tai Yuen Street (RC9) should be adopted alongside with the other shop comparable next door.

16.  In the final analysis, AW opined that the average adjusted unit rate of his best comparables was $388,248 m² and the RW’s respective figure was $228,067 per m².  Applying these to the agreed effective area of the Property at 33.83 m², these give respective OMV figures, on vacant possession basis, of $13,134,430 and $7,715,507.

17.  Therefore, the remaining differences between the experts as far as the very important issue of the choice of comparables were: whether or not the 2 transactions at Wanchai Road and the transaction of the larger shop at Tai Yuen Street (RC9) should be adopted.  I will consider these below.

Should the Wanchai Road  transactions be adopted?

18. Although AW and RW held different views as to whether the 2 Wanchai Road comparables should be adopted for this valuation exercise, they had common ground that these 2 comparables were superior in location than the Property.  AW opined that the differences in location did not make these comparables unsuitable but it could be reflected by downward adjustment of say 20%.  On the other hand, RW opined that the differences are so great as to distinguish the comparables as inappropriate comparables for the Property.  In the event that he were asked to opine the level of differences between the comparables and the Property, RW would adopt a downward adjustment rate of 60%. 

19. AW did agree with the Respondent that Wanchai Road was directly accessible by traffic while the Property was not; shops along Wanchai Road had a much wider catchment area while the Property mainly attracted local residents in the neighbourhood; Wanchai Road was wider and more accessible than Cross Street and the retail potential of the traditional Wanchai market neighbourhood was best at the junction of Cross Street and Wanchai Road.  However, although AW agreed with the Respondent that the comparables AC2/RC4 and AC4 were superior than the Property in terms of location and visibility, he disagreed that they were also much more superior in terms of retail potential. 

20. Also, AW did not agree with the Respondent that retail potential dropped as one went further away from the junction with Wanchai Road.  Rather, AW opined that “the pedestrians usually live or work locally and tend to know the place quite well.  They do not mind to search the place all over in order to get the right goods or service.  Within the area, location specificity is not very important.”  In addition, although AW accepted that there appeared to be higher order trades outside the local neighbourhood of Wanchai wet market area, he was of the view that “higher-order trade does not mean higher profitability and hence higher ability to command a higher rent or higher property value, just as a 5-star hotel may not necessarily be more profitable than a 3-star hotel.”

21. In support of his opinion that the 2 comparables at Wanchai Road were not suitable comparables, RW show in his Supplemental Report his comparison and analysis of rents of the Property and the comparables including shops at Wanchai Road, Stone Nullah Street and Tai Yuen Street.   Based on the analyzed results, he came to the conclusion that as Wanchai Road comparables clearly fetched rents at unit rates of 2.5 times to 3.7 times (depending on the year) to the unit rates of the Property.

22. AW opined that the rental analysis was flawed and meaningless for the reasons that the comparisons of rental values were made at years 2001, 2003, 2005 and 2006 between the Property and AC2/RC4 and AC4 when the rental value of the Property would have been affected by the announcement of the Scheme since around late 2003.  The Applicant also submitted that although there was no dispute that comparables AC2/RC4 and AC4 were situated at a better location than the Property, the rental analysis gave an unusual but inexplicably higher yield for the said 2 comparables.  The Applicant challenged the rental analysis carried out by RW on the ground that there was no information as to whether the existing rent passing of the Property was at market level.  Furthermore, the Applicant submitted that as even RW had agreed under cross-examination that the rental market was different from the capital market, the 2 markets might “move in different directions and/or with different paces.”   Therefore, the Applicant submitted that it would be unreliable to use RW’s rental analysis to come up with any meaningful conclusion.

23. I agree entirely with AW’s opinion and the Applicant’s submission on the un-suitability of using RW’s rental analysis in this valuation exercise.  There’s no point for the experts in this case to introduce the results of the rental analysis, which are subject to different interpretation.

