CHANCEMORE LTD v. YEE ON ENTERPRISES LTD

LDCS 17000/2015

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION

NO. LDCS 17000 OF 2015

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JUDGMENT

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1.  This is an application for compulsory sale of all the undivided shares of and in the Section Q and Section R of Inland Lot No 730 (collectively “the Lot”) with the buildings erected thereon known as 11 & 13 Matheson Street respectively (collectively “the Building”) for the purposes of redevelopment pursuant to section 3(1) of the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”). 

2.  The Building, comprising a pair of 6-storey buildings served by one common staircase abutting Matheson Street, was permitted to be occupied as per an occupation permit issued on 30 November 1965 as follows:

(1)   G/F: 2 shops for non-domestic use;

(2)   M/F (or Cockloft Floor): 2 stores for non-domestic use;

(3)   1/F: 1 office for non-domestic use; and

(4)   2/F-5/F: 2 tenements per floor for domestic use.

3.  Use and development of the Lot is governed by a Government Lease, the salient points of which are extracted as follows:

“…… which said message or tenement, messuages or tenements, shall be of the same rate of buildings, elevation, character and description, and shall front and range in an uniform manner with messuages or tenements in the same Street, and whole to be done to the satisfaction of the Surveyor of Her said Majesty, Her Heirs, Successors, or Assigns ……”

“…… shall not nor will, during the continuances of this demise, use exercise or follow, in or upon the said premises or any part thereof, the trade or business of a Brazier, Slaughterman, Soap-maker, Sugar-baker, Fellmonger, Melter of tallow, Oilman, Butcher, Distiller, Victualler, or Tavern-keeper, Blacksmith, Nightman, Scavenger, or any or either of them, or any other noisy noisome or offensive trade or business …..”

The Application

4.  There are a total of 14 units in the Building and each is allocated 1/14 undivided shares of the Lot. When the applicant commenced the present proceedings on 1 December 2015 (“the Application”), the applicant owned all the undivided shares in the Lot save and except for the 2 shares owned by the respondent in respect of G/F and Cockloft Floor of 11 Matheson Street (“the respondent’s units”). That is, the applicant has owned 85.71% of the undivided shares of the Lot.

Agreement Prior to Hearing

5.  On 27 May 2017, the applicant and the respondent have come to an agreement (“the Agreement”) that the apportionment ratio of the proceeds of sale of the Lot in respect of the respondent’s units is 42% in return for the following:

(1)   The respondent agrees to withdraw the contention that the existing use value (“EUV”) of the units in the Building was or is higher than the redevelopment value (“RDV”) of the Lot;

(2)   The respondent agrees to leave the applicant to prove its case for compulsory sale order in the hearing, save for the question of the updated RDV to fix the reserve price;

(3)   The respondent agrees not to cross-examine any of the witnesses, expert or factual, to be called by the applicant except on matters relevant to the assessment of the RDV and the respondent will not take any action which may hinder the applicant from obtaining the compulsory sale order in the action.

6.  The EUV of each unit in the Building has been agreed by the applicant and the respondent through their valuation experts in their joint statement dated 19 June 2017 as set out at Bundle III/F/1419 as follows:

(1)   The total EUV is agreed at $310,056,000; and

(2)   The EUV of the Respondent’s C/L is agreed at   32,560,000(10.50%) and G/F at $97,681,500(31.50%)

7.  In the present hearing, the applicant is represented by Mr Mok Yeuk Chi (“Mr Mok”) whereas the respondent is represented by Mr Walker Sham (“Mr Sham”).

8.  At the beginning of the hearing, Mr Sham further confirmed that the respondent would no longer rely on its valuation expert’s evidence as regards the assessment of RDV and the valuation expert would not be called.

Whether the Applicant isentitled to make the Application

9.  Section 3(1) of the Ordinance requires an applicant to have not less than 90% of the undivided shares in a lot before he can make an application.

10.  Section 3(2)(b) further provides that an application under subsection (1) may cover 2 or more lots-

(i)   on which one building is connected to another building by a staircase intended for common use by the occupiers of the buildings; and

(ii)   where the average of-

(A)   the percentage of the undivided shares owned by the majority owner in the lot or lots on which one of the buildings stands; and

(B)   the percentage of the undivided shares owned by the majority owner in the lot or lots on which the other of the buildings stands, is not less than the percentage specified in subsection (1).

