Yuen Long Fish Merchant's Association Ltd.. v. Secretary for Transport

LDMR44/2000

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Application No.: LDMR No. 44 of 2000

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JUDGMENT

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(1) Background

1. The Applicant was the former registered owner of the Remaining Portion of Lot No. 1051, Lot No. 1052 and the Remaining Portion of Lot No. 1053 in Demarcation District No. 120 ("the Lots"), Tai Kiu, Yuen Long, New Territories. The Lots were resumed by the Government under the Railways Ordinance for the Kowloon-Canton Railway Corporation ("KCRC")'s West Rail (Phase 1) scheme. The Government Notice No. 4958 dated 15 October 1998 authorizing the resumption of the Lots and other land was published in the Government Gazette on 16 October 1998. The date of affixing of the Notice was 15 October 1998 and the date the Lots reverted to the Government was 16 January 1999. The Government and the KCRC cleared the site on 12 April 2000.

2. Fotton Surveyors Limited submitted on behalf of the Applicant a compensation claim to the Government on 10 January 2000. The Government rejected the claim and made a counter offer on 8 June 2000. The Applicant did not accept the said offer, nor did the Applicant and the Government reach any agreement. Pursuant to section 34(7) of the Railways Ordinance, the Applicant applied on 30 August 2000 to the Lands Tribunal to determine the compensation for the Lots resumed. On 2 November 2000, the Applicant applied for listing for hearing.

3. The Government filed a notice of opposition on 21 September 2000 on the ground that the claim by the Applicant was excessive. Expert reports were filed and exchanged by the parties following a call-over hearing held on 6 December 2000. The only dispute between the parties was on the quantum of compensation.

(2) The lots

4. The Lots are situated immediately east of a nullah off San Pui River, north of Long Yip Street and south east of Wang Yip Street South, in an area locally known as Tung Tau at the northern fringe of Yuen Long Town. The Lots consist of 3 contiguous parcels of agricultural lots directly adjoining a paved road off Long Yip Street and Wang Yip Street South. The subject site consisting of the Lots can be directly accessed by motor vehicles via either of these streets. To the east of Lots is an elevated walkway linking Wang Yip Street South and Tai Kiu Street.

5. The subject site comprising three contigious lots is irregular in shape. The Lots are Old Scheduled agricultural lots held under a Block Government Lease. The Lots are covered by the draft Yuen Long Outline Zoning Plan No. S/YL/4 dated 4 September 1998 and fall within an area zoned "G/IC" (Government, Institution or Community). At the reversion date, the Lots were occupied as part of a Wholesale Fish Market. There were some single-storey and some two-storey structures on the Lots, permitted under a Short Term Waiver granted by the Government since 1975. The Short Term Waiver ran on a quarterly basis and had been terminated prior to the resumption.

6. It was common ground that the total site area of the Lots was 2,804 sq. m. The Lots were wholly resumed by the Government in this resumption.

(3) Statutory Basis of Claim and Assessment

7. Under section 32 of the Railways Ordinance (Cap. 519), "Matters for which compensation may be claimed", "Basis on which compensation is to be assessed", "Persons who may claim compensation for their respective loss" and "Period which the claim must be served on the Secretary" are set out in Part II of Schedule 1 of the Ordinance. Section 1 of the said schedule provides that a claim may be made for the resumption of land as if that claim were made under section 6(3) of the Lands Resumption Ordinance (Cap. 124). In addition, under section 38(a) of the Railways Ordinance, "the Lands Tribunal may direct that interest be paid on compensation (but not on costs) for compensation payable under item 1 in Part II of the Schedule, as if the claim were made under the Lands Resumption Ordinance (Cap. 124) for land resumed under that Ordinance."

8. Therefore, the provisions of the Lands Resumption Ordinance regarding the basis of compensation, the principles to be applied in the assessment of compensation, professional fees and interests all apply in the present case.

9. Section 10 of the Lands Resumption Ordinance provides that:-

"the Tribunal shall determine the amount of compensation (if any) payable in respect of a claim submitted to it under section 6(3) or 8(2) on the basis of the loss or damage suffered by the claimant due to the resumption of the land specified in the claim."

10. Also, Section 12 of the same Ordinance sets out certain additional rules for determining compensation. In particular, the value of the land resumed is defined under Section 12(d) as to be: -

"...the amount which the land if sold by a willing seller in the open market might be expected to realise."

11. Therefore, the compensation for the Lots should be assessed on the basis of the open market value of the Lots as at 16 January 1999, the date of reversion. In this respect, both parties agreed that the highest and best use of the Lots at the relevant date of valuation was the use of the Lots as an open car park. Therefore, the Tribunal has to determine the open market value of the Lots as an open car park at 16 January 1999.

(4) Method of Valuation

12. The expert witnesses for both parties used the investment method of valuation as their principal method of valuation for the Lots. They also sought to support their valuation by the comparison method. They identified comparable lettings of sites for open car park use. They adjusted the comparables for various factors in order to arrive at the estimated unit market rent for the Lots. Applying this rate to the site area of the Lots, they estimated the full market rent for the Lots, on the basis of its use as an open car park. Finally, they multiplied the estimated full market rent for the Lots with the reciprocal of their estimated market yield for the Lots to arrive at the capitalized open market value for the Lots. On this basis, Mr. Alain Lau Yuet Ming ("Mr. Lau"), Chartered Estate Surveyor, the Applicant's expert, estimated the market value of the Lots to be $25,200,000. Similarly, Mr. Yip Ho Chuen ("Mr. Yip"), Chartered Surveyor, the expert witness for the Respondent estimated the market value of the Lots, after allowing for the demolition cost of structures, to be $10,716,000.

