LEE YUN v. DIRECTOR OF LANDS

LDLR 12/2006

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Lands Resumption Application No. 12 of 2006

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JUDGMENT

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Background

1.  The Applicants were the registered owners of Shop 1C on Ground Floor, Johnston Apartments, 86-90 and 90A Johnston Road, 46-54 Amoy Street and 1-11 and 11A Lee Tung Street, Wan Chai, Hong Kong (“Subject Property”) and the Respondent was the resumption authority. The Subject Property was resumed by the Government under the Lands Resumption Ordinance (“the Ordinance”) for the implementation of the Development Scheme H15 of the Urban Renewal Authority vide Government Notification No. 3739 dated 1 August 2005. The date of resumption was 5 November 2005.

2.  This Application was made pursuant to section 10(2) of the Ordinance for determination of the amount of compensation payable by the Respondent to the Applicant. There was no dispute that such amount shall be the open market value of the Subject Property on the date of resumption as more particularly defined in sections 10, 11 and 12 of the Ordinance. This Tribunal is therefore asked to determine the open market value of the Subject Property according to those well established statutory principles.

3.  In order to assist this Tribunal to determine the open market value of the Subject Property, the parties called for expert evidence. The Applicants called for the evidence of Mr. Eric S. K. Yeung, MRICS, MHKIS, Chartered Valuation Surveyor and the Respondent called for the evidence of Mr. James Y. W. Ng, MRICS, MHKIS, Chartered Valuation Surveyor.  I am satisfied that both Mr. Yeung and Mr. Ng were duly qualified and had sufficient experience in valuation, and in particular, for resumption matters. I therefore accept both of them to give expert evidence in this Tribunal.

4.  Pursuant to the directions of this Tribunal, the 2 experts filed and served on the other party 2 reports each before the hearing. Mr. Yeung and Mr. Ng however came to different opinions on the open market value of the Subject Property, namely:-

	Mr. Yeung’s View	Mr. Ng’s View
Open Market Value	$7,660,000	$3,877,000

5.  Upon this Tribunal’s request, Mr. Yeung and Mr. Ng took part in an experts meeting on 27 September 2010 and jointly submitted 2 signed statements dated 28 and 29 September 2010 respectively which helpfully set out their agreement on some of the assumptions adopted and steps taken in the valuation.

The Subject Property

6.  The Subject Property was a ground floor shop of a building called Johnston Apartments with its frontage facing onto Lee Tung Street. Johnston Apartments was a 15-storey tenement building completed in 1959. There was no dispute that the best use for the Subject Property was for retail purposes. It was agreed by the experts that the Effective Saleable Area was 14.98 sq.m. with a clear headroom of 4.69 m. (excluding the floor slab). The experts however disagreed on the definition of the frontage and came to different measurements for the Subject Property. Mr. Yeung was of the view that it was 3.28 m (including the width of the columns) but Mr. Ng said that it should be the clear width of 3.01 m excluding the columns.

7.  On the date of resumption, the Subject Property was subject to a tenancy agreement dated 1 May 2005 for a term of 1 year from 1 March 2005 to 28 February 2006 at a monthly rent of $16,000, exclusive of rates and management fee.

The Valuation

8.  The date of resumption was agreed by the experts as the date of valuation, namely 5 November 2005. There was no dispute that, due to the existing tenancy, the “Term and Reversion” Valuation Method was adopted for the valuation of the Subject Property for its open market value. Both experts had no dispute for the valuation of the “Term” interest of the Subject Property. For the valuation of the reversionary interest, there was no dispute for the discount rate at 5% and the discount period of 3.8214 months being used. The dispute was therefore only about the open market value of the reversionary interest of the Subject Property before discounting, on vacant possession basis.

The Issues

9.  For determination of the reversionary interest of the Subject Property before discounting, on vacant possession basis, the issues involved the following questions:-

 (1) What are the appropriate comparables ?

(2) What are the appropriate adjustments ?

 (3) What are the appropriate quantum of adjustment ?

10.  There was no dispute that the Direct Comparison Method should be used as the primary method of valuation in the present case.  However, Mr. Yeung, the valuation expert of the Respondent, suggested that the technique in Reduced Zoning Method should also be applied as well. Therefore, it was also in issue that whether or not the Reduced Zoning Method was a suitable valuation method for the present case. Given my findings on comparables and adjustments below, this should no longer be a live issue between the parties and I shall therefore deal with it appropriately later in this judgment.