24. However, I do not agree with AW that the differences in location of the 2 Wanchai Road comparables and the Property could be reconciled by a downward adjustment of 20%.  On the contrary, I agree with RW that the differences are so great that these 2 comparables should be discarded.  This is, in my view, also supported by the large disparity in the adjusted unit rates of these 2 comparables and those of the other comparables.  That is, from Table 1, I find that the average of AW’s adjusted unit rates for these 2 comparables at Wanchai Road, at $542,318, is about 210% of the average of the adjusted unit rates for the 2 comparables at Stone Nullah Lane, or about 154% of that for AC5/RC10 at Tai Yuen Street whilst the differences between the adjusted unit rates of Stone Nullah Lane comparables and AC5/RC10 are much smaller.

25. To sum up, I concur with RW that the 2 Wanchai Road comparables should be discarded in this valuation exercise.

Should the transaction of RC9 be adopted?

26. AW was of the view that RC9 was not a suitable comparable for the following 3 reasons: (i) its effective area of 84.61 m² is over 2.5 times that of the Property; (ii) the depth of RC9, at 12 m was almost twice as long as the Property (at 7.2 m) and (iii) the area of the yard attached to RC9, at 95.79 m², was even larger than the shop proper and this disproportionate large size of the yard made the task of effective area conversion difficult. On the other hand, RW disagreed and opined that the differences in area, shop depth or the existence of a large open yard could all be accounted for by suitable adjustments the summation of which were also found to be not significant.  Therefore, the Respondent submitted that none of the said three reasons, whether taken in isolation or in total, justified AW’s opinion in discarding RC9 as a suitable comparable, particularly when AW accepted the next door comparable, transacted on the same date, as one of his adopted comparables.

27. AW also opined in his Supplemental Report that the transactions of 2 comparables at Tai Yuen Street (i.e. AC5/RC10 and RC9) “bear every hall mark of a single investment of an individual (purchaser)”.  Therefore, AW suggested that the apparently separate transactions should be taken as one comparable instead of two so as to avoid distortion by “undue exaggeration of representation” by the purchase decision of an individual.

28. On the other hand, RW took the view that although the 2 transactions had a common purchaser, the vendors were different.  The Respondent further submitted that as confirmed by AW while giving evidence in the Tribunal, there was no evidence whatsoever to suggest that the two vendors were connected in any way.  As such, the Respondent disagreed to discard this comparable.  Using a similar argument as propounded by RW, the Respondent submitted that to disregard the transaction of RC9 (which was “cheaper” in terms of unit rate when compared with that of AC5/RC10) would actually distort the result of the analysis of the so-called “single transaction” by the common purchaser and in turn the present valuation.

29. Having considered the evidence and the submission for these 2 transactions, I concur with RW that there is insufficient ground to discard the transaction of comparable RC9.  As revealed by the description of the comparable and the registered floor plan, the property actually consists of 2 shops in the building of Tai Yuen Court.  Therefore, it appears to me that the adjustment for differences in the size of the comparable and that of the Property somewhat amounts to the quantum adjustment one would allow for when considering the transaction prices and values of one or two shops.  I have raised this question in the hearing but both experts did not see fit to take this into consideration in their valuation.  To conclude, I agree with RW and am satisfied that the physical differences between RC9 and the Property could be dealt with by adjustments in the usual manner.

Adoption of the best comparables by the Tribunal

30. To summarize, I decide for reasons set out above that the best comparables for the present valuation exercise should be AC1/RC3, AC3/RC5, AC5/RC10 and RC9.

Adjustments of the comparables by the Tribunal

31. I have also summarized below the adjustments I consider to be appropriate for the 5 adopted comparables: -

Table 2 – Adjustments of comparables adopted by the Tribunal

32. I have noted and accepted the experts’ agreements on the adjustments for time and headroom.  I will consider below the differences in adjustments by AW and RW for the other factors in respect of all or some comparables.