13. The experts also valued the Lots using an alternative, comparison approach in which they first estimated the number of car parks that could be accommodated on the Lots and then, the estimated sale price of the car parks. On this basis, Mr. Lau estimated the market value of the subject Lots to be $25,900,000 whilst Mr. Yip's estimate, after allowing for demolition cost of structures, was only $10,830,000.

The experts reconciliated their valuations and opined in their conclusions that the open market value estimates for the Lots should be based on their assessments using the investment approach.

14. The methodology adopted by the experts were proper and in order. The valuations by the parties' expert witnesses will be considered in details below.

(5) The choice and adjustments of rental comparables by the experts

15. In Mr. Lau's first valuation report (Exhibit A1) filed to the Tribunal, he had identified and investigated a total of 14 rental comparables of open car park sites. He respectively described them as "STT Letting Comparables" and "Recent STT Tender Results" in Appendix 7 and 8 of Exhibit A1. It appeared that his division of these comparables into two separate lists had more to do with the dates of commencement of these STT (short term tenancies) and the source of the evidence than the existence of any common characteristics of these tenancies. I note that for the list of 7 tenancies in Appendix 7, they were all, with the exception of STT No. 1556, located in Tuen Mun and Sheung Shui. STT No. 1556 was located in San Tin, Yuen Long although it was actually much closer to Sheung Shui town than Yuen Long town. For the tenancies in Appendix 8, only two (STT 1567 and STT 1569) were located in Yuen Long whilst the other 5 tenancies were in Tuen Mun, Fanling and Sheung Shui.

16. Mr. Lau opined that of theses 14 comparables lettings (numbered AC1 to AC14 in Attachment 1 of the Applicant's Final Submission), the following 7 were relevant for the valuation:

Ref.	STT No.	Location	Unit Rate (per sq.m.)
AC1	951	Tuen Mun	$522
AC2	963	Tuen Mun	$733
AC3	969	Tuen Mun	$1,256
AC5	1056	Sheung Shui	$504
AC10 (=C3)	1567	Yuen Long	$737
AC11 (=C2)	1569	Yuen Long	$981

17. Mr. Lau considered that "of the comparables gathered, 4 car park sites are most relevant for comparison purposes for their being in or close to the township similar to the Resumed lots." He concluded that having regard to the first four comparables listed above (AC1, AC2, AC3 and AC5) and after taking all relevant considerations, the subject Lots would be able to fetch a market rent of $700 per sq.m. p.a. This estimate, he said, was supported by the two more recent comparables (STT No. 1569 and 1567) in Yuen Long which are closer to the subject Lots. Mr. Lau provided no detailed adjustment to the comparables and admitted that this was a broad-brush valuation approach.

18. In his second valuation report (Exhibit A2), Mr. Lau stated that "with the benefit of further analysis it is considered the best letting comparable are to be found in the two STT sites, i.e. STT No. 1569 (C2) and 1567 (C3) in Yuen Long tendered out in 5/99 and 6/99 respectively." He then made adjustments for the factors of location, configuration, time and size to these two best comparables and arrived at after adjusted unit rates of $726 and $693 per sq.m. for STT No. 1569 (Comparable C2) and STT 1567 (Comparable C3) respectively. He calculated the average of these two after adjusted unit rates at $709 which he rounded to $700 as his estimated market rent for the subject Lots.

19. Mr. Yip differed from Mr. Lau in both the identification of comparables, and in the choice of the best comparables. They also differed very much in the percentages of adjustments for some factors of adjustments for the comparables. In Mr. Yip's first report (Exhibit R1), he assembled and analyzed in details 7 STT rental comparable which he considered to be more relevant. They were referenced as Comparables C1 to C7, the details of which are as follows:-

Ref.	STT No.	Location	Unit Rate (per sq.m.)
C1	1088	Yuen Long	$229
C2(=AC11)	1569	Yuen Long	$981
C3(=AC10)	1567	Yuen Long	$737
C4	1376	Tin Shui Wai	$450
C5	1052	Yuen Long	$250
C6	1297	Yuen Long	$310
C7	1395	Tin Shui Wai	$370

20. Mr. Yip discarded his Comparable C5 as it was an outdated tenancy commencing in 1995, over 3 years before the relevant valuation date for the subject Lots. His Comparable C4 was also dropped as it was let for a different user. Finally, he did not use Comparable C7 as it was similar to Comparable C4 except on size. As a result of this discarding process, Mr. Yip considered the remaining 4 comparables to be the most relevant comparables. He then made adjustments to reflect the differences between the subject Lots and these comparables, in terms of location, catchment area, layout, time and size. In the final analysis, he estimated after adjusted unit rates of $291, $461, $413 and $396 per sq.m. per annum for these Comparables C1 to C4 respectively. He found the average of these to be $390 and he at the end adopted a unit rate of $400 per sq.m., for the purpose of assessing the market rent for the Lots at the relevant date.