11.  Section 3(5) of the Ordinance provides that the Chief Executive in Council may, by notice in the Gazette, specify a percentage lower than the percentage mentioned in section 3(1) in respect of a lot belonging to a class of lots specified in the notice.

12.  The Land (Compulsory Sale for Redevelopment (Specification of Lower Percentage)) Notice was gazetted on 22 January 2010 and came into operation on 1 April 2010 (“the Notice”).  Section 3 of the Notice lowered the threshold for compulsory sale in respect of the classes of lots specified in the Notice from 90% to 80%.  Those classes of lots include: “a lot with each of the building erected on the lot issued with an occupation permit at least 50 years before the relevant date (ie the date of the application under the Ordinance)”. 

13.  The occupation permit of the Building was issued on 30 November 1965 (ie 50 years before the date of the Application).  The Notice is applicable and the threshold percentage should be 80%.

14.  When the applicant commenced the present proceedings on 1 December 2015, it owned 85.71% of the undivided shares in the Lot, ie it owned on average more than 80.0% of the undivided shares in the Lot.  I agree therefore that the applicant was entitled to make the Application under section 3(2)(b) of the Ordinance.

Section 4(2)(a) - Whether redevelopment of the Lot is justified due to the “age” and/or “state or repair” of the Building

15.  Under section 4(1)(b) of the Ordinance, the Tribunal is to be satisfied that an order of sale should be made pursuant to the Application.  Section 4(2) of the Ordinance provides that there are basically 2 considerations, namely:

(i)   whether the redevelopment is justified due to age or state of repair of the existing development on the Lot; and

(ii)   whether the applicant has taken reasonable steps to acquire all the undivided shares in the Lot where a minority owner’s whereabouts are known.

16.  The applicant has to satisfy this Tribunal that the above statutory requirements are met; otherwise, an order for compulsory sale would not be granted.

17.  For the age and state of repair requirements, the applicant adduced the expert evidence of Mr Wong Chi Ming (“Mr C M Wong”), a Registered Structural Engineer and Authorised Person, and Mr Dennis Wong Wing Cheung (“Mr Dennis Wong”), a Registered Building Surveyor and Authorised Person. 

18.  Mr C M Wong conducted a Structural Assessment Report dated 14 November 2016 in respect of the Building.  He identified the following defects:

(1)   while no structural defects were observed in the common area during visual inspection, cracks and water stain were found at 4 locations within the flats; the observed cracks are longitudinal cracks caused by corrosion of the reinforcement;

(2)   open up inspection showed that all 106 steel reinforcement bars exposed are suffering from corrosion with 101 reinforcement bars (95%) suffering from grade 3 corrosion (mild corrosion); the corrosion of steel bars would significantly reduce the flexural and shear strength of the structural elements and hence the effectiveness of the structural elements;

(3)   31% of the covermeter test results showed concrete cover smaller than the design cover such that the corrosion rate of the steel reinforcement will be higher than that allowed for in the original design;

(4)   71% of the carbonation test samples showed depth of carbonation had exceeded the actual concrete surrounding the steel reinforcement bars;

(5)   41% of the core samples had chloride content exceeding 0.40% which can be inferred as moderate risk of corrosion.

19.  Based on his findings above, Mr C M Wong concluded the structural elements of the Building were in a poor condition.  He opined that the structural elements had approached the end of their design life of 50 years.  Mr C M Wong explained the importance of ductility and robustness, both of which were absence in the design requirements at the time of the construction of the Building. The corrosion of the reinforcement bars had entered the propagation phase and extensive maintenance and repair works would be required in the near future.  Mr C M Wong said that the design and construction of the structural frames had become obsolete over time and the structures failed to meet the current safety standard.  He recommended that hammer tapping works be carried out to all the structural members and he also recommended that all revealed cracks and spalling should be patch repaired, the costs of which total about $42,347. He also estimated the costs for applying elastomeric cementitious coating on clean concrete surface after removing existing plaster or tiles to be about $791,250 without the inclusion of the costs of reinstatement of the removed plaster or tiles.

20.  Mr Dennis Wong also prepared a condition survey report dated 14 November 2016 in respect of the Building.  He stated that the Building was in a state of disrepair with many of its components, finishes and services installations requiring high cost in maintaining it in a tenantable condition.