Location

33. The experts agreed on the level of adjustments for AC1/RC3 and AC3/RC5 while they had differences in the adjustments for the shops at Tai Yuen Street (AC5/RC10 and RC9).  I agree that the Property was superior in location to the latter 2 comparables but not to the extent as opined by AW.  I adopt the same +5% for both comparables.

Obstruction to shop front

34. Both experts agreed that the 2 comparables at Stone Nullah Street (AC1/RC3 and AC3/RC5) were superior to the Property as they were not obstructed by the on-street licensed hawker stalls.  AW and RW opined adjustments of -8% and -10% respectively for both comparables.  I adopt RW’s opinion of -10% adjustment.  As for the 2 adjoining comparables at Tai Yuen Street (AC5/RC10 and RC9), RW opined that there should not be any difference whilst AW suggested an adjustment of +6% for AC5/RC10.  I agree with AW that there appeared to be less obstruction at the Property.  Hence, I adopt an adjustment of +5% for both comparables at Tai Yuen Street.

Size

35. The experts had agreements on the adjustments for the 2 comparables at Stone Nullah Street and the common comparable at Tai Yuen Street.  As for RC9, I note that RW gave an adjustment of 10.2%.  Indeed, as discussed above, it consisted of 2 shops (Shops E & F) of the building Tai Yuen Court at 38 Tai Yuen St.  As I find RW’s proposed adjustment to be reasonable, I adopt his figure.

Frontage

36. This is the only factor of adjustment that the 2 experts differed to a large extent.  The parties’ position are summarized below:

37. As summed up by the Respondent in the Final Written Submission, the large differences in the parties’ estimates were caused by the following:

(a)     Disagreement as to whether the thickness of the walls and columns ought to be included in measuring the frontage of both the Property and the comparables;

(b)    Disagreement as to whether the toilet wall and the wall adjoining the toilet wall ought to be included as the frontage;

(c)    AW allowed an adjustment of 3.5% for every 1 m difference in frontage while RW’s corresponding adjustment was 4% (hence their differences in this respect was relatively minor);

(d)    Disagreement as to whether the general rule applies to the side frontage along Sam Pan Street.

38. Firstly, I agree with RW that the thickness of wall and column should not be included as the dimension of the shop frontage.  I believe that it is just sheer common sense that the linear dimension of a shop’s open frontage has a much greater bearing on the value of the shop than the dimension of the end wall or column.  Next, as to the adjustment for the secondary return frontage of Sam Pan Street of the Property, I concur with RW that a ballpark figure but not the general straight-line approach should be applied.  This is because I agree that Sam Pan Street was much inferior to Cross Street in terms of attraction and pedestrian flow at the date of reversion.   For this reason, there is no longer any need to decide whether the toilet wall and the wall next to it at Sam Pan Street should be treated in full as the rest of the frontages at Sam Pan Street and Cross Street.

39. To conclude, I agree with RW in his adjustments for the factor of frontage for all 4 comparables.

Layout

40. The experts agreed that no adjustment was required for AC1/RC3 and RC9.  AW opined that an adjustment of +5% be applied to AC3/RC5 and AC5/RC10 while RW suggested that these were unnecessary.  I agree with AW’s opinion for these 2 comparables.

Building Age

41. I agree with RW that no adjustment to the comparables for this factor of adjustment is required. 

Valuation of the OMV of the Property on vacant possession basis

42. Applying the average of the adjusted unit rates of the adopted 4 comparables, in the amount of $248,498 per sq. m. as set out in Table 2 above to the agreed effective area of the Property at 33. 83 sq. m. gives the OMV of the Property, on vacant possession basis, as $8,406,687, which is rounded to $8,410,000.

Valuation of the OMV of the Property subject to tenancies

43. Adopting the methodology and valuation parameters of RW as set out in Exh. R7, the OMV of the Property subject to tenancies is estimated as follows:

Orders

44. Accordingly, I order that the Respondent do pay the Applicant compensation for the Property in the sum of $8,400,000.  The matters of professional fees, interest and costs shall be reserved, with liberty to apply by either party.