21. After reviewing Mr. Lau's first valuation report, Mr. Yip still considered his chosen Comparables C1 to C4 to be more comparable than the 4 key comparables identified by Mr. Lau in Exhibit A1. On the other hand, Mr. Yip stated in his supplementary valuation report (Exhibit R2) that should the Tribunal find Mr. Lau's comparables preferable, substantial adjustments of -27%, -44% and -62% for Comparables AC1, AC2 and AC3 respectively were warranted. Mr. Yip considered Comparable AC5 to be less relevant because of its being located in Sheung Shui. At the end, based on his analysis of Comparable AC1, AC2 and AC3, Mr. Yip estimated that the appropriate unit rental rate for the subject Lots to be $430 per sq.m. per annum.

22. During the hearing and the submission, the parties centred their evidence and submission on the two common comparables, Comparable C2 and C3. The Applicant in the final submission submitted that the Tribunal should put more weight on Mr. Lau's selection of comparables and particularly, Comparables C2 and C3. On the other hand, Mr. Miu, the Respondent's Counsel summarized their differences and stated that, "the question here is really the magnitude of adjustments that needs to be made to Comparables C2 (STT 1569, at Kin Tak Street) and C3 (STT 1567, at Ma Tin Road)." Of course, he further submitted that the "Respondent's expert's approach is more thorough and meticulous, and as a result, his figure is more reliable."

23. Before I consider these two common comparables and the parties' adjustments in details, it is necessary to ask whether the valuation of the subject Lots should best be based on these two comparables, C2 and C3 alone. If not, what other comparables should be considered and how much weight should be given to the other comparables?

(6) Choice of comparables by the Tribunal

24. Although the two experts had between them considered a total of 19 rental comparables, only two comparables (i.e. Comparables C2 and C3) are found to be located within the Yuen Long Town. The market rental value of any car park site obviously depends on the competing supply of other car parking facilities and the demand for car parking services, both of which are very much location sensitive. Since these two comparables, similar to the subject Lots, are located at or near the fringe of Yuen Long town, I agree that they are the best comparables.

25. Although Mr. Lau opined that 7 out of his 14 comparables were the more relevant comparables, they are all, with the exception of the two common comparables, located outside Yuen Long Town.

26. The other two of Mr. Yip's chosen 4 best comparables are also not located within Yuen Long Town. Although Mr. Yip's Comparable C1 was said to be located in Yuen Long district, it is in fact located at "about 800m west of the western edge of Yuen Long Town", in Ping Shan. For Comparable C4, it is located at the outskirts of Tin Shui Wai. Although Mr. Yip opined that Comparable C4 enjoyed a similar position as the subject Lots since both were not close to any commercial activity with expected low demand for hourly parking, this was not agreed by the Applicant.

27. All in all, I agree and decide that in general, the differences between different towns are so great that it is difficult to compare the rental levels of different car parking lots in different towns. This is especially so in our present valuation exercise as neither party has attempted any detailed quantitative car parking study and survey regarding the immediate areas surrounding the subject Lots and the comparables, or similar but comprehensive studies and surveys in the different towns in a wider context. As a result, both experts in assessing the market rent of the subject Lots very much relied on their professional experience and judgment. Therefore, I agree with the Applicant that Comparable C4 is also not a good comparable and should not be given the same weight as the two common comparables, Comparables C2 and C3.

(7) Adjustment of comparables by the Tribunal

28. The adjustments to the two common comparables made by the two experts are summarized below:-

29. The major difference between the two experts was their adjustment for the factors of location and catchment area, especially for Comparable C2. I will consider these adjustments in sequence below.

Location / Catchment Area

30. The Applicant's witness, Mr. Lau, was of the view that location was the most important consideration as it reflected the demand/supply for car parking spaces, access conditions, etc. Mr. Lau accepted that the Lots were inferior to Comparables C2 and C3 and downward adjustments of -20% and -10% were made respectively.

31. In the valuation reports prepared by Mr. Yip, the Respondent's expert, there was also a location factor but it transpired during cross-examination that this location factor was used to differentiate whether a certain comparable was located within or at the fringe of a town. It did not relate to the local demand and supply of car parking spaces, which were considered by Mr. Yip under a different heading of "Catchment Area". Therefore, the considerations involved under "Catchment Area" were the same as those considered by Mr. Lau under the heading of Location. Mr. Yip shared the same view that the Lots were inferior to Comparables C2 and C3 but he proposed adjustments of -40% and -25% respectively. The reason for Mr. Yip of making such large adjustments was that the demand for car parking spaces at locations of Comparables C2 and C3 were much greater than the Lots but the competing supply of car parks were far less than the Lots.

The Applicant criticised Mr. Yip that in Exhibit R1, he had deliberately omitted several temporary, open car parking lots located in the vicinity of Comparables C2 and C3. On the other hand, Mr. Yip, in analysing the demand and supply of car parking spaces in Kwan Lok San Tsuen, had not omitted to suggest that there were 3 temporary car parking lots near the subject Lots to provide "supply/competition" to the residents of Kwan Lok San Tsuen.

32. The Applicant submitted that as both experts admitted that the adjustment for this factor was only a subjective judgment, a large adjustment would be unsafe and unreliable.

