DOUBLE ROCK LTD v. THE DIRECTOR OF LANDS

LDLR 11 OF 2007

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LANDS RESUMPTION APPLICATION NO. 11 OF 2007

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BETWEEN

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J U D G M E N T

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Background

1.  This is an application for compensation under the Lands Resumption Ordinance, Cap. 124. The Applicant is the former registered owner of the property known as Ground Floor, No. 13 Ivy Street, Kowloon (“the Property”). Before the trial, the Applicant’s entitlement to compensation is no longer in issue. The main dispute remains to be the assessment of the open market value (“OMV”) of the Property at the relevant valuation date of 24 May 2006 (“relevant date”).

The Property

2.  There is no dispute on the following particulars of the Property: -

(1)The effective saleable area: 52.6 sq. m. (“sm”)

(2)The frontage: 4.23 m

(3)The headroom: 4.32 m

(4)The best use of the Property is for non-domestic / retail purpose.

(5)The Property was, at the relevant valuation date, subject to a monthly tenancy at a monthly rent of $18,000 which was determinable by a one-month notice

Summary of valuation

3.  Mr. Wayne W.K. Lee (“Mr. Lee”) and Ms. Ng Hung Mui (“Ms. Ng”) are the valuation experts respectively appointed by the Applicant and the Respondent to give evidence in this case. The parties do not dispute the valuation expertise of these 2 witnesses. Prior to the hearing, they have exchanged valuation reports and supplementary reports. Mr. Lee opined the OMV of the Property to be $5,040,000, as opposed to Ms. Ng’s estimate of $2,946,000.

4.  In valuing the Property, it is common ground to adopt the direct comparison method and to assume vacant possession despite of the then existing monthly tenancy.

The issues

5.  The issues to be decided in this case are: -

(1)What are the appropriate comparables?

(2)What are the frontages of the adopted comparables?

(3)What are the effective saleable areas of the adopted comparables, and whether the cocklofts of the adopted comparables should be taken into account in the calculation of the effective saleable areas?

(4)What are the appropriate adjustments for the adopted comparables?

(5)Finally, what is the OMV of the Property?

Issue (1) – what are the appropriate comparables?

6.  Originally, there were between the 2 experts a total of 12 comparables, with only 1 common comparable (AC5/RC4). The details are shown in Exhibit A4 produced by Mr. Lee.

7.  However, the Applicant confirmed at the final Closing Submission that the Applicant agreed to abandon AC1, AC2 and AC3, and also, to accept RC1 as the other common comparable. So, there are now for consideration a total of 9 comparables, with 2 common comparables, AC5/RC4 and RC1. The Applicant accepts 5 comparables as suitable: RC1, AC5/RC4, AC4, RC6 and RC7 whilst the Respondent’s 6 suitable comparables are RC1, AC5/RC4, RC2, RC3, RC5 and RC8.

8.  Therefore, the comparables identified and accepted by the 2 experts are as follows: -

Table 1

Comp. Ref.	Address	Date of Sale	Sale Price	Effective Saleable Area (sm)	Unadjusted Unit Rate (psm)
Common comparables-
RC1*	12 Larch St. G/F	13/3/06	$4,500,000	69.51	$64,735
AC5 /RC4	3-11 Pine St., G/F, Shop1	3/3/06	$3,000,000	61.00	$49,179
Mr. Lee's additional comparables-
AC1#	70-86 Ivy St., G/F, Shops 3B & 3C	31/8/06	$18,800,000	215.48	$87,246
AC2#	33 Larch St., G/F., Shop 3	31/3/06	$2,000,000	10.51	$190,220
AC3#	12 Larch St., G/F	16/10/06	$5,800,000	69.51	$83,436
AC4	70-86 Ivy St., G/F, Shop 3C	3/3/06	$5,500,000	81.05	$67,859
RC6	89 Oak St., G/F	14/11/06	$3,350,000	52.86	$63,374
RC7	95 Oak St., G/F	17/8/06	$3,000,000	51.34	$58,439
Ms. Ng's additional comparables-
RC2	6 Ash St., G/F, Commercial Unit 13	14/7/05	$3,800,000	56.32	$67,472
RC3	27 Pine St., G/F	5/7/05	$3,050,000	50.56	$60,324
RC5	78 Oak St., G/F	20/4/05	$2,000,000	53.79	$37,182
RC8	61 Oak St., G/F	28/5/05	$1,850,000	37.89	$48,826

Notes: * RC1: accepted by Mr. Lee as a common suitable comparable

# AC1, AC2 & AC3: abandoned by Mr. Lee as suitable comparables

9.  As one of the issues between the 2 experts is the difference in the physical dimensions and the effective saleable areas of the comparables, this will be considered below in this Judgment. For easy of comparison, I have provisionally used in the above Table 1 the effective saleable area estimated by Mr. Lee.

