TUNG MEI CHI VERA AND ANOTHER v. THE DIRECTOR OF LANDS

LDLR 1 OF 2006

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Lands Resumption Application No. 1 of 2006

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J U D G M E N T

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Background

1. The Applicants were the registered owners of the property known as Shop 2 on G/F, Lee Tung Apartments, Nos. 192, 192A, 194 Queen’s Road East and Nos. 49-61 Lee Tung Street (“the Property”).  The Property was resumed by the Government (by G.N. 3139) under the Lands Resumption Ordinance (“the Ordinance”) for the implementation of the Urban Renewal Authority’s (“URA’s”) Development Scheme H15 at Lee Tung Street/McGregor Street.  The Property reverted to the Government on 5 November 2005. On 25 November 2005, the Respondent offered to the Applicants a sum of $11,437,000 in full and final settlement of all claims.  This offer was rejected and no agreement between the parties could be reached. 

2. The 2 experts filed and exchanged a number of reports before the hearing.  During the hearing, they have reached agreement, for the present valuation purpose, to adopt the same effective saleable floor areas, for the Property and all the comparables.  Otherwise, they had little agreement in the choice of comparables, as well as in the adjustments appropriate for their adopted comparables.  In their final valuation reports, they valued the Open Market Value of the Property as follows: -

	Mr. Ng Sai Hee (“AW”)	Mr. James Ng (“RW”)
Shop A1	-	$2,752,185
Shop A2	-	$8,943,284
The Property	$17,948,907	$11,695,469
		rounded to $11,696,000

The Property

3. The Property was a ground floor shop of the building, Lee Tung Apartments, situated at the junction of Queen’s Road East and Lee Tung Street in the Wanchai district of Hong Kong.  The building was a 12-storey composite development completed in 1960.  According to the Occupation Permit of the building, the whole of the ground floor including the Property was permitted for shops purposes.  The Property fell within the controversial URA’s H15 Scheme, the largest project in Wanchai district involving all the buildings on both sides of Lee Tung Street, the buildings on the eastern side of Amoy Street as well as some buildings on the western side of Spring Garden Lanes and some buildings on both sides of McGregor Street near Cross Street.

4. The Property was divided into 2 portions, Shop A1 and Shop A2.  It was not disputed that Shop A1 was leased to a Mr. Lam Hung (trading under the name of “One More” fruit juice) for a term of 2 years from 20/12/1999 at a monthly rent of $12,000 inclusive of rates, and subsequently the rent from 20/12/2001 to 5/11/2005 was revised to $11,000 per month.  It was also not disputed that Shop A2 was leased to a “Wing Kwong Optical” for a term of 3 years from 3/10/2003 to 2/10/2006, at a rent of $14,000 per month inclusive of rates. Therefore, Shop A2 was subject to the tenancy with an unexpected term of 10 months and 27 days (i.e. 10.871 months) from the relevant valuation date.  Summing up, it was common ground that immediately before the resumption, Shop A1 was subject to an oral monthly tenancy, which could be terminated by a 1-month notice whilst the tenancy of Shop A2 had an unexpired term of 10 months and 27 days (i.e. 10.871 months) from the date of reversion.  Also, the experts agreed that the best use for the Property was for retail purposes.

5.  The 2 experts said in their valuation reports that the 2 portions of the Property had the following saleable areas and other dimensions: -

	AW	RW
Shop A1	10.235 sq. m.	10.48 sq. m.
Shop A2	35.275 sq. m.	35.03 sq. m.
Total area of the Property	45.511 sq. m.	45.51 sq. m.

For the purpose of the present proceedings, the experts agreed that the Property has an effective saleable floor area of 45.51m².

6. During the hearing, the 2 experts managed to agree on the headroom of the Property as 3.77 m but they could not agree on its frontage.  AW contended that the frontage should be the mutually agreed physical dimension of the frontage of the Property, at 4.705 m whilst RW said that the “clear” frontage should be 4.25 m as the columns on the sides of the Property should be excluded in the measurement of its frontage, which must be referred to as the extent of the clear frontage onto the street.

