FAN CHUN KEUNG v. THE SECRETARY FOR THE ENVIRONMENT, TRANSPORT AND WORKS

LDMR 5/2004

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS REFERENCE APPLICATION NO. 5 OF 2004

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DECISION  ON  REVIEW

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Background

1. On 15 July 2005, we delivered our judgment (“the Judgment”) in this case and determined the total compensation payable to the Applicant to be in the sum of $7,980,000.

2. The Applicant filed a review application on 8 August 2005.  In the notice of application to review, the Applicant stated various grounds of application for review, but they can be summarized as follows: -

(1)  The common law principle of equivalence has not been recognized or applied to sufficient depth in the circumstances of this case, in particular, comparing non-Melhado land with Melhado land is not comparing “like with like”.

(2)  The finding of the “existing use” of the subject lots to be “a container vehicle park” is unnecessary (if not undesirable) in the context of compensation on the subject lots.

(3)  It would be desirable that the adjudication process on the alternative investment approach be proceeded with to completion.

(4)  Whether there was evidence on land values of different forms of open storage?

3. The Applicant also proposed that the Tribunal should give directions that there be liberty for the parties to file and serve further expert reports “to elaborate into greater depth and detail all matters pertaining to the aforesaid grounds of review without departing from the general scope of evidence defined in the hearing which has taken place” and that the respective experts do attend the Tribunal for further testimony in a review hearing.

Adducing further evidence

4. We will firstly deal with the application for adducing further evidence.   The Respondent objects to the application on the ground that the parties should not have “a second bite of the cherry”, otherwise, there could be no end to litigation.  The Applicant submits that in compensation cases, the Tribunal should adopt a more liberal approach, as the nature of the cases are non-contentious, and that by adducing new evidence, the Applicant is not trying to have a new trial, but just to supplement the evidence so that the Tribunal can come to a prefect conclusion.

5. No doubt, the Tribunal has in the past acceded to requests for adducing new evidence, e.g. Secretary for Transport v Wong Bun, unreported case LDRW14 of 2001 (Review).  However, we do not think that there is any justification to do so in the present case.  The Applicant, his legal representatives and his expert should have known what they wanted to argue at the trial and adduced all the evidence to support their contentions.  There is no suggestion that the proposed new evidence was not available at the trial.  When the Applicant has chosen not to adduce such evidence that he wants to rely on now, he should not be given a second chance.  The fundamental principle that there should be an end to litigation must apply here.  We therefore decide not to give the directions as sought by the Applicant. 

Principle of equivalence

6. The Applicant contends that he should be entitled to compensation on the basis of “best possible use”.  In other words, the Applicant should, in the present case, be entitled to “Melhado-based” compensation as of right.  The Applicant submits that since the Tribunal in the Judgment compared several comparables, which were “non-Melhado” land, with the subject site, which was “Melhado” land, the Tribunal was not comparing “like with like”.  As a result, the fundamental concept of compensating the Applicant, being the former owner of the land resumed and the severed land, on the basis of “neither less nor more than his loss”, which was in turn founded on the notion of “comparing like with like”, has not been properly applied.

7. The Applicant seeks to re-open the case so that the important question of Melhado potential in each of the direct sale examples could be re-considered and critically assessed, in particular, the effect of enforcement notices in some comparables should be examined.  This issue was in fact not properly brought to the attention of the Tribunal at the trial, but the Applicant submits that if the Tribunal disagreed with the Applicant’s expert as to the existence of “Melhado potential” or otherwise of each sale comparable, the grounds for disagreement should have been explicitly dealt with and explained in the Judgment.

8. As far as the “Melhado use” is concerned, we agree with the Respondent that the term “Melhado use” was generally taken to mean “any use to which the land may be put without the erection of a building, and is to be contrasted with pure agricultural use.”  However, in so far as none of the sales comparables adopted in the Judgment were put to agricultural use, it is obvious that their “Melhado potential” had been taken into account.  If what the Applicant meant and wished to say, in his stated ground of review, was that the Melhado potential of the subject site reflected the potential to use the said land for open storage of container vehicles and/or containers, we are in agreement with the Respondent that this specified Melhado potential was but only one type of Melhado use.     

9. On the other hand, if what the Applicant actually complained of under this ground was that we erred in agreeing to adopt the five sale comparables (some were without the “Melhado potential” for open storage of container vehicles and / or containers) as being relevant for the purpose of assessing the open market value of the subject site (which was with the “Melhado potential” for open storage of container vehicles and / or containers), we will deal with this issue later, when we re-consider in details the relevance and appropriateness of the adopted sales comparables.