21.  Mr Dennis Wong estimated that the total costs of immediate repair works to restore the Building to tenantable standard would come to $5,197,705 which is about 35.63% of the cost of constructing a similar new building.  He concluded that the Building had deteriorated to a state which is beyond reasonable economic repair.  Also the carrying out of the essential repairs would cause considerable disturbance and would require a very long implementation period.  It is inevitable that the occupation and enjoyment of the flats would be affected intermittently during the course of the repair. For flats with substantial unauthorized building works, the occupants would have to be evacuated during the carrying out of work for safety reasons.

22.  Mr Dennis Wong also pointed out that even after essential repair works have been implemented, the Building will remain an old residential cum commercial building with out-dated design and construction which not only falls below market expectations but also constituts a continuing repair liability to the owners. 

23.  As said, the respondent did not seek to challenge these expert evidences at the hearing.

24.  Having considered the evidence before the Tribunal, I am satisfied that redevelopment of the Building is justified due to the age and state of repair of the existing development on the Lot.

Section 4(2)(b) – Whether Applicant has taken reasonable steps

25.  The applicant is under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of the interest of the respondent owning minority interests in the Lot under section 4(2)(b) of the Ordinance.

26.  In this regard, the applicant had made 3 offers to the respondent from 13 April 2015 to 23 November 2015 in the sum about $150 million/ $160 million which were higher than the assessment by Mr Alnwick Chan (“Mr Chan”) of Knight Frank Petty Limited at then 36.89% of the respondent’s proportionate share of the RDV as at 1 June 2016. The respondent did not accept any of the offers.

27.  On 19 April 2017, the applicant made the 4^th offer to purchase the respondent’s units for $180,581,440. This offer was accompanied by a letter of Mr Chan in which he had adopted 43.16% as proposed by the respondent’s valuation expert, Mr Patrick Lai (“Mr Lai”) in assessing the respondent’s proportionate share of the RDV at $403,400,000 which was even higher than the RDV assessed by Mr Lai at $303,000,000. On 10 May 2017, despite the change of representing solicitors by the respondent, this offer was rejected.

28.  Following the Agreement (where the sharing ratio of the respondent’s units was agreed at 42%) and the updated RDV reports from Mr Chan and Mr Lai, on 14 June 2017, the applicant made the 5^th and the last offer to the respondent also at $180,581,440. The updated RDV assessed by Mr Lai was $323,800,000 and that by Mr Chan was $413,700,000 so that 42% of $413,700,000 yields only $173,754,000. This offer was rejected by the respondent on 15 June 2017.

29.  In Intelligent House Limited v Chan Tung Shing & Others [2008] 4 HKC 421 where the majority owner relied on its valuation expert to formulate some of the offers, the Tribunal ruled at §334(3) that:

“… it is not disputed that Savills is a reputable firm of valuers. In our view, it is also reasonable for Intelligent House to rely on Savills’ expert opinion to formulate the purchase prices offered to the minority owners. There is also no reason for us to believe, nor is there such evidence to suggest, that the advices from Savills were not properly made based on professional valuation of the EUV and RDV of the minority owners’ units.”

30.  More importantly, the Court of Final Appeal in Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578, [2005] 4 HKLRD 363 (“Capital Well”) has emphasised at §33 that:

“… the Tribunal is not conducting a valuation exercise. It does not need to adjudicate upon any disputes about the correct valuation principles to be applied. It does not itself arrive at any conclusion as to what figure represents the correct valuation. It merely needs to be satisfied that, on the evidence available, the offer falls within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question.”[1]

31.  Bearing in mind the above and in particular the respondent’s position before the hearing having been that the RDV assessed by Mr Chan was too high (ie higher than the RDV assessed by Mr Lai), I am satisfied that on the evidence available and in the circumstances of the Application, the applicant has taken reasonable steps to acquire all the undivided shares in the Lot which include negotiating for the purchase of those shares owned by the respondent on terms that are fair and reasonable.

32.  Having considered the above, this Tribunal is satisfied that the requirements and conditions as laid down in the Ordinance have been met and an order for compulsory sale sought by the applicant should be granted.

Disputeson the estimation of the RDV of the Lot

33.  The only major issue remaining at trial was the determination of the RDV as the reserve price when the compulsory sale order is granted by the Tribunal.