33. The Applicant submitted that Mr. Yip had underestimated the demand for car parking spaces from Tung Tau Industrial Area to the immediate north of the Lots and from the residents of various villages which were only about 10 to 20 minutes walking distance away. Finally, the Applicant submitted that Mr. Yip's analysis was unrealistic and unreliable because according to the Applicant, the following all reinforced their argument that there was a high demand for parking in the subject Lots' location: -

- "the 2 free parking lots within the Area, according to the evidence of RW1, were always full";

- "the prices for hourly parking for 2 industrial building (namely no. 3 and 4 shown on R12), were much higher than other parking lots";

- "the illegal parking around the subject Lots were serious"; and

- "there were many car repair workshops or garages in the Tung Tau Industrial Area, it generated a lot of demand for parking spaces".

34. Mr. Yip opined that the subject Lots and the two common comparables differ a great deal in terms of the catchment area. The Comparables C2 and C3 could attract hourly parking customers who patronize the retail shops, building material shops, supermarket, off-course betting centre and restaurants in the vicinity of the Comparables. Mr. Yip gave evidence (Exhibit R12) that the operator of Comparable C2 used to charge $7 per hour, which was high for open car parks by Yuen Long standards. Similarly, it was reported that Comparable C2 charged a higher rate of $7 for the evening hours (6 p.m. to midnight) and a lower rate of $3 for other hours.

35. The Respondent submitted that by contrast, the subject Lots "is unlikely to attract any significant amount of customers who wanted to transact business in Yuen Long Town." Although the nearest centre of commercial activities is the market complex at Sau Fu Street and Fook Tak Street, there is strong competition as there is a multi-storey car park in the development next door. More importantly, the Respondent submitted, "it is a positive nightmare for someone unfamiliar with the vicinity to drive from Kiu Lok Fong to the subject site. Even for someone who is familiar with the vicinity, the subject site is 300 m plus a footbridge away. It would be a most unpleasant walk at night."

The Respondent agreed that the customers for the Lots are likely to come from the north side of Long Yip Street, in the Tung Tau Industrial Area. However, the Respondent submitted that "while there may be some demand, the demand is bound to be few and uncertain."

36. The Respondent dismissed the suggestion by the Applicant's expert, Mr. Lau, that there could be demand from the 2 vehicle examination centres as far-fetched and unrealistic. Regarding the survey by Mr. Lau that the hourly car parking charges in some industrial buildings near the subject Lots were expensive, the Respondent argued that they were designed to discourage people from using the car park for long to medium term parking. The Respondent also submitted that the existence of some 23 garages and 3 tyre shopes in the vicinity did not boost the demand for parking. Garage operators would always take advantage of any free car parking space or illegal off-street parking first but would use fee-charging car parks as a last resort. Lastly, the Respondent accepted that there would be some demand from other users of industrial buildings, but only very limited ones.

37. Therefore, the Applicant submitted that a downward adjustment of 25% for the subject Lots as it was compared to Comparable C3 (Ma Tin Road) would not be inappropriate. Since Comparable C2 (Kin Tak Street) was in an area of unusually high demand for hourly parking, hence a -40% adjustment.

38. I have reviewed all the evidence and find that the submission by the Respondent were more supported by the facts and evidence adduced by both parties. Although the two Comparables C2 and C3 and the Lots are roughly the same distance away from the town centre of Yuen Long, they enjoyed different locational characteristics. Whilst Comparables C2 and C3 are easily accessible to the residential / commercial areas to the north of Ma Tin Road, the Lots are almost physically cut off from the area south of Long Yip Street by the latter street and the traffic pattern in the vicinity of the Lots. I agree with the Respondent that the demand generated from the users of the industrial buildings north of the Lots were likely to be far less than that from users of commercial premises in the vicinity of Comparables C2 and C3. As a result of this finding, I am convinced that substantial adjustments to the comparables were warranted for this factor of location / catchment area.

39. I agree that if in the final analysis, a large adjustment has to be made, one could argue that the comparable may not in the circumstances be the best comparable. However, the reality is that there is a dearth of good comparable - which is usually the case in direct comparison method of valuation - any valuer (in that context including the Tribunal) could only attempt to do the best out of the limited quantity of good comparables. If it is considered that a substantial adjustment to a comparable is needed to account for a particular factor, I do not think it would be right to do otherwise, or to artificially reduce the quantum of adjustment for that particular factor in order to give a false picture that the overall adjustment amount is not substantial, thus avoiding the criticism that the comparable chosen may not the best comparable. In reality, that comparable may still be the best comparables, out of all the evidence that is available. This is exactly what I find to be the case here.

40. In the circumstances, I consider it appropriate to adjust Comparables C2 and C3 downward by 35% and 25% respectively to reflect this factor.

Layout/Shape/Configuration

The subject site formed by the Lots is irregular in shape while the two comparables are more regularly shaped. Both experts shared the same view that the Lots as a car park site was inferior to the two comparables but the extent of adjustments for the factor of layout/shape/configuration were different.

Mr. Lau, the expert for the Applicant suggested downward adjustments of 10% and 5% for Comparables C2 and C3 respectively. There was however no reasoning for his choice of adjustments.

Mr. Yip, the expert for the Respondent, estimated the number of car parks that could be accommodated on the Lots and the comparables, on the assumption that they are only to provide private car parks. Mr. Yip formulated hypothetical car park layouts that are set out in Appendix XI of Exhibit A1. Mr. Yip found that because of the irregular shape of the subject site which affects the efficiency of the resulting car park layout, the average size of the car park, including circulation space, of the Lots is bigger than the comparables, as follows:-

41. The adjustments proposed by Mr. Yip were based on the percentage difference between the average size of the car park (including the circulation space) of the comparables and that of the subject Lots.