The Appropriate Comparables

11.  The valuation experts agreed that the following comparables were suitable for the valuation of the Subject Property:-

	Address	Date of Transaction	Consideration	Agreed Effective Area (sq.m.)	Parties’ Description
C-1	Unit 2, G/F, Shu Tak Building, 22-30 Tai Wong Street East	26.1.2006	$12,300,000	46.65	“AC1/RC1”
C-2	Shop 3, G/F & C/L, Luckifast Building, 1 Stone Nullah Lane	28.7.2005	$7,300,000	28.8	“AC5/RC3”
C-3	Unit 14, G/F & C/L Tai Wong Building, 3-5 Tai Wong Street East	11.3.2005	$11,300,000	56.6	“AC8/RC4”
C-4	Portion 1, Unit 12, G/F & C/L, Antung Building, 6-16 Tai Wong Street East	8.9.2005	$13,500,000	59.47	“RC2”

12.  In addition to the above, the Applicant expert, Mr. Yeung, suggested to take the following comparables into consideration as well:-

	Address	Date of Transaction	Consideration	Agreed Effective Area (sq.m.)	Parties’ Description
C-5	Unit 148, G/F, Chung Nam Mansion, 148-158 Johnston Road	20.8.2005	$41,000,000	48.37	“AC4”
C-6	G/F, 162 Johnston Road	30.3.2005	$32,750,000	48.23	“AC7”

13.  On the other hand, the Respondent’s expert, Mr. Ng, suggested to take the following additional comparable into consideration:-

	Address	Date of Transaction	Consideration	Agreed Effective Area (sq.m.)	Parties’ Description
C-7	Unit C, G/F, 136 Queen’s Road East	2.2.2005	$2,180,000	11.68	“RC5”

14.  After I have had inspection of all the comparables on the first day of the hearing with the parties’ experts and legal representatives, I have already indicated that those comparables situated along Johnston Road might not be suitable for this valuation because the Subject Property only enjoyed a frontage onto Lee Tung Street and it did not enjoy any frontage onto Johnston Road. As Lee Tung Street was only a side street, it was quite different in character from Johnston Road which was a major pedestrian and traffic distributor of the Wan Chai area. Johnston Road enjoyed the benefit of high pedestrian flow but the Subject Property was only about 7 m away from the junction of Johnston Road. In my judgment, although the Subject Property might enjoy some retail potential from the pedestrian flow along Johnston Road, given the nature and the character of Lee Tung Street, it was not suitable to compare the Subject Property with shops along Johnston Road. After hearing evidence and submissions from parties, I maintained the same view as before. I therefore reject the view of Mr. Yeung that C-5 and C-6 were appropriate comparables for the valuation of the Subject Property.

13.  For C-7, since Mr. Yeung accepted, under cross-examination, that it was a suitable comparable subject to appropriate adjustments being made, I therefore accept the view of Mr. Ng that this should also be taken into consideration for the valuation.

14.  I therefore find that the appropriate comparables for the valuation of the Subject Property are:- C-1, C-2, C-3, C-4 and C-7.

Reduced Zoning Method

15.  Given my findings above that there would be 5 appropriate comparables for the valuation, the Respondent’s valuation expert, Mr. Yeung agreed that, since there were now sufficient comparables for this particular case, it would be no longer necessary to use the Reduced Zoning Method. For this reason, it is not necessary for this Tribunal to decide, in the present case, whether or not the Reduced Zoning Method was an appropriate method of valuation. I, however, would like to add that the decided valuation principles mentioned in the authorities cited by the Counsel for the Applicant, Mr. Pao, namely:- Tung Mei Chi Vera & Another V. Director of Lands LDLR 1 of 2006 (Unreported) 26 June 2007 (at para. 22-24), Rand Company Limited v. Director of Lands LDLR 7 of 2001 (Unreported) 7 March 2002 (at para. 20-25) and Ng Kai-suen v. Director of Lands [1994] HKDCLR 123 at 127, were very well established. I do not intend to repeat them here, save to say that, generally speaking, given the nature of the property market in Hong Kong, the Reduced Zoning Method should only be used as an exception rather than a general rule.

16.  I therefore find that the appropriate method of valuation for the present case is the Direct Comparison approach.

The Appropriate Adjustments

17.  The experts agreed that “Location”, “Time”, “Size (Quantum)” and “Headroom” were appropriate adjustments for comparing the Subject Property with the comparables. They also agreed that “Frontage / Returned Frontage”, “Frontage and Depth Ratio” and “Layout” were appropriate factors for consideration and therefore adjustments should also be made accordingly. However Mr. Yueng and Mr. Ng were unable to agree how these factors should be reflected in the valuation.