34.  At the beginning of hearing, Mr Sham conceded that the respondent is no longer challenging the RDV assessed by Mr Chan being too high. Instead, Mr Sham seeks to increase the RDV as assessed by Mr Chan.

35.  It is undisputed that both Mr Chan and Mr Lai had resorted to the residual valuation method in determining the RDV of the Lot. This is done by deducting development costs (including construction cost, professional fees, finance costs etc) and developer’s profit from the estimated gross development value of the completed optimum development.

36.  By reference to the Joint Expert Statement prepared by Mr Chan and Mr Lai on 19 June 2017, the two valuation experts had the following agreements/disagreements:²

		Mr Chan		Mr Lai
Date of Valuation:		2 May 2017
Assumed Development:		A 25-storey commercial building, with a roof signage, designated for retail, dining and entertainment purpose		A 25-storey commercial building for shop or service trade uses
Vertical Circulation:		2 passenger lifts and 2 common staircases
Registered Site Area:		170.56 sq m
Right of Way Area:		18.95 sq m
Buildable Site Area:		151.61 sq m
Site Level:		4.90 mPD
Max Gross Floor Area (“GFA”) under B(P)R:		2,558.4 sq m (PR 15)
Max Building Height under OZP:		130.0 mPD
Class of Site under B(P)R:		Class A
Proposed Building Height:		125.0 m (excl height of the proposed rooftop signage)		117.5 m
G/F Shop(s)	Saleable Area:	81.03 sq m		101.61 sq m
	Common Area:	45.00 sq m		45.00 sq m
	Adopted Unit Rate:	$1,682,000/sq m		$1,550,000/sq m
Cockloft	Saleable Area:	N/A		46.17 sq m
	Adopted Unit Rate:	N/A		$388,000/sq m
1/F-24/F Shop(s)	Saleable Area:	1,702.37 sq m		N/A
	Common Area:	35.00 sq m (1/F -2/F)	30.00 sq m (3/F -24/F)
	Adopted Unit Rate:	$332,000/sq m
1/[2]F-2/F Shop(s)	Saleable Area:	N/A		213.22 sq m
	Common Area:			40.00 sq m
	Adopted Unit Rate:			$387,000/sq m
4/F-24/F Shop(s)	Saleable Area:	N/A		1,227.42 sq m
	Common Area:			40.00 sq m
	Adopted Unit Rate:			$316,000/sq m
Flat Roof	Area:	53.67 sq m (on 3/F)		N/A
	Adopted Unit Rate:	$50,000/sq m
	Conversion Factor:	1/6
Rooftop Signage	Dimensions:	12 m (L) x 5 m (H) supported by a 5 m (H) metal frame		N/A
	Adopted GDV:	$5,700,000
Marketing Cost:		1%
Demolition Cost:		$1,541,000 (based on Existing GFA: 731.77 sq m)
Construction Cost (Ginza):		$33,302/sq m on the basis of Medium Quality and on GFA		$43,340/sq m on the basis of High Quality and on GFA
Rooftop Signage		$2,650,000		N/A
Total Construction Cost		$87,849,071		$115,479,154
Demolition Period		0.75 year
Construction Period		2.5 years
Deferment Rate		5%
Professional Fee		6%
Developer’s Profit on cost and land		20%		25%
Land Value		$413.70 M*		$323.80 M

* Mr Chan has revised his valuation to $421,900,000 on the basis of updated time index.

Assessment of GDV - G/F

37.  Discarding a latest sale of a shop which Mr Chan considers different from the hypothetical shop in location, trading potential, pedestrian flow and layout etc, Mr Chan has basically only 2 comparables, one at G/F, 51 Jardine’s Bazaar and the other at 59 Percival Street as follows:

Comp	Address	Age of Building	Date of Sale	Consideration	Saleable Area (m2)	Frontage (m)	Depth (m)	Head-room (m)	Unit Price (/m2)
2.	Shop A, G/F, 51 Jardine’s Bazaar	1988	9 Mar 16	$68,800,000	40.18	3.34	15.47	3.50	$1,712,295
3.	G/F & C/L, 59 Percival Street	1954	6 Oct 15	$92,800,000	50.14 + C/L 14.09	4.18	15.24	2.9	$1,655,369

38.  “Comparable 2 at No 51 Jardine’s Bazaar is identical to the Property in terms of pedestrian flow. The Respondent’s expert challenged the validity of this comparable as it was sold with a sale and lease back arrangement. Nevertheless, it is a good reference transaction as the initial yield derived from the information contained in the Agreement for Sale and Purchase is approximately 3% and represents the market yield.”[3] Despite this comment as stated in his Supplemental Report dated 5 June 2017, Mr Chan does not rely on this comparable in the end.