Other common grounds between the parties

7. The parties were in agreement of the following: -

(a)      The amount of compensation awarded to the Applicants, the former owners of the Property shall be the Open Market Value of the Property as at the relevant date of valuation, which was 5 November 2005 (i.e. the date of reversion of the Property to the Government).

(b)      Both experts agreed to adopt the direct comparison method of valuation using the effective saleable floor areas of the Property and the comparables as the basis for comparison in arriving at the Open Market Value of the Property.  However, whilst AW advocated the use of the Reduced Zoning Method for analysis and valuation, RW opined that the use of the average unit rate should be preferred.

Issues before the Tribunal

8. The following matters require determination by the Tribunal: -

(a)       the choice of the suitable comparables;

(b)      whether the overall unit rate method or the Zonal Method (Reduced Zone A Method) should be adopted;

(c)       the appropriate quantum for the various factors of adjustments that should be applied to the comparables;

(d)      determination of minor disputes between the parties on the measurements of the Property and the comparables.

Comparables adopted by the 2 experts

9. I have set out in the following Table 1 the details of the transactions of all the 16 comparables analysed by RW and set out in Appendix I of his report dated 28 September 2006 (pages 99 and 100 of the trial bundle) in response to AW’s valuation report dated 20 July 2006.  For convenience of comparison, I have also added in Table 1, for each comparable, the “Area in Terms of Zone A” and the “Zone A Unit Rate”, both of which were extracted from AW’s analyses at page 92 of the trial bundle and Exhibit A3.

Table 1 – Details of the comparable transactions

Notes

1.   The reference nos. AC1 to AC7 refer to AW’s comparables, which are set out as comparables (1) to (7) in the Table “B” (“Shop Value Analysis”) of his report dated 20 July 2006 (at page 47 of the trial bundle).

2.   The reference nos. * refer to the 3 other comparables listed out in AW’s report dated 20 July 2006 but not analysed in his Table “B”.

3.   The reference nos. RC1 to RC16 refer to the list of 16 comparables set out as comparables items (1) to (16) in Appendix I of RW’s report dated 28 September 2006 (at pages 99 and 102 of the trial bundle).

4.   The Effective Saleable Areas shown in this table were those agreed by the parties and shown in the revised schedule at Exhibit R1 provided by RW during the hearing.  It is submitted by the parties that whenever there were differences in the effective saleable areas of the comparables as quoted by the 2 experts in their valuation reports, they have agreed to use an average figure as an agreed area.

5.   The Area in terms of Zone A were the figures shown in AW’s analysis at page 92 of the trial bundle and Exhibit A3.

Summary of valuation by the 2 experts

10. In his written valuation report, AW valued the Open Market Value on vacant possession basis, as at the relevant date, at $18,560,000 (Zone A area of 40.68 sq. m. x average adjusted unit rate in terms of Zone A of $456,400 per sq. m. = $18,566,352 rounded to be $18,560,000, at page 92 of the trial bundle).  AW then undertook a term and reversion valuation to reflect the existing tenancies of the Property and arrived at a value of $17,948,907 as the Open Market Value of the Property at the relevant date.

11. During the hearing, AW produced Exhibit A3 giving his analysis of RW’s additional 6 comparables shown in the latter’s rebuttal report.  This analysis, together with AW’s earlier analysis of the 7 comparables at page 92 of the trial bundle gives the average adjusted unit rate of the comparables, in terms of Zone A, as follows: -

Average of 7 comparables shown in page 92 = $3,194,803 / 7 = $456,400

Average of 6 comparables shown in Exhibit A3 = $1,845,932 / 6 = $307,655

Average of 13 comparables = $3,194,803 + $1,845,932 / 13 = $387,749

12. If I use the above computed average figure of $387,749 and multiply that by the Zone A area of the Property, I arrive at a figure of $15,773,629.  However, AW did not actually set out the revised valuation of the Property assuming all the above 13 comparables were taken into account in arriving at the average adjusted unit rate.  This is because, as submitted by the Applicants, AW opined that only the first set of comparables as analysed in his report at page 92 should be accepted as comparables.