42. The Applicant commented that the analysis carried out by Mr. Yip depended substantially on the hypothetical layouts. The Applicant submitted that although there could be many alternatives, Mr. Yip had only presented one of the alternatives. The Respondent replied that the manner in which Mr. Yip derived the adjustments was more empirical and thus scientific than the broad-brush approach adopted by Mr. Lau. The Tribunal agrees with the Applicant's submission and accepts Mr. Yip's adjustments. The Applicant had the opportunity of giving evidence to challenge Mr. Yip's hypothetical layouts. If they chose not to, there is no reason that the Tribunal should not accept Mr. Yip's evidence that is a reasonable attempt to quantify this item of adjustment.

Time

43. Mr. Yip estimated the percentage adjustments for time by reference to the Rating & Valuation Department's rental indices for flatted factories, in the absence of other better evidence. The experts were agreed on the quantum of adjustments for time for these two comparables. I adopt their agreed adjustment of +4%.

Quantum

44. Mr. Lau gave evidence that there was no or little adjustment for size (or quantum as described by Mr. Yip) if a car park fell within what Mr. Lau called an "optimal" size range of 2,000 to 5,000 sq. m. Hence, Mr. Lau gave no adjustment to Comparable C2 and suggested an upward adjustment of 5% to Comparable C3 since it only had a less than optimal area of 1,792 sq. m.

45. Mr. Yip opined that the unit rental of a car park was inversely proportional to the size. He stated in his report (Exhibit A1), "The smaller the size of a car park, the chance of getting high occupancy rate is higher than that of the larger one. Therefore, the car park operator may prepare to pay higher unit rental for a smaller site because the risk of running a small car park is lower. On the contrary, the larger the size of a car park, the average operation cost may be lower as it can enjoy the economy of scale. However, the fixed cost (e.g. salary for the security guard, business registration fee) of operating a car park is minimal as compared to the rental expenses." Mr. Yip actually compared the rental rates for Comparables C4 and C7. He demonstrated that for these two similar adjoining comparable sites having a similar shape/layout but different sizes (with C7 about 1.74 times or 2,610 sq. m. larger than that of C4), the unit rate of Comparable C7 was about 22% lower than that of Comparble C4. At the end, Mr. Yip proposed downward adjustments of -5% and -10% respectively to Comparables C2 and C3 be made.

46. The Applicant submitted that Mr. Yip's theory of "inversely proportional to size" was not substantiated. On the other hand, the Respondent countered that Mr. Lau's contention of an "optimal size range" was unreal. The Respondent also submitted that if it was suggested that Comparable C4 should have attracted a higher rental had it been put on public tender (and not rent review as was the case), then the effect of size on rental would be even more marked.

47. I agree that there is certainly an optimal size limit for a car park. For example, if a car park is below a certain size that the proportion of driveway to the whole site area is much higher than that of the market norm, the rental rate for such a car park will certainly be affected by the size. However, in my view, the optimal size range may not be as high as 2,000 to 5,000 sq. m., as suggested by Mr. Lau. He had not provided any calculation or evidence to demonstrate that the 2,000 sq. m. to 5,000 sq. m. range was the "optimal size range".

48. Also, I agree with the Respondent that generally speaking, Mr. Yip's reasoning (smaller size means higher utilization rates) is also logical, if the size of the car park exceeds a certain size limit. I find that Mr. Yip's opinion was also supported by his analysis of two similar tenancies (Comparable C4 and C7). However, it is obvious that the rent of a car park will not always be inversely proportional to size.

49. In the present valuation exercise, I consider that the difference in size between Comparable C2 and C3 is not large enough to justify a difference in adjustment of 5% for quantum/size alone. In fact, in my view, similar adjustment to both comparables should apply. Therefore, I determine that Mr. Yip's opinion of -5% for Comparable C2 is accepted but that his estimated adjustment for Comparable C3 should be amended to -5% as well.

Overall adjustment by the Tribunal

50. I summarize below my adopted adjustments for the two best comparables, as follow: -

51. Therefore, the adjusted unit rates of these two comparables, C2 and C4, are calculated to be $510 and $450 per sq. m. respectively. The average of these two unit rates is $480 per sq. m. Giving equal weight to these two comparables, I adopt $480 per sq. m. as to be the appropriate unit rate for the assessment of the full market rental value for the subject Lots, as follows:-

(8) Choice of appropriate market yield

52. Both experts agreed that the market yield for the Lots should be between the flatted factories yield of 12.9% and the office yield of 6.7% to 6.9%. The quoted yields were based on the Rating & Valuation Department published "private property market yield" for different types of properties in Hong Kong in the first quarter of 1999. Both acknowledged that there was no market survey of yield for open car park held for investment purposes.

53. However, in finding the appropriate yield for the subject Lots, the basis of adjustment by the experts was different. Mr. Lau used the average office yield of 6.8% as the starting point and added 1% to reflect the risk difference between the return for office properties and that for the Lots as an open car park. Mr. Lau also supplied an alternative approach to obtain the appropriate yield for car parking lot. He used the net monthly rent of $1,000 per space in Kwan Lok San Tsuen and the average transacted price of $180,000 for a space to obtain a yield of 6.67% for a single car parking space. Mr. Lau gave opinion that this also gave an indication of the appropriate yield for the Lots assuming that the Lots were to be used for car parking purposes. In light of this evidence, Mr. Lau concluded that his estimate of 7.8% was a suitable market yield for the valuation of the Lots.