39.  Instead, Mr Chan relies mainly on comparable 3 and arrives at a unit rate of $1,720,000/sq m though he had carried out analysis of the 2 comparables as follows:

Comp	Unit Price (/m2)	Adjustments								Adjusted Unit Price (/m2)
		Time	Location	Age	Frontage	Headroom	Size	Layout	Total
2.	$1,712,295	2.6%	-10%	2%	3%	3%	0%	3%	3.6%	$1,773,938
3.	$1,655,369	-3.6%	-10%	6%	1%	4%	3%	3%	3.4%	$1,711,652

40.  Without the aid of his own valuation expert, Mr Sham has difficulty in challenging the assessment of Mr Chan. However, I agree with Mr Sham that, in light of what Mr Chan stated in his Supplemental Report dated 5 June 2017, it would be more reasonable to adopt the average of the 2 adjusted comparables, ie $1,742,795/sq m or say $1,740,000/sq m.

41.  In Mr Chan’s hypothetical model, he has allowed for 2 shops on G/F, one with a saleable area of 42.84 sq m and the other 38.19 sq m after provision of a lobby of 45.00 sq m and a transformer room of 25.58 sq m. In this regard, Mr Chan makes reference to the provision of similar transformer room at the Sharp, a 32-storey Ginza-style commercial building completed in February 2016 at 11 & 13 Sharp Street on a slightly larger site about one block away from the Lot.

42.  Mr Sham challenges whether such a transformer room is really needed, making reference to a similar Ginza-style development, Oliv, at 15 Sharp Street where there appears to be no provision of a transformer room. During cross-examination, Mr Chan replied that he had made enquiry to the Hongkong Electric Company Limited, the sole electricity provider on Hong Kong Island. He found such a transformer room would only be exempted if there be sufficient surplus capacity left from existing low voltage network; he finds no evidence of any such sufficient surplus capacity left. Nor can Mr Sham find evidence to the contrary except by reference to Oliv which was built earlier in 2013.

43.  On the balance of probabilities, I accept the evidence of Mr Chan that a transformer room would be required on-site. That the transformer room at the Sharp would provide surplus electricity capacity to the Lot, as suggested by Mr Sham, is purely speculative. Following Mr Chan’s approach in assessments as shown at Bundle III/F/1331(A), I arrive at a GDV for G/F at $140,328,000.

Assessment of GDV - U/F

44.  Again, in assessing the GDV for the upper floors, Mr Chan relies on only one comparable – the sale of 17/F, Oliv, 15 Sharp Street ie KF1 on 9 March 2016 despite he notes the following transactions as well:

Comp	Address	Age of Building	Date of Sale	Consideration	Saleable Area (m2)	Headroom (m)	Effective Area (m2)	Unit Price (/m2)
KF1	17/F, Oliv, 15 Sharp Street	2013	9 Mar 16	$41,000,000	129.43	4.98	129.43	$316,774
KF2	10/F, Oliv, 15 Sharp Street	2013	4 Sep 14	$46,238,400	152.45	4.98	152.45	$303,302
KF3	20/F, Oliv, 15 Sharp Street	2013	4 Sep 14	$46,800,000	135.44	4.98	135.44	$345,540
KF4	21/F, Oliv, 15 Sharp Street	2013	4 Sep 14	$37,820,000	137.29	4.98	137.29	$275,475
KF5	7/F, Emperor Watch and Jewellery Centre, 8 Russell Street	2001	8 Sep 15	$97,000,000	298.73	3.50	298.73	$324,708
KF6	6/F, Emperor Watch and Jewellery Centre, 8 Russell Street	2001	7 Sep 15	$102,000,000	298.73 + Flat Roof 4.23	3.50	299.44	$340,636
KF7	28/F, Emperor Watch and Jewellery Centre, 8 Russell Street	2001	25 Jun 15	$117,000,000	298.73	3.50	298.73	$391,658
KF8	Unit A,, 9/F, Emperor Watch and Jewellery Centre, 8 Russell Street	2001	18 May 15	$19,958,400	47.56	3.50	47.56	$419,647
KF9	Unit B, 9/F, Emperor Watch and Jewellery Centre, 8 Russell Street	2001	18 May 15	$14,911,200	30.62	3.50	30.62	$486,976
KF10	Unit C, 9/F, Emperor Watch and Jewellery Centre, 8 Russell Street	2001	18 May 15	$19,859,200	43.67	3.50	43.67	$454,756