10. One other complaint of the Applicant was that the Tribunal erred in not “comparing like with like”, in terms of the likeness in size of the comparables vis-à-vis the subject site.  This issue has been covered in our Judgment.  In a perfect world with plenty of suitable comparables, we would of course use comparables which resemble the subject property in every aspect.  Otherwise, the Tribunal is usually left with scanty evidence of sales or rental comparables when trying to reach for a most comfortable solution.  Thus, in valuation exercises, we are bound to have comparables which differ in certain aspects from the subject site including size.  The market’s and the Tribunal’s approach to this reality was invariably the same - to make reasonable adjustments to account for the differences.

11. The Applicant states in the notice of review that “Lots of small physical area, or lots without acquired status of existing or permitted use with Melhado potential command much lower prices and both vendors and purchasers know this in an open market.”  The Respondent disagrees and submits that “this is a bare assertion without supporting evidence and is not accepted”.  The Respondent would however accept that “a piece of land used for, e.g. open storage purpose without a section 16 approval and where such use was not an “existing use” back in 1991 might be subject to enforcement notice by the Town Planning Department and therefore would command a lower price than a piece of land where such use was an “existing use” back in 1991 and/or has received express approval pursuant to a section 16 application.”

12. The Respondent therefore invites the Tribunal to consider and review its decision in paragraph 45 of the Judgment in which the Tribunal expressed the view that it is unnecessary to make any adjustment on the factor of “risk of planning enforcement”.  The Respondent submits that the Tribunal should consider and make such adjustments to the comparables, where appropriate, for the factor of risk of planning enforcement.  We accept this approach and will deal with this issue below.  Before going into that issue, we first deal with the other grounds cited by the Applicant in the notice of review application.

The finding of the “existing use” of the subject lots

13. We are surprised that the Applicant complains that we should not have attempted to find the existing use of the subject lots but should have been silent on this.  During the closing submissions and from the evidence adduced by the parties’ expert surveyors, there were disputes on the “existing use” of the subject lot.  Although the law requires that the “existing use” or tolerated use for the purposes of town planning zones (with certain exceptions) were to be ignored for the purpose of assessment of compensation, it was necessary for us to make a finding of fact in this regard in view of the dispute.  It was also necessary for us to know and determine (if in dispute) the basic characteristics of the subject site, before we embark on the valuation exercise.

Whether there was evidence on land values of different forms of open storage

14. The Applicant submits that the Tribunal has been misled by the Respondent into thinking that there was no evidence on whether values of land in open storage for container trucks, trailers and containers would be higher than other forms of usage such as scrap metal yard or fee paying car parks.  The Applicant stresses that the Respondent or the Tribunal should not challenge the “professional” views of Mr. Lau, his expert witness, in this regard.  We find this to be a strange argument.  During the hearing, as was commonly the case for most compensation cases, we heard various conflicting “professional” views from two qualified and experienced expert surveyors, who professed to have good knowledge of the property market.  Which view should the Tribunal take is certainly one of the judicial functions that we have to carry out.  Furthermore, indeed, even in the case of only having the benefit of hearing professional views from one side, the Tribunal as a specialized tribunal has to make decisions from time to time as to whether the Tribunal should accept, with or without qualifications, all or only some of the conclusions of the professional expert giving testimony in the Tribunal. 

15. As to the issue of whether values of land in open storage for container trucks, trailers and containers would necessarily be higher than other forms of usage such as scrap metal yard or fee paying car parks, we find on review that this was not supported by evidence adduced during the hearing.  The Respondent’s expert, Mr. Yip, had pointed out that even based on Mr. Lau’s evidence of adjusted rents of his comparables, RC2’s effective rent per sq. m. was $319.45 (“A4”), whereas the adjusted unit rental for AWT6 and AWT7 (the two carparks close to Lok Ma Chau interchange) were $401 and $659 respectively.  Even the unadjusted unit rentals, at $357 and $499, were already higher than that obtainable for RC2.  So, as concluded by Mr. Yip, the Applicant’s hypothesis that use for open storage of containers is always the best and highest use, regardless of location is not supported by his own expert’s computations.