RC1 and AC5/RC4

10.  Both experts accept these 2 comparables as suitable comparables. I do not find any reason to depart from their consensus view.

AC1, AC2 & AC3

11.  Similarly, there is no longer any need to consider if these 3 comparables are suitable or not as both experts decide against adopting them.

AC4

12.  Mr. Lee opined that although this comparable was situated on the western side of Tai Kok Tsui Road, it could still be adopted as a suitable comparable after properly adjusting the location difference between the comparable and the Property. In this regard, Mr. Lee suggested that a –5% location adjustment was warranted. Ms. Ng differed in opinion and said that the location difference was so substantial that AC4 ought not be adopted as a suitable comparable.

13.  The Applicant submits that according to the evidence of Mr. Lee, the Property was similar to AC4 in pedestrian flow at the relevant date. There were residential and commercial complexes and even a community centre near and around the Property. Also, the Applicant submits that on the eastern side of Tai Kok Tsui Road where the Property was located, there were similarly high pedestrian flows with different types of retail shops such as restaurants, banks, mahjong centre and Chinese medicine clinics.

14.  Besides, the Applicant submits that when compared with the unadjusted and the adjusted unit rates of the Respondent’s other comparables, the unadjusted unit rate of AC4 and the Respondent’s adjusted unit rate fall within the range of the former figures. So, the Applicant says that the Respondent’s allegation that the Property and AC4 are substantially different in terms of location is not supported by the market transaction prices of the other comparables and Ms. Ng’s own valuation.

15.  On balance, I agree with the Applicant that this comparable AC4 can be adopted as a suitable comparable.

RC6 & RC7

16.  Ms. Ng previously adopted these 2 comparables and used in her valuation on several occasions. However, in the Supplementary Report, she changed tack and opined that these 2 comparables were not suitable comparables for the following reasons:

(1) They were transacted after the relevant date.

(2) There was a high demand for replacement shops by displaced owners thereby bidding up the market price after the relevant date.

(3) Evidence of some transactions of “paired sales” (i.e. transactions of same or similar shops) at different times, one prior to and one after the reversion date, supported Ms. Ng’s opinion.

17.  However, the Applicant submits that in principle (which is not opposed by the Respondent) a market transaction after the valuation date per se does not bar it for consideration as a comparable, as said by Dr. Gordon N Cruden in his book, Land Compensation and Valuation Law in Hong Kong, 3^rd edition, pp. 606-608,

“The Hong Kong practice of admitting and relying on hindsight is firmly established and frequently followed… Evidence of value after the relevant date is admissible, unless the particular statutory provisions clearly prohibit such evidence being considered. Valuers generally may use hindsight and the courts are similarly entitled to the benefit of hindsight.”

18.  Regarding Ms. Ng’s claim of the high demand for replacement shops by displaced owners, the Applicant submits that she actually “agreed in cross examination that she had no factual basis to support the alleged high demand.”

19.  In addition, the Applicant submits that the 2 “paired sales” of AC1 v. AC4 and RC1 v. AC3 cannot substantiate Ms. Ng’s assertion of unusual upward price swing after the relevant date because there are plausible explanation in both cases. The Applicant also submits that Ms. Ng has unrealistically assumed that the displaced owners would all find replacements in the vicinity. There is simply no factual evidence to support such an assumption.

20.  Having considered all the evidence, I find in favor of the Applicant and agree to adopt RC6 & RC7 as suitable comparables.

RC2, RC3, RC5 & RC8

21.  The Applicant objects these 4 comparables mainly on the ground that they were transacted quite a long time before the relevant date of 24 May 2006 (i.e. RC2 on 14 July 2005, RC3 on 5 July 2005, RC5 on 20 April 2005 and RC8 on 28 May 2005). In addition, the Applicant objects the adoption of RC2 and RC8 for other different reasons, that the former has no en-suite toilet and would complicate the adjustment exercise whilst the later was subject to tenancies. Therefore, there is no need to adopt these 4 dated transactions as comparables particularly as there is already a sufficient number of suitable comparables.

22.  On the contrary, the Respondent submits to include these 4 comparables as suitable comparables for the following reasons: -

(1) All these 4 comparables are located relatively close to the Property and are located on the same, eastern side of Tai Kok Tsui Road which means that location adjustments will be less subjective and arbitrary.

(2) All these 4 comparables have similar saleable areas and layouts as the Property hence requiring lesser and easier adjustments.