13. Similarly, in his written valuation report (page 89 of the trial bundle) filed in this case, RW valued the Open Market Property on vacant possession basis, as at the relevant date, at $11,955,477 (45.51 sq. m. x $262,700 per sq. m.).  After taking into account the then existing tenancies, RW valued the Property at $11,696,000.  RW revised the inputs in his valuation schedule at Exhibit R1, replacing his areas for the comparables by the areas “agreed” by the 2 experts (being the mean of their different areas) for those comparables with differences in areas.  RW also made, for each comparable, the necessary adjustments in consequence of the experts’ decision to “agree” on the frontage and headroom of the comparable.  RW then calculated the average adjusted unit rate for the comparables, which was $259,300 per sq. m. if all except RC2, RC9 and RC10 were taken into account, or $254,800 per sq. m. if all except RC2, RC9, RC10, RC13 to RC16 were taken into account.  However, RW also did not revise his final valuation as shown in page 89 of the trial bundle.

Choice of the best comparables to be adopted in this valuation

14. I first turn to the issue of the choice of comparables.  Both parties agreed that Comparables RC14 and RC16 should be discarded.  Otherwise, they had differences in the choice of all other comparables in this exercise.

15. In addition, AW opined that RC1 and RC11 should be rejected because the price ranges of both were so divergent from the other comparables that they should be considered as suspect or other than at arms length transactions.  In addition, RC7 should be excluded because of its remote location.  Other than these exclusions, the Applicants submitted that the Tribunal should accept all the comparables relied on by AW and in particular RC2, RC3, RC4, RC8, RC9, RC10, RC13 and RC15.

16. The Applicants submitted that even though both experts agreed that their obligations were to provide the Tribunal with neutral evidence and should not be biased towards the party that engaged them, the evidence of RW was doubtful for various reasons.  These include: (a) 8 of the original list of 9 comparables chosen by but now abandoned by RW were located not on the Queen’s Road East and RW admitted that he had made a mistake in the original choice of comparables; (b) his adjustments for RC2 were irreconcilable for which RW admitted that it was a mistake; (c) the differences in his calculations at pages 99 and 100 of the trial bundle and Exhibit R1 are so divergent that their reliability must be doubtful; (d) the inclusion of 6 new comparables in RW’s rebuttal report was meant to “ambush” AW; and (e) the RW’s suggestion in his report that the URA’s offer of $9,863,000 on 17 October 2003 was not the open market value accepted by URA at that time.

17. On the other hand, the Respondent submitted that the Tribunal need not be concerned with RC2, RC9, RC13 and RC15 but should take into account RC1, RC5, RC6, RC11, RC11 and RC12, in addition to the agreed comparables of RC3, RC4 and RC8.

18. I do not accept that RW’s evidence should be rejected on grounds as submitted by the Applicants.  RW admitted that he had made a mistake in the choice of comparables in his first report.  And, as submitted by the Respondent, there was a long time between the date of RW’s rebuttal report and the hearing that the Applicants could not claim that AW did not have sufficient time to deal with the new comparables identified by RW.

19. Since the parties were in disagreement, I will consider the relevance of each of the 16 comparables below: -

RC1 and RC12

There is no doubt that out of the 16 comparables analysed by the parties (shown as comparables RC1 to RC12 in Exhibit R1), there is a very wide range of values. However, I do not agree that we should simply look into the unadjusted unit rates of these comparables and conclude at the outset that some of these are out of range with the rest.  Since there are five comparables (RC1, RC2, RC7, RC11 and RC12) that seem to be forming a league of their own, with unadjusted unit rates of between $152,207 and $229,495 (as compared to the rest, which falls between $291,074 and $514,069) we should see if we could reach a similar conclusion after making adjustments to all the comparables. 

RC2

I agree with RW that RC2 should be discarded because its effective saleable area, at 221.17 sq. m. is over 4.8 times that of the Property (at 45.51 sq. m.).  Besides, it has a sizeable basement, which will affect the accuracy of the analysis even though the parties agreed to use the same conversion factor for basement in calculating the effective area of the comparable.  In addition, I note that there are several steps in between the street level and the ground level of RC2, which will affect its value as shoppers are known to avoid going up or down from the street level.  

RC3, RC4, RC5, RC6, RC8, RC11

Neither expert suggested to discard any of these comparables.  I have no reason to depart from them.