45.  As can be seen from the above, all those transactions are dated sales and Mr Chan explains that even the Private Retail Price index published by the Rating and Valuation Department (“RVD index”) which has been borrowed as reference for time adjustment is not reliable for Ginza type development as envisaged for the hypothetical development.

46.  For the purpose of illustration, Mr Chan has prepared an analysis which is produced as Exhibit A2 showing that although during the interim periods among the above transactions, the RVD index shows a minor increase, these transactions demonstrate a drop in value as much as 40% or thereabouts.

47.  Therefore, Mr Chan relies on only KF1 which is the most recent transaction in comparison though it took place also more than a year ago. Mr Chan analysed the adjusted rate to be $337,681/sq m. Again, Mr Sham failed to challenge this analysis.

48.  On the other hand, Mr Sham suggests, in addition to the further adjustments by Mr Chan on street exposure for 1/F at +10% and for 2/F at +5% in respect of the hypothetical development, there should be upward adjustments for convenient access and flexibility of layout for these lower floors. I agree with Mr Chan that with efficient provision of lifts, the further attraction of these lower floors through access by staircases would be minimal bearing in mind the headroom for each storey in the hypothetical development is 5m. I also agree with Mr Chan that by breaking down these 2 floors into smaller units for analysis, it would have incorporated a degree of flexibility in layout; otherwise, each floor with a saleable area of about 100 sq m may be too large or too expensive for the prospective users.

49.  In his closing submission, Mr Sham however criticizes that, contrary to the positive “flexibility” and “convenience” factors, Mr Chan has made a downward adjustment for “floor”, namely -12% for 1/F and -11% for 2/F. As rightly pointed out by Mr Mok, such adjustment for floor is usually adopted by valuers and indeed in the captioned case also agreed by Mr Lai in his joint statement with Mr Chan on 19 June 2017 though the quantum of adjustment suggested by Mr Lai was even larger[4]. Indeed, Mr Sham did not cross-examine Mr Chan on this issue and it is too late “to spring a surprise attack in the closing submissions”, the wordings used by Mr Mok in response.

50.  Mr Mok also contends that the ‘floor’ adjustment is a different and independent factor of adjustment separated from ‘flexibility’ and ‘convenience’. To this I agree.

51.  As a result, I accept Mr Chan’s total assessment of the GDV for the upper floors which is in the sum of $574,404,471 as stated at Bundle F/1338(A) based on an effective area of 1,702.37 sq m.

52.  Thus, the total GDV of the hypothetical development excluding the value of the Rooftop signage is $717,469,641 or$280,437/sq m.

Assessment of GDV - Rooftop

53.  Mr Chan proposes a rooftop signage for the reason that he identifies a rooftop signage at Southern Pearl Court, 151-153 Wong Nai Chung Road which is visible from the Happy Valley sports grounds. Mr Chan contends that a rooftop signage at the hypothetical development would be similarly visible.

54.  However, Mr Chan cannot find any comparable sale but relies on the rateable value of this comparable at $576,000 per annum and assumes a 30% discount for location to arrive at his assessment of rental value $400,000 per annum for his proposed signage. Then Mr Chan takes a 7% yield to get his assessment of $5,700,000.

55.  In 梁續有(以天祥參茸藥行的名營業) v 地政總署署長, LDLR 4/2006 (unreported, dated 22 February 2008), the Lands Tribunal remarked at §46 as follows:

“Although it is not the same as the market rent at any particular time, the rateable value of a property is an estimate of the annual rental value of the property at a designated valuation reference date (i.e. 1 October of each year), assuming that the property was then vacant and to let. In the absence of any evidence on market rent, the rateable value can be an indication of the level of rent a property can attract.”