18.  Mr. Yeung suggested that adjustments should be made for “Returned Frontage” and “Frontage to Depth Ratio” but Mr. Ng was of the view that “Frontage” and “Layout” were more appropriate factors for adjustment. Both experts seemed to have taken relevant consideration for deciding the adjustment factors but approached the matter from slightly different angles. Since valuation is not an exact science, it would seem unfair to criticize either Mr. Yeung’s or Mr. Ng’s approach. However, in my judgment, for the present case Mr. Ng’s approach is preferred because “Frontage” and “Layout” are the usual adjustments made for valuation of retail shops and they have been accepted by this Tribunal on many occasions in the past. Further, Mr. Yeung’s approach was only his alternative view when his suggestion to use the Reduced Zoning Method was no longer needed. I therefore attach less weight to it. I, however, will treat Mr. Yeung’s adjustments for “Frontage to Depth Ratio” the same as Mr. Ng’s adjustments for “Layout” because according to their evidence, they, in fact, took similar consideration, namely depth of the shops, when making their adjustments. By reason of the above, I find that the appropriate adjustments for the valuation of the Subject Property are:- “Location”, “Time”, “Size (Quantum)”, “Headroom”, “Frontage” and “Layout (or “Frontage to Depth Ratio” according to Mr. Yeung)”.

Location Adjustment

19.  The is an extremely subjective matter for any valuation surveyor. Surveyors generally accept that there is no universal applicable formula for making adjustment for location. Therefore, not uncommon in valuation dispute, this is one of the most argued adjustments amongst surveyors. And not surprisingly for the present case, there was a great disparity between the views of Mr. Yeung and Mr. Ng. Their views were:-

Comparables	Mr. Yeung’s View	Mr. Ng’s View
C-1	+ 30 %	0 %
C-2	+ 10 %	- 5 %
C-3	+ 40 %	+ 5 %
C-4	+ 40 %	+ 5 %
C-7	+ 40 %	+15 %

20.  Perhaps for reasons mentioned above, parties invited this Tribunal to carry out a joint site visit on the first day of the hearing. During the site visit, I was asked by the parties to make my own observation on the location characteristic of the comparables and to compare them with the Subject Property. I was also reminded that Lee Tung Street, where the Subject Property located, no longer existed on the day when this Tribunal carried out the site visit and it had become part of a construction site. As a result, for objective evidence of the location characteristic of the Subject Property, I could only refer to the photographs and maps in the reports of Mr. Yeung and Mr. Ng. While I would take into account the observation which I made during the site visit for coming to my decision, I would remind myself that the effect of the underlying development of the Urban Renewal Authority must be ignored. Further, I reframe from relying too much on the subjective impression of the experts because, without much corroborative evidence, I find that some of their contradicting impression was not very helpful to my determination.

21.  Mr. Yeung and Mr. Ng, each carried out some analysis based on the rental values of the shops located along Lee Tung Street, Spring Garden Land, Tai Wong Street East and Stone Nullah Lane. I understand that these analyses were prepared for good intention to help this Tribunal for resolving the dispute on location adjustment. With respect, I find that they totally failed to serve their purposes. If I were to take them into consideration, they only created further disputes, rather than to resolve them. I appreciate that surveyors would like to form their opinion on more solid ground than just their own subjective impression. However, if surveyors, in valuation disputes, carry out different analyses based on very different data and assumptions without prior discussion of the usefulness of such analyses with surveyors of the other party, it would be more likely than not that these analyses would turn out to be complete waste of effort. I therefore recommend that, except for those established valuation methods, if a surveyor were to carry out some other analyses in future, some discussion with the surveyor of the other party must be undertaken prior to the preparation of the reports. I should also take this opportunity to remind the experts that they had an overriding duty to assist this Tribunal on matters relevant to their expertise and not to assume the role of an advocate for their respective clients.

22.  In my judgment, for C-1, C-3 and C-4, they all located along Tai Wong Street East which, I agree, had a similar character to Lee Tung Street. I also agree with Mr. Ng that, given the similar nature of the Tai Wong Street and Lee Tung Street, Mr. Yeung’s adjustment appeared to be excessive. But, on the other hand, I also accept Mr. Yeung’s view that Lee Tung Street was closer to the MTR station and the busiest section of Johnston Road. I therefore also find that, in terms of retail potential, Lee Tung Street was more superior than Tai Wong Street East. For these reasons, I reject the opinion of Mr. Yeung being excessive but accept the opinion of Mr. Ng but subject to an increase of “+10%” to all his location adjustments for C-1, C-3 and C-4 to reflect his insufficient consideration for Lee Tung Street being more superior than Tai Wong Street East.