54. Mr. Yip admitted during the cross examination that based on Mr. Lau's evidence and calculation, the yield of a single car parking space in Kwan Lok San was 6.67%. However, he still maintained that his choice of a yield of about 10% for the Lots, based on the average of the yield for offices and flatted factories, was appropriate. This was because a car parking lot would have a much higher yield than a single car parking space.

55. The Applicant submitted that an adjustment of more than 3% to reflect the difference between the yield of a single car parking space at Kwan Lok San Tsuen and the yield for the Lots was too large. The adjustment made by Mr. Yip was, according to the Applicant, "unsafe and unreliable". The Applicant also submitted that although Mr. Yip had no information or knowledge of the demand and supply of flatted factories, yet he adopted the yield of flatted factories as the starting point of his adjustment for the yield for the Lots. Therefore, the Applicant submitted that Mr. Yip's adjustment was unreliable.

56. The Respondent submitted that investment in an open-air car park could not be compared with investment in residential/commercial properties, particularly given the nature of uncertain demand for car parking spaces in the Lots. Moreover, in so far as the Lots must depend on visitors to the Tung Tau Industrial Area for demand, there was more reason for pegging the yield at a figure close to the flatted factories' index than to the commercial/residential index. Hence, the Respondent submitted that even if one were to take a simple average of two, the result would be 9.8. This equates to a premium of 3% above the published average market yield for office properties for the first quarter of 1999.

57. I agree with the experts that the yield for the subject Lots should fall between the yields for offices and flatted factories. Also, I agree with them that the yield for the Lots should definitely be above the yield for a single parking space in Kwan Lok San Tsuen, a small housing estate about 500m walking distance away. The ultimate question is the premium that has to be added on top of the yield for a single parking space in Kwan Lok San Tsuen.

58. The Tribunal notes that the 6.67% yield obtained for a single car parking space in Kwan Lok San Tsuen is almost identical to the average market yields for offices and retail properties (6.8% and 6.7% respectively) in the Rating & Valuation Department's published statistics for the first quarter of 1999.

59. In my opinion, a premium of 1% as suggested by Mr. Lau is clearly insufficient. There are much differences between investing in a single car parking space in Kwan Lok San Tsuen (an estate of some 360 village type houses with a car parking space to house ratio of less than 1 in 4) and in the subject Lots, which could accommodate a total of about 125 car parking spaces. The security of income is substantially different. There was evidence that there was insufficient car park in Kwan Lok San Tsuen. All the car parks that were offered for sale in 1999 were sold out in a few months' time. On the other hand, the subject Lots were not within the boundary of a residential estate but on the edge of an industrial area, bounded by Long Yip Street to the south. Long Yip Street was an arterial road that also served as a physical obstacle for users who would have to walk across an elevated walkway before they could access to the area south of the road.

60. Therefore, in the circumstances, in my opinion, a premium of about 2.5% is required to be added to the yield for a single car parking space in Kwan Lok San Tsuen in order to arrive at the appropriate yield for the subject Lots. The resulting yield of 9.17% will be used in the capitalization of the estimated market rent for the Lots.

(9) Capitalization of the estimated market rent by the adopted yield

61. From the above, the full market rental value for the Lots, at the relevant valuation date, was estimated to be $1,345,920. Applying this to the Tribunal's estimated yield of 9.17% (i.e. $1,345,920 x 100/9.17) gives a figure of $14,677,426. I round this to $14,680,000, which is the estimated market value of the Lots using the investment method of valuation, before the deduction for demolition costs of the structures.

(10) Alternative approach based on comparison sale of car park

62. The Applicant's expert, Mr. Lau, submitted an alternative approach in Exhibit A2. He carried out an analysis of the "minimum efficient area (including circulation space) per parking lot in various car parks in Yuen Long. The analyzed results in Exhibit A3 suggested that the "norm" or "modal" size of a parking space in the selected private open car parks in Yuen Long was about 10.58 sq. m. and the minimum efficient parking area was between 20 to 25 sq. m. per parking space. On that basis, Mr. Lau estimated that the subject Lots should be able to provide a total of about 125 car parks for sale. Based on the average sale price of about $180,000 in respect of 39 open car parks in Kwan Lok San Tsuen nearby in between September 1999 and December 1999, he estimated that each car park in the subject Lots could be sold for about the same price. Although Mr. Lau agreed that generally speaking, a resident would pay a slightly higher price for car parking space located within an estate or a village than a car parking space located outside of it, he was of the view that this may not apply in some situations such as Kwan Lok San Tsuen. The limited supply within the estate coupled with the high demand for parking space would force residents to buy car parking space outside the estate, such as those available at the subject Lots, at the same price. In addition, he suggested that the circulation space would still be able to generate regular incomes in the form of management/passage fees. This he estimated to be about 15% of the value of the parking lots. On this basis, he estimated that the market value of the Lots to be about $25,900,000.

63. Mr. Lau admitted that in his hypothetical layout for the Lots, the dimensions of the car parking spaces did not comply with Transport Department's Planning & Design Manual for Parking (Appendix D of Exhibit A3), yet this was only a realistic assumption reflecting the real life situation. In his opinion, none of the open car parking lots in Yuen Long complied with the Manual's standard dimensions. Therefore, he commented that the Respondent's expert's hypothetical layout was unrealistic and did not reflect the market situation. The Applicant submitted that since the Respondent's expert was unable to give any evidence on whether other parking lots in Yuen Long complied with the standard dimensions, Mr. Lau's view should be preferred.