56.  More recently, the District Court has also made similar observation in 皇河實業有限公司 v Wan Chiu Yuen & Another, DCCJ4448/2011 (unreported, dated 20 April 2015) at §204:

“The Rating and Valuation Department with its statutory authority should have collected a representative percentage, if not all, of the rental transactions at the material times to assess rateable value of properties. Of course special features of individual property such as internal decoration; historical nature of the information obtained by the Rating and Valuation Department and change of market conditions after the designated valuation reference date will all affect the valuation of market rental at a particular date. It should also not be forgotten that the rateable value of a property is assessed for the purpose of determining how much is payable as rates for the property. Various adjustments have been made by the Rating and Valuation Department to the data collected to achieve the statutory purposes. The rateable value is not the exact rental which a particular property may fetch in the open market but it provides a useful reference of the market rental of a property.”

57.  In any event, Mr Sham has not challenged Mr Chan’s assessment and as $5,700,000 is not a significant amount especially when Mr Chan has provisioned for a construction cost of $2,650,000, I accept his valuation.

Construction Cost

58.  In arriving at his construction cost of $33,302/sq m, Mr Chan has relied on the building cost data published by Rider Levett Bucknall assuming a “Medium Quality Office Building”. In answer to Mr Sham’s cross-examination at trial, Mr Chan gave evidence that the construction cost for a Ginza type commercial building would not be significantly higher though it has to take into account the provision of exhaust system, grease trap and extra electricity/gas supply and wider staircases for escape necessitated by the eateries. Nevertheless, I consider his assumption of “Medium Quality Office Building” might not be so appropriate if such additional costs are taken into account. Instead I would adopt $35,000/sq m.

Developer’s Profit

59.  At trial, Mr Chan conceded that for a hypothetical Ginza type development, he had been consistently adopting a developer’s profit of 20% on costs. Cheer Capital Limited v Unibase Investment Limited & Others, LDCS 5000 & 6000/2013 (unreported, dated 12 June 2015) is a case, for instance, in which the Lands Tribunal accepted his proposed developer’s profit of 20%.

60.  On the other hand, Mr Chan also conceded that the retail market had rebounded and the market sentiment had improved. Despite that, Mr Chan maintained his view that a developer’s profit of 20% is appropriate.

61.  Developer’s profit is allowed in residual valuation for the purpose of compensating for the risk taken by developers in undertaking property development. In Hong Kong it is usual to assume that the developer seeks a capital profit expressed as a percentage of the total development cost (including interest) but such a percentage can never be a constant.  “The target levels of profit will depend on the nature of development and allied risks, the competition for development schemes in the market, the period of the development and the general optimism in relation to that form of development.”[5]

62.  More recently, the HKIS Guidance Notes on Valuation of Development Land contains the following provisions:

“3.6.4 Developer’s profit needs to reflect:

i. The nature of the development and related risks. These include marketing risks for sales and lettings, risks of construction difficulties and cost overruns, and delays in obtaining relevant development approvals.

ii. Competition and market demand for the type of development scheme, plus:

iii. The development duration, since lengthening the development period will escalate the necessary return on outlays and capital.

3.6.5 Straightforward developments catering to strong market demand will serve to reduce risk, and thus profit rate expectation.”

63.  Indeed, the strong market demand especially in the vicinity of the Lot is supported by market news as reported by the Hong Kong Economic Times on 5 July 2017 (“Exhibit A6”). It was reported that a Ginza style commercial building, renovated some 3 years ago, situated at 38 Yiu Wa Street around the corner of the Lot with about 7,400 sq m was just sold for $2,000,000,000 (or $270,000/sq m). Also, two commercial buildings at the end of Sugar Street with a total gross floor area of 5,796 sq m or thereabouts were just sold at $289,851/sq m[6]. Lastly, a service apartment situated near the junction of Irving Street and Pennington Street (ie a corner site) was sold in January 2017 for redevelopment at $1,700,000,000 or an accommodation value about $215,000/sq m[7].

64.  In addition, when compared with Cheer Capital where the total GFA was about 9,695 sq m, the scale of development in the present case is much smaller and the construction period of 30 months is also shorter so that the developer can expect a quicker return. In the circumstances of this case, therefore, I am prepared to adopt a developer’s profit of 15%.