(3) Ms. Lee did not raise any strong objection to these 4 comparables apart from their transaction dates, with the exception of RC8, which was also objected on the basis of an existing tenancy.

(4) Even in the case of RC8, there was no concrete evidence to suggest that the existing tenancy affected the transaction price, and in any event, there was nothing to suggest that the tenancy was not a genuine “at arms length” tenancy.

(5) Most importantly, “the time objection is not justified given that the general market in Hong Kong between the earliest transaction in April 2005 and the date of resumption in May 2006 was not volatile as evidenced in the RVD price index, which was accepted by the Applicant’s expert.”

23.  Timing of sale is one of the most important factors affecting the market prices of properties, particularly shops. No adjustment or an adjustment reflecting a small difference in time is far better than an adjustment reflecting a large difference in time. This is so even if the time adjustments are based on an index of property prices compiled statistically, including the RVD price index. However, in the real world, it is usually difficult and almost impossible to find comparable sales at the same date. Therefore, in the alternative, those comparables closer to the relevant date are always preferred for adoption as suitable comparables. For this reason, any valuation expert, and any valuation court, will have to balance the pros and cons of adopting comparables that are closer in time or closer in other respects.

24.  In the present case, even though the parties agree to use the RVD index as the basis for time adjustment, I prefer to adopt the comparables that are much closer in time to the relevant date. Having considered the evidence for these 4 transactions, I agree with the Applicant to discard adopting them as suitable comparables.

Adoption of suitable comparables by the Tribunal

25.  Thus, for reasons stated above, I adopt the following 5 comparables as the best and suitable comparables for the valuation of the Property: RC1, AC5/RC4, AC4, RC6 and RC7. The important details of these comparables have already been set out in paragraph 8 above. Before considering the different adjustments proposed by the 2 experts, I will deal with the issues below, regarding (i) the differences in the experts’ estimates of the frontages of these comparables, (ii) the existence and the areas of the cocklofts in these comparables as well as (iii) the differences in the saleable areas of these cocklofts and the effective saleable areas of the comparables.

Issue (2) - frontages of the comparables

26.  The experts failed to agree on the physical dimensions of the clear frontages of the comparables. As a result, leave was granted for each of the parties to file a written report from the experts summarizing their scaled measurements of the clear frontages of the comparables and their computations. The results are as follows: -

Table 2

	RC1	AC5/RC4	AC4	RC6	RC7
Mr. Lee	3.27 m	3.58 m	3.09 m	3.08 m	2.53 m
Ms. Ng	3.47 m	3.59 m	3.89 m	2.96 m	2.66 m

27.  The major discrepancy exists for AC4 whilst the differences for RC1 and RC7 are about 5 to 6%. Otherwise, the experts’ figures are more or less the same for AC5/RC4 and RC6.

28.  There are bound to be certain degree of inaccuracies in these estimates as they were arrived at by scaling off the photocopied plans obtained from the Land Registry or the Buildings Department. However, I find from Mr. Lee’s report that he has shown detailed scaled measurements, the arithmetic formula and the detailed calculations in the computation sheet for which I could cross check and find them to be correct. By comparison, in some of Ms. Ng’s computation sheets, I could only find a reference to a certain ratio (presumably meant to be the estimated scale of the respective plan) without detailed figures showing how the ratio was derived, as a result of which I could not verify its correctness. Hence, I decide to adopt Mr. Lee’s figures.

Issue (3) – the effective saleable areas of the adopted comparables

29.  The experts’ estimates of the saleable areas of the comparables’ shop proper and where appropriate, the areas of their yards and cocklofts, as well as the overall effective saleable areas of the comparables are shown in the following table:

Table 3

	Shop (sm)	Yard (sm)	Cockloft (sm)	Saleable Area (sm)
RC1 (Mr. Lee)	61.21	15.07	23.19	69.51
RC1 (Ms. Ng)	64.11	14.74	53.68	79.99
AC5 (Mr. Lee)	61.00	0	0	61.00
RC4 (Ms. Ng)	60.21	0	27.16	67.00
AC4 (Mr. Lee)	81.05	0	0	81.05
RC6 (Mr. Lee)	51.41	8.69	0	52.86
RC7 (Mr. Lee)	50.64	4.20	0	51.34

30.  As can be seen from the above Table 3, Ms. Ng only provided different sets of area figures for the common comparables of RC1 and AC5/RC4. Therefore, I have only to determine the differences between the parties for these 2 comparables, out of the total 5 adopted comparables.

31.  The Applicant submits that the experts had different estimates of saleable areas for the comparables because they used different measurement approach: Mr. Lee adopted saleable areas consistently for both the Property and the comparables, all based on measurements from the building floor plans whilst Ms. Ng used the Internal Floor Area (“IFA”) records from the RVD and multiplied them by a conversion factor of 1.05 in arriving at the saleable areas.