23.  For C-2, although I accept that Stone Nullah Lane, where it was within a wet market, had a different character with Lee Tung Street, it does not necessary follow that Stone Nullah Lane was more superior than Lee Tung Street. I notice, however, that Stone Nullah Lane was a very narrow street but, on the other hand, Lee Tung Street could accommodate both vehicular and pedestrian traffic and therefore comparatively also had very good retail potential. Further, Lee Tung Street had a special attractiveness of being a street “specialised” in selling wedding cards, I consider that the retail potential of both locations, be it of different nature, was quite similar. In my judgment, I consider that nil adjustment for C-2 is more appropriate.

24.  C-7 was located towards the junction of Ship Street and Queen’s Road East. I accept that, out of the 5 comparables, in terms of retail potential, this was the most inferior. My own observation was that this comparable was located in a rather quite corner of Wan Chai district and a slightly higher adjustment is therefore justified. Having said that, I do not think that it should be as high as +40% as suggested by Mr. Yeung but Mr. Ng’s view of +15% was equally unreasonable. I therefore find that a suitable location adjustment for C-7 is +25%. My determination for the location adjustments are:-

Comparables	Tribunal’s Determination for Location Adjustment
C-1	+ 10 %
C-2	0 %
C-3	+ 15 %
C-4	+ 15 %
C-7	+ 25 %

Time Adjustment

25.  Time adjustments were agreed by experts that they should be based on the Private Retail Price Indices of the Rating and Valuation Department. I find that the experts’ views were reasonable and therefore accept them. My determination, as per the parties’ agreement, are:-

Comparables	Tribunal’s Determination for Time Adjustment
C-1	+ 3.6 %
C-2	+ 5.4 %
C-3	+ 1.4 %
C-4	- 1.8 %
C-7	+ 10 %

Size (Quantum) Adjustment

26.  Mr. Yeung and Mr Ng agreed for all the Effective Saleable Areas of all 5 comparables and the rate of adjustment at 3% for every 10 sq.m. difference. My determination, as per the parties’ agreement, are:-

Comparables	Tribunal’s Determination for Size Adjustment
C-1	+ 9.5 %
C-2	+ 4.1 %
C-3	+ 12.5 %
C-4	+ 13.3 %
C-7	- 1.0 %

Headroom Adjustment

27.  Mr. Yeung and Mr. Ng agreed that the clear headroom of the Subject Property was 4.69 m. The experts also agreed the clear headroom for the comparables, namely:-

Comparables	Clear Headroom
C-1	4.3 m.
C-2	3.2 m.
C-3	2.9 m.
C-4	2.9 m.
C-7	4.4 m.

28.  The experts had a slight divergence of the views on how adjustment for headroom should be made. Their adjustments were:-

Comparables	Mr. Yeung’s View	Mr. Ng’s View
C-1	+ 5 %	+1.2 %
C-2	+ 10 %	+ 4.5 %
C-3	+ 10 %	+ 5.4 %
C-4	+ 10 %	+ 5.4 %
C-7	+ 5 %	+ 0.9 %

29.  Both experts agreed that the Subject Property enjoyed the benefit of high headroom but they approached the matter rather differently. Mr. Yeung disagreed with Mr. Ng’s opinion that the amount of the headroom had a linear relationship with value of the property. Mr. Ng suggested that there should be an increase of 3% in value for every 1 m increase in headroom. Mr. Yeung cast doubt on this approach and commented that the suggested logical pattern could not be observed in reality and therefore suggested a “spot” approach. Although I accept that no empirical analysis was undertaken to prove that there was a linear relationship between headroom space and value, on balance of probabilities, I accept that Mr. Ng’s approach was more reliable than Mr. Yeung’s “spot” approach. I therefore find that Mr. Ng’s opinion be adopted as my determination for all the headroom adjustments.

Frontage Adjustment

30.  Mr. Yeung and Mr. Ng disagreed on the measurement of frontage of the Subject Property and all the comparables. The disagreement was about the definition of frontage. Mr. Yeung suggested that in measuring the frontage of a shop, the width of the 2 columns on either side of a shop should also be included as part of the frontage because they also served the function of the frontage For example, the columns could be designed in such a way to attract customers to patron the shop. Mr. Ng however said that only the clear width of the shop front should be measured because that was the only part where a retailer could have some practical use for display of goods and for access. In my judgment, the guiding principle for comparison must be to compare “like with like”. It was a reasonable approach as long as the same basis of measurement was used for comparison. I therefore do not see why experts could not reasonably come to a common view for adjustment of frontage. However, for this particular case, I noticed (from the photographs of the Subject Property) that one of the columns of the Subject Property was unusually wide. Although the column was used for display of goods, in doing so, some unauthorized encroachment on the government pavement was necessary and this could be easily seen from the photographs. For this reason, it would be unfair if this particular column was also taken into account as part of the frontage for comparison purpose, in particular, when none of the comparables had such wide columns. I therefore find that, for frontage measurement, Mr. Ng’s approach is preferred.