64. In response to Mr. Lau's valuation on the alternative direct sale comparison approach, Mr. Yip, the Respondent's expert, submitted a similar valuation (Exhibit R3) during the hearing. He identified and analysed a number of private car park comparbles (Ref. C8 to C12), which were sales of car parks in between November 1998 and April 1999. Comparable C8 was sale of a covered car park in Kar Wah Industrial Building at Hi Yip Street and Leung Yip Street. Comparable C9 were sales of 10 covered car parks in Covent Garden, Ma Tin Road and Comparable C10, 13 covered car parks in Park Royale, Town-Park Road. Comparable C11 and C12 were covered car parks in Villa Art Deco, Town Park Road and Grand Del Sol, Fung Cheung Road respectively. Mr. Yip made adjustments to Comparables C8 to C12 in respects of the factors of level, covered or open state, ancillary to development and time and adopted an average of the adjusted unit rates of $122,000 in his valuation. He estimated that the maximum number of open car parks that could be accommodated on the Lots was 116, based on his hypothetical layout for the Lots. He multiplied that with $122,000 after which he made a build discount of 20% for bulk purchase. He finally arrived at a value of $10,830,000.

65. The Respondent submitted that "it is wholly inappropriate to use sale of car parks in Kwan Lok San Tsuen as comparables for the subject site for the following reasons: -

(a) demand for Kwan Lok San Tsuen situation greatly exceed supply by more than 4 to 1 (360 to 85);

(b) greater security for carparks within the estate than outside;

( c) reduction of supply nearby in mid-1999 due to resumption by West Rail (some 190 car parking spaces in Fu Kee, Chan Hing Kee and Tung Tau Tsuen "R4")".

66. The Respondent further submitted that "alternatively, if one were to use the car parks in Kwun Lok San Tsuen as guideline, the price of a car park in the subject site must be considerably less than $120,000, for the following reasons: -

(a) The common evidence is that car parks in Kwan Lok San Tsuen were renting for $1,200 per month at or around the date of resumption in the beginning of 1999. At the same time, the going rental for carparks in Fu Kee were only $800 per month (and Fu Kee had no hourly parking).

(b) The evidence therefore is that the residents of Kwan Lok San Tsuen were prepared to pay a 50% for a car park within Kwan Lok San Tsuen.

(c) If a car park in Kwan Lok San Tsuen could be sold for $180,000, a car park in Fu Kee could only be sold for $180,00x 800/1200 or $120,000.

(d) If a car park space in Fu Kee, which is right next door to Kwan Lok San Tsuen, could only be sold for $120,000, what price could a parking space in the Subject Site, which is nearly 500m, away from Kwan Lok San Tsuen, attract?

(e) The figure proposed by the Respondent's expert in Exhibit R3, that of $122,000, was therefore more than generous."

67. The Respondent submitted that the owner/developer of Kwan Lok San Tsuen were able to charge a premium for car parks in the estate and that the purchasers/residents were willing to pay. The answer should be due to the huge imbalance in supply and demand, and the fact that the residents prefer to park their car within the development. The Respondent submitted that the premium, estimated to be 50%, must carry over to the sale price. If there was a premium in the rental, so should there be a premium in the selling price of $180,000. The sale of a car parking space outside the development of Kwan Lok San Tsuen, such as in the subject Lots, would not be able to command such a premium. The Respondent dismissed the argument by the Applicant's expert that if a person (such as a resident in Kwan Lok San Tsuen) had nowhere to park his car, he would pay anything for a parking space. The Respondent pointed out that the 29 car parking lots in Kwan Lok San Tsuen were not sold over-night but over a period of 3 months, from September 1999 to December 1999. The Respondent further submitted that if a resident of Kwan Lok San Tsuen decided to go outside the estate to search for the purchase of a car park, the subject Lot might not be the only choice since it was neither the closest nor the most convenient.

68. Regarding the potential demand from other purchasers, the Respondent submitted that the subject Lots did not have any specific locational advantage relative to other car parks, particularly in the context of the normally accepted maximum distance that an average driver may be willing to walk to park in his car. Therefore, the Respondent submitted that the subject Lots could not hope to compete with other sites, except on price.

69. The Applicant's expert denied that there was any need for a volume discount in the valuation. He based this on the fact that the 29 car parking slots in Kwan Lok San Tsuen were sold within a period of 3 months as evidence of "strong demand". On the other hand, the Respondent submitted that the demand-supply situation within Kwan Lok San Tsuen was wholly different. Given that there was no well-defined target group of potential purchasers for car parks in the subject Lots, the Respondent submitted that as it would be unlikely for all the car parks in the Lots to be sold within a short time, the volume discount of 20% adopted by the Respondent's expert was in the circumstances a small one only.

70. Finally, the Applicant submitted that since it was not disputed that only 116 slots could be carved out from the Lots using standard dimensions of 2.5 m. times 5 m., this quantity should be used in the valuation.

71. I decide that the best comparables were the sales of the car parks at Kwan Lok San Tsuen as quoted by the Applicant. Not only that it was quite close to the Lots, about 500 m away, the analyzed price was in fact the average of some 29 sales, thus reducing the risks and uncertain factors that might be associated with only one particular sale.