RC7

AW opined that RC7 should be discarded on the basis of its remote location.  This was not accepted by RW.  I agree with RW.

RC9 and RC10

Although AW only agreed to discard RC10, a comparable with an area of about 1/5 of that of the Property, he said that RC9 should be retained on the ground of maintaining “balance”.  I cannot understand the Applicants’ reasoning.  If RC10 should be rejected because it falls into a different category of shop premises, so should be RC9.  Therefore, I decide that both these 2 comparables are not suitable for the valuation of the Property.

RC13 and RC15

Both RC13 and RC15 were transacted over a year ago from the valuation date.  Therefore, the Respondent submitted said that these should be excluded especially since the property market between 2004 and 2005 were in a state of flux and there is sufficient number of comparables with lesser time differences.  I think we have to consider the time differences among the comparables as well.  I note that with the exception of RC1 that was transacted in March 2006, being 4 and 1/3 months away from the valuation date, the comparable with the closest transaction date was RC3 (which was agreed in April 2005, being 7 months away from the valuation date).  For the rest of the comparables, they were all clustered in between November 2004 and January 2005.  Therefore, I decide that if it is considered possible with reasonable degree of accuracy (by pegging it with the RVD’s territorial wide price index for retail properties) to adjust the comparables, we should also do the same for RC13 and RC15, both of which were only 2 months away from RC11 and RC12, and 3 months away from RC7 and RC8.

20. Summing up, I agree to discard, at this pre-adjustment stage, the following comparables: RC2, RC9, RC10, RC14 and RC16.

Use of Reduced Zoning Method or the average unit rate method in the valuation

21. AW adopted the use of the Reduced Zoning Method in analysing the comparables and the valuation.  Basically, AW reduced the effective saleable area of each comparable into an area in terms of Zone A by adopting a Zone A depth of 7.62 metre (25 ft.) or a Zone A depth of 9.15 metre (30 ft.) for a comparable with double frontage, and the remainder (equivalent to one half of the value of Zone A).  AW said he had been using this method in the valuation of retail premises over his career spanning for several decades.  On the other hand, RW opined that it was not that common to use the said method in Hong Kong.

22. The Applicants submitted that since 7 out of 14 comparables are of irregular layouts, it would be appropriate to adopt the Reduced Zoning Method for the purpose of this valuation.  Also, the Applicants submitted that AW was correct in his opinion that the most important factors for shops are size, layout and depth.

23. RW opined that Reduced Zoning Method was not reliable since the adoption of different Zone A depths would lead to different results and the choice of a 25-ft. Zone A by AW was just arbitrary.  Besides, most of the comparables are of similar size to the Property.  Therefore, RW considered that the Reduced Zoning Method was inappropriate.  Instead, he used the more common average unit rate method in this valuation. 

24. I agree with the opinion of RW in the drawback of using the Reduced Zoning Method.  Besides, after the exclusion of RC2, RC9, RC10, RC14 and RC16, the remaining 11 comparables are of fairly similar size.  With the exception of RC4 and RC11, they actually range in area of between 32.87 m and 51.37 m.  I have checked the layout plans produced by RW and find that most of them are of fairly regular shape too.  To conclude, I decide in favour of the Respondent.

The Tribunal’s adopted adjustments to the comparables

25. I will consider below the various adjustments opined by AW and RW, as well as my adopted adjustments to the 11 comparables: -

Location

AW did not find it necessary to adjust for the location of RC3, RC6, RC13 and RC15. He allowed small adjustments of between –3% to +5% for the other comparables with the exception of RC7 for which he gave an allowance of +50%.  On the other hand, RW’s adjustments for location were, in general, comparatively much larger, ranging from –35% to +10%.  Having considered the evidence of both experts, I decide to give allowance of between –10% to +5% with the exception of (i) RC3 and RC8 for both of which I do not give any adjustment and (ii) RC7 for which I give an allowance of +25%.

Time

This is the only area of adjustment that the 2 experts could agree on the figures.  They actually disagreed in their reports but they finally managed to agree the adjustment percentages, after clarifying that they were using the index figures from the same RVD table.  I have no reason to disagree this.