31.  According to Mr. Ng, the proper measurement of frontage of the Subject Property, for comparison with the comparables, was 3.01 m. For the same reason, I also accept all the measurement of frontage of the comparables suggested by Mr. Ng. Given that there was no evidence to suggest that the adjustment of every 4% increase in value for every 1 m increase in frontage was unreasonable, I therefore find that the opinion of Mr. Ng on all frontage adjustments be adopted as my determination, namely:-

Comparables	Measurement of Frontage	Tribunal’s Determination for Frontage Adjustment
C-1	3.5 m.	- 2.0 %
C-2	2.1 m.	+ 3.6 %
C-3	4.57 m.	- 6.2 %
C-4	4.5 m.	- 6.0 %
C-7	2.6 m.	+ 1.6 %

Layout Adjustment

32.  This was another area of dispute (similar to location adjustment) where the adjustments were largely determined by the professional judgment and experience of individual valuation surveyors. Both experts seemed to focus on comparing the depths of comparables to the Subject Property. Their views were:-

Comparables	Mr. Yeung’s View	Mr. Ng’s View
C-1	+ 30 %	+ 2 %
C-2	+ 35 %	+ 4 %
C-3	+ 25 %	+ 2 %
C-4	+ 30 %	+ 2 %
C-7	+ 5 %	0 %

33.  Mr. Ng was of the view that, except for comparable C-7 where no adjustment should be made, layout adjustments should be between +2% to +4%. For Mr. Yeung, he came to view that +5% to +35% were the suitable adjustments for the comparables. It was again difficult for this Tribunal to decide who’s approach should be preferred, given that they were all subjective judgment by surveyors. In my judgment, Mr. Yeung’s adjustments were somewhat on the high side and no evidence was adduced as to why there should be such substantial adjustments for depth. On the other hand, Mr. Ng gave very little explanation as to why his adjustments were so conservative. Having considered all the evidence adduced before this Tribunal, including the relevant measurements of the comparables and the Subject Property, I tend to accept Mr. Ng’s opinion with some improvement on his over conservatism and find that the suitable adjustments for layout should be:-

Comparables	Tribunal’s Determination for Layout Adjustment
C-1	+ 5 %
C-2	+ 10 %
C-3	+ 5 %
C-4	+ 5 %
C-7	0 %

The Tribunal’s Findings

34.  By reason of the above, I find that the adjusted unit rate for each comparable and the average adjusted unit rate, respectively, are:-

	Unit Rate ($ psm)	Location	Time	Size	Headroom	Frontage	Layout	Total Adjustment	Adjusted Unit Rate ($ psm)
C-1	263,666	+10%	+3.6%	+9.5%	+1.2%	-2.0%	+5%	+27.3%	335,646
C-2	253,472	0%	+5.4%	+4.1%	+4.5%	+3.6%	+10%	+27.6%	323,431
C-3	199,647	+15%	+1.4%	+12.5	+5.4%	-6.2%	+5%	+33.1%	265,730
C-4	227,005	+15%	-1.8%	+13.3%	+5.4%	-6.0%	+5%	+30.9%	297,150
C-7	186,644	+25	+10%	-1.0%	+0.9%	+1.6%	0%	+36.5%	254,769
								Average	295,345

35.  I therefore find that the unit rate for the open market value of the Subject Property, on vacant possession basis, is $295,345 per sq.m. Since both experts agreed that Mr. Ng’s “Term and Reversion” valuation be adopted, I therefore determine that the open market value of the Subject Property, subject to existing tenancy, as at the date of resumption, was:-  

Term
Rent per month	$16,000		per month
	x 12
Rent per annum	$192,000
Less rates at	0		per annum
Net rent per annum	$192,000
Y.P. 3.8214 month @ 4.0%	0.3103
			$59,578
Reversion
14.98 sq.m. x  $ 295,345 per sq.m.	$4,424,268
P.V. 3.8214 month at 5%	0.9846
			$4,356,134
			$4,415,712
	Say		$4,416,000

Orders

36.  Accordingly, I order that the Respondent do pay the Applicants compensation for the Subject Property in the sums of 4,416,000.  The matters of professional fees, interest and costs shall be adjourned to a date to be fixed, with liberty to apply for any other ancillary and consequential matters.