Finding on RDV and the Reserve Price

65.  Whereas the other development parameters are not in dispute, subject to what I have stated above, I follow Mr Chan’s residual valuation at Bundle III/F/1353(A) as a template and have prepared a residual valuation at Appendix A hereof. I arrive at $441,000,000 or an accommodation value of $172,373/sq m.

66.  The major shortcoming of the residual valuation method is that there are many variables or assumptions as to inputs so that a minor variation in any of the factors involved may be compounded when they are carried forward throughout the lifespan of the project, thus producing a major effect on the final value of the scheme.[8] In the professional guidance: Valuation of Development Land, Hong Kong, 1st edition published by the Royal Institution of Chartered Surveyors, it is recommended that an attempt be made by the valuers to compare the result with such market evidence as may exist because the residual method sometimes produces theoretical results that are out of line with prices being achieved in the market. In this regard, I consider the accommodation value of $172,373/sq m is reasonably comparable to the reported sale of the service apartment situated near the junction of Irving Street and Pennington Street, supra, taking into account the location, the small size of the Lot or the hypothetical development.

67.  I determine, therefore, the reserve price at $441,000,000.

Other Incidental Matters

68.  The applicant proposes to appoint Mr Ho Hing Choi Peter (何慶材) and Mr Yip Tung Sang (葉冬生), both partners of Messrs Mayer Brown JSM, as the sale trustees.  By reference to a letter dated 27 June 2017from the latter, I am satisfied that they are proper persons to be appointed as trustees to discharge the duties imposed on trustees under the Ordinance.  The remuneration package proposed in the said letter appears to be reasonable.

69.  In the same letter, it is also proposed to appoint Messrs. Michael Cheuk, Wong & Kee as independent legal adviser for the Trustees (“the Trustees’ Solicitors”). The remuneration package proposed in the said letter appears to be reasonable too.

70.  The applicant has prepared a set of draft Particulars and Conditions of Sale of the Lot[9].  Subject to any amendment that may become necessary as a result of my ruling on the arrangement of auction above, the particulars and conditions of sale of the Lot by public auction submitted by the applicant are also reasonable.

Order

71.  This Tribunal make the following orders:

(1) this Tribunal is satisfied that the redevelopment of the Lot is justified due to the “age” and “state of repair” of the Building and that the applicant has taken reasonable steps to acquire all the units in the Building including that of the respondent;

(2) an order for sale of all the undivided shares in the Lot should be made by auction pursuant to section 5(1)(a) of the Ordinance;

(3) the reserve price for the sale of the Lot be set at $441,000,000;

(4) the entire amount of the proceeds of sale of the Lot (after deduction of all legitimate expenses and payments) be apportioned between the applicant and the respondent by reference to the agreed EUVs of their units as set out at Bundle III/F/1419;

(5) Mr Ho Hing Choi Peter (何慶材) and Mr Yip Tung Sang (葉冬生), nominated by the applicant, be appointed trustees (“the Trustees”) to discharge the duties imposed on trustee under the Ordinance in relation to the Lot and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter from Messrs Mayer Brown JSMdated 27 June 2017;

(6) Messrs Michael Cheuk, Wong & Kee be appointed as the solicitors for the Trustees (“the Trustees’ Solicitors”) to assist the Trustees in discharging their duties imposed by the Ordinance and the Trustees’ Solicitors be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Mayer Brown JSM dated 27 June 2017;

(7) for the purposes of the sale of the Lot by public auction, the sale of the Lot be on the particulars and conditions of sale substantially the same as those in the draft Particulars and Conditions of Sale as set out in Bundle IV/307-336 to be initialled and approved by the Tribunal.

(8) subject to further extensions that the Tribunal may subsequently allow upon the application of the purchaser of the Lot or its successor in title, the redevelopment of the Lot and the development to be erected thereon shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot becomes the owner of the Lot; and

(9) liberty to the applicant, the respondent and the Trustees to apply to the Tribunal for further directions.

Costs

72.  Following the principles laid down in Good Faith Properties Ltd v Cibean Development Co Ltd [2014] 5 HKLRD 534, I make a Costs order nisi that the applicant do pay the respondent costs of the Application, including all costs reserved to be taxed if not agreed on High Court Scale. Such order be made absolute after 14 days if no application is made to vary the said Costs order.