32.  I find that Ms. Ng failed to show that her estimated figures necessarily represent the saleable areas of the comparables. Therefore, having considered the evidence of both experts, I agree to adopt the saleable areas of the comparables as estimated by Mr. Lee, including the areas for the shops, the yards and the cocklofts) instead of adopting Ms. Ng’s suggested figures.

33.  Also, the Applicant submits that for the common comparables RC1 and AC5/RC4, Ms. Ng, in estimating the areas of the cocklofts, did not adopt the saleable areas as shown in the approved building plans but made her own estimates. The Applicants submits that since Ms. Ng has included the unauthorized and illegal areas of the cocklofts, the Tribunal should not accept her estimates. Instead, the Tribunal should adopt the areas of the authorized cocklofts as estimated by Mr. Lee.

34.  After considering the experts’ evidence and the detailed analysis and submission of the parties on the issue of the cockloft areas, I prefer to accept Mr. Lee’s figures.

35.  Other than the above said differences of (i) the use of saleable area or the use of IFA multiplying by a factor of 1.05 and (ii) the exclusion of unauthorized areas in the calculation of the cockloft areas, both experts agreed to use the same conversion factors in converting the areas of the yards and the cocklofts into the effective saleable areas of the comparables. Since the parties have reached agreement in these conversion factors, I adopt their common factors in the conversion of these ancillary areas.

36.  Thus, for the adopted comparables, I adopt the effective saleable areas of Mr. Lee.

Issue (4) – the appropriate adjustments for the adopted comparables

37.  The 2 expert surveyors adjusted the comparables for various factors of adjustments: time, location, size, frontage, layout/shape, headroom.

38.  They held the same opinion as to the extents of the time adjustments for the comparables as both of them agreed to use the RVD Index as the basis of their adjustments. I agree to adopt the experts’ common adjustment for time.

39.  Similarly, they agreed on the basis of adjustments for size, frontage and headroom. I agree to adopt the same common basis of the 2 experts in the adjustments for these 3 factors. However, as they had differences in the effective saleable areas or the net headroom of some comparables, their proposed actual adjustments in the factors of size, frontage and headroom differed even though some of the differences were minimal. However, since I have earlier decided to adopt Mr. Lee’s figures for the frontages of the comparables as well as his effective saleable area figures for all the comparables including RC1 and AC5/RC4, I actually adopt the percentage adjustments of Mr. Lee for all the comparables in respect of these 3 factors of adjustments.

40.  The remaining areas of dispute are the adjustment factors for location and layout/shape. The experts held different opinion on the location of the Property relative to those of the comparables. This is also an area where each valuation expert usually claims to have his or her own personal opinion. Have considered the opinion of both experts and all the evidence adduced, I will adopt in the next section an appropriate adjustment percentage for each adopted comparable.

41.  Lastly, for the layout/shape, Mr. Lee adopted an across the board adjustment of +5% for each comparable whilst Ms. Ng opined that nil adjustment would be warranted as the difference in the layout/shape of the Property and the comparables is minimal. I agree with the opinion of Ms. Ng.

Issue (5) – the OMV of the Property

42.  Adopting the adjustments as summarized above, I have analyzed the adopted comparables as follows: -

Table 4

Comp. Ref.	Unadjusted Unit Rate ($ psm)	Time	Location	Size	Frontage	Headroom	Total	Adjusted Unit Rate ($ psm)
RC1	64,735	+2.7%	0	3.4%	+3.8%	-2.0%	+7.9%	69,849
AC5/RC4	49,179	+2.7%	+15%	+1.7%	+2.6%	-3.0%	+19.0%	58,523
AC4	67,859	+2.7%	-10%	+5.7%	+4.6%	+3.0%	+6.0%	71,931
RC6	63,374	+2.5%	+5%	+0.1%	+4.6%	+2.0%	+14.2%	72,373
RC7	58,439	+2.7%	+5%	-0.3%	+6.8%	-2.0%	+12.2%	65,569

43.  The average of the adjusted unit rates of the 5 adopted comparables is calculated to be $67,649 psm. Applying this unit rate to the agreed effective saleable area of the Property, at 52.6 sq. m., gives the sum of $3,558,337 as to be the OMV of the Property. This I would round to $3,560,000.

Conclusion

44.   In light of the above findings, I make the following orders:

(1) The Respondent do pay the Applicant the sum of $3,560,000 as the compensation for the resumption of the Property;

(2) The matters of professional fees, interest and costs be adjourned to a date to be fixed, with liberty to apply for consequential and ancillary matters.