72. I also agree with the Respondent's submission that adjustment of the average sale price of the car parks at Kwan Lok San Tsuen should be made to reflect the differences in the rental levels between a car park in the estate and a car park in the parking lots nearby, such as Fee Kee. Hence, the price of $180,000 is adjusted to $120,000, after reflecting the proportional differences between the agreed rents, close to the relevant valuation date, of a car park in Kwan Lok San Tsuen and Fee Kee, $1,200 and $800 respectively.

73. The Applicant's expert gave evidence that the renters of car parking slots in Fu Kee were not given fixed parking space,. This would enable the operator to earn more income by taking in more customers than the space admitted. Although I agree with the Applicant that it would be unlikely that the operator could issue any significantly more monthly passes than it had space, I consider that it would be not unreasonable to assume that the operator could issue, for instance, 10% more such monthly passes. Therefore, the derived price for a car park of $120,000 should be adjusted further to reflect this factor. Finally, I agree with the Respondent that a total number of 125 car parking slots, based on the dimensions of car parks in Kwan Lok San Tsuen and most other open car parks but not the Design Manual's standard dimensions, should be adopted. This is because as we utilize the sale evidence from the market, we should also base on the actual information of parking dimensions from the same market sources, particularly it was mutually accepted that the dimensions in the Design Manual was not mandatory for open car parks. Finally, I agree with the Respondent that a discount for the sale of such a large number of car parks is required. This I estimate to be 10%. In the circumstances, the open market value of the Lots on direct sale comparison approach is estimated as follows: -

(11) Cost of demolition and preparation work for the use of the lot as an open car park

74. The Applicant's expert witness, Mr. Lau, gave evidence that in his view, no demolition costs should be allowed for in the valuation of the Lots as the said costs was not part of the expenses related to the ownership of the Lots. The Applicant submitted that Mr. Lau's view was correct. In the event that the Tribunal decides that cost of demolition of the structures on the Lots had to be deducted before arriving at the value of the Lots, the Applicant agreed to adopt the estimate made by Mr. Yip, the Respondent's expert witness.

75. Mr. Yip opined in his first report (Exhibit A1) that since the Lots could not be used as an open car park before the structures inside the Lots were cleared, he considered that it would be reasonable to deduct the demolition cost for clearing the structures. Mr. Yip adopted a unit rate of $450 per sq. m. as to be the demolition cost for clearing the structures. This was based on the Building Cost Index for the first quarter of 1999 which was prepared by Levett & Bailey, Quantity Surveyors and the type and scale of the structures existing on the site. By scaling off the survey sheet, Mr. Yip estimated the built over area of the structures to be about 1,100 sq. m. Therefore, Mr. Yip estimated the demolition cost to be about $500,000.

76. During the hearing, I asked Mr. Yip whether additional cost, apart from the cost of demolition, had to be incurred in order to prepare the site for use as an open car park. Mr. Yip opined that the additional cost would be minimal and could be assumed to be included in the estimated cost of $500,000.

77. The Respondent submitted that Mr. Lau's rationale was wholly unconvincing. Firstly, there was no evidence that the owner of the Lots was not the operator. Secondly, the structures were fixtures to the land and should belong to the landlord, which was the owner of the Lots (i.e. the Applicant). Therefore, unless there was evidence (of which there was none) that the operators were bound to demolish the structures before leaving, the owner of the Lots would have to demolish the structures before the Lots could be converted into a car park.

78. I agree with Mr. Yip's opinion and the Respondent's submission. As aptly summed up by Mr. Miu in his submission, the "value of the land resumed" must be taken to be the value of the land sold on the resumption date on an "as is" basis. Any purchaser who bought the Lots with a view to change it into a car park must incur expenditure to tear down the structures. So, the demolition costs must be taken into account when the purchaser made the offer.

79. Since Mr. Yip's estimate of the approximate cost of demolition was supported by scaled measurements from the survey sheet and the established building cost index, and challenged by the Applicant, I agree to adopt his estimate of $500,000 in this case.

(12) Determination of open market value of the Lots by the Tribunal

80. Using the investment approach, the open market value of the Lots, before deduction of the demolition cost of the structures, has been estimated to be $14,680,000. In addition, the open market value of the Lots, using the direct comparison approach, before deducting the demolition cost, has been estimated to be $14,850,000. Both parties opined that the value of the Lots should be based on the investment approach. I have accepted their opinion and therefore determine that the open market value of the Lots before deducting for demolition cost to be $14,680,000. After deducting the estimated demolition cost of $500,000, the open market value of the Lots as at the relevant valuation date is therefore $14,680,000 less $500,000, or $14,180,000.

(13) Order

81. Accordingly, the Respondent is ordered to pay to the Applicant compensation for the value of the resumed Lots in the sum of $14,180,000 plus interests. Leave is reserved to the parties to apply for the rate of interest, if not agreed, to be determined under section 17(3A) of the Lands Resumption Ordinance, Cap. 124. There will also be an order nisi that the Respondent pay the Applicant's costs on the High Court party and party scale with certificate for counsel, to be taxed if not agreed, to be made absolute unless application is made by either party within 21 days for another order in place thereof. Liberty to apply is also reserved for ancillary and consequential matters.

Dated this 3 April 2001