Size

AW gave minute adjustments, ranging from –2.91% for RC4 to +2.82% for RC11.  Although RW adopted an adjustment ratio of 2% per 10 sq. m. difference, roughly twice of AW’s adopted adjustment ratio of 1% per 9.29 sq. m. (or 100 sq. ft.), his adjustment figures were still quite small, ranging from –5.2% for RC4 to +5.3% for RC11.  This is because the effective saleable areas of all the adopted comparables are very similar to that of the Property.  I decide to adopt RW’s adjustments as they are more likely reflecting the differences between the comparables and the Property.

Frontage

Since AW adopted Reduced Zoning Method, he used a depth to frontage ratio as the basis of adjustment.  He first computed the depth to frontage ratio of the Property to be 2.1 and then opined that an adjustment of 1% per a ratio difference of 0.1 would be appropriate.  In this manner, he again computed modest adjustments for the comparables, ranging from –0.74% for RC1 to +2.55% for RC11.  On the other hand, RW advocated an adjustment based on the more traditional method of 4% per frontage difference of 1m.  RW also agreed that a linear approach could not be used for comparables with return frontages.  He therefore adopted different adjustments for comparables with return frontages.  As a result, RW’s adjustments ranged from –25% for RC3 to +6.2% for RC7.  I again find RW’s adjustments to be more appropriate than those of AW.

Headroom

AW did not make any adjustment for difference in headroom whilst RW adopted an adjustment of 3% per metre difference.  Counsel for the Respondent cited in the Closing Submission 5 reasons for the preference of RW’s approach.  I agree with the submission and adopt all the adjustments given by RW.

Building Age

AW opined that he would adopt an adjustment of 0.1% per year of difference in terms of building age.  Although RW did not allow for this factor in his valuation, the Respondent, in the Closing Submission, did not object to the Tribunal taking this factor into account.  Therefore, I adopt the figures suggested by AW.

26. Adopting the adjustments as summarized before, I have analyzed the adopted 11 comparable in Table 2 below: - 

Table 2 – Tribunal’s adjustments of the adopted comparables

The adjusted unit rates range between $147,184 (RC12) and $364,411 (RC5).  I note that 2 comparables have particularly low adjusted unit rates.  They are RC1 and RC12, at $151,277 and $147,184 respectively.  I decide that they should be excluded because they are far out of range with the rest and with the average unit rate of $291,064.

27. Therefore, after excluding comparables RC1 and RC12, I find that the remaining 9 comparables fetch an average unit adjusted rate of $322,583 per sq. m.  Applying this to the agreed effective saleable area of the Property, at 45.51 sq. m., gives the Open Market Value of the Property on vacant possession basis as $14,680,752.

Valuation of the term and reversion to reflect the existing tenancies

28. I agree with RW’s approach that since the Property was factually subject to two existing tenancies, its open market value should, technically speaking, be valued as the summation of the values of Shop A1 and Shop A2.  However, as the tenancy of Shop A1 was only a monthly tenancy, it was virtually worth the same as if vacant possession could be given.  Therefore, even though there was a dispute between the experts as to the different areas of Shop A1 and A2 and the discounting period, I adopt the figures used by RW, as this will be to the Applicants’ favour. 

Shop A1
Estimated Open Market Value = 10.48 sq. m. x 322,583 per sq. m. = $3,380,670

Shop A2
Value of the term:

Net rent passing per annum	$157,200
Y.P. 10.871 months at 3%	0.8807	$138,446
Reversion:
Open Market Value calculated at
35.03 sq. m. x $322,583 per sq. m.	$11,300,082
P.V. 10.871 months at 5%	0.9568	$10,811,918
		$10,950,364

29. Therefore, the open market value of the Property, being the summation of the open market values of Shop A1 and Shop A2, is equal to $3,380,670 plus $10,950,364, or $14,331,034, which is rounded to $14,331,000.

Orders

30. Accordingly, I order that the Respondent do pay the Applicants compensation for the resumption of the Property in the sum of $14,331,000.  The matters of professional fees, interest and costs shall be adjourned to a date to be fixed by the Registrar, with liberty to apply for any other ancillary and consequential matters.