Suitability of comparables used in the original valuation on direct sales approach

16. We now come to the suitability of the sale comparables.  Mr. Yip opined in the original hearing that adjustments could be made to account for the factor of risk of planning enforcement.  The Respondent agrees in this review that this factor should be adopted and added in the analysis and adjustments of several sales comparables for which, despite of their actual existing uses at the time of sales, there were planning enforcement notices registered against the comparable lots and/or there were evidence that these comparables did not enjoy the “Melhado potential” for open storage uses.  On re-consideration, we agree with this approach.  The Applicant’s present contention that the sale comparables were not suitable for comparison was based on the facts that there were enforcement notices issued and planning permission had been refused in the past.  We do not agree that these factors would make the sale comparables unsuitable altogether.  We agree with the Respondent that with suitable adjustments, they can still be used as comparables and we are still comparing “like with like”.  We will now re-consider the 5 sales comparables, one by one.

Comparable AWS1/C3

17. This comparable site is situated almost immediately adjacent to the subject site.  Mr. Lau said that before the resumption, it was used to form part of larger open storage / parking ground, a usage similar to that for the subject site.  It became landlocked after almost two thirds of the original lot was resumed by the same resumption exercise as the subject site.  There was also an enforcement notice dated 19 December 2001 registered against this lot in the Land Registry, about 13 months after the date of sale of this comparable.  For these reasons, Mr. Lau said that this site was not a suitable comparable for the subject site.  On the other hand, Mr. Yip opined that this comparable site had been used and was capable of being used for open storage including storage of containers.  He therefore adopted this comparable in assessing the open market value of the “non-enforcement” portion of the subject site (with Melhado Use value).  He also did not find it necessary to adjust this comparable for the factor of risk of planning enforcement. 

18. However, in view of the presence of enforcement notice registered against this comparable site, we hold the view that adjustment for the factor of risk of planning enforcement will be required.  There was evidence that a planning enforcement notice was registered against the site after about 13 months after the date of its sale.  It was not clear whether the planning enforcement notice was registered against the lot because of any change in use (nature and/or intensity) of the site subsequent to the date of sale, or before the date of sale.  We are prepared to give the benefit of doubt to the Applicant in that the subject matter of the planning enforcement notice was in respect of the use of the site for the period leading up to the date of sale but not subsequent to the sale.  In this respect, we agree with Mr. Yip that in the market, there are buyers who are prepared to pay for the purchase of open storage land even though there is a risk of planning enforcement.  As for the suitable adjustment to reflect this risk element, we are also prepared to accept Mr. Yip’s suggested range of 20% to 30% for this factor.  We will choose the upper end of this suggested range, i.e. 30%.  As such, revision of the adjustment to reflect this factor, to the extent of an additional 30%, will be made to this comparable in the computation below.

Comparable AWS2/C1

19. Mr. Lau said that this was sold as a piece of vacant land in August 2000 but acknowledged that this was formerly occupied for open storage use as evidenced from aerial photo.  Mr. Lau dismissed this site as a suitable comparable for the subject site whereas Mr. Yip opined otherwise but he agreed that an adjustment of 30% to reflect the risk of planning enforcement was warranted.  Although there was no enforcement notice registered against this comparable site, the fact that this site was vacant for a period of time around the date of transaction might suggest that there was no continuing occupation dated back since 1991; and hence the site would be subject to the risk of planning enforcement should the owner decides to use the site for open storage including storage of containers.  We agree to allow an adjustment of 30% to this comparable site to reflect for this factor of risk of planning enforcement as suggested by Mr. Yip.  This will be done in the computation below.

Comparable AWS3/C4

20. Mr. Lau said that the small size of this site prevented it from being used as a large storage site for bulky goods, vehicles and containers.  He accepted that the site was the only one out of the 5 sales comparables that could be said to possess “Melhado value” albeit that that was “Melhado value” for open storage other than container vehicles and/or containers.  Therefore, although there was neither any record of planning enforcement registered against this comparable site nor any evidence of its being left vacant in the past, Mr. Lau opined that this comparable site could not be a suitable comparable for the subject site due to its small size and the encroachment by an adjacent structure.  Mr. Yip opined otherwise and that the size and the encroachment factor should not make this an unsuitable comparable.  He also dismissed Mr. Lau’s view on the different forms of Melhado values.  After re-consideration, we maintain our view in the Judgment that this is a suitable comparable.

Comparable AWS4

21. This was similar to the comparable site AWS1/C3 in that a large part of the original site had been resumed prior to the transaction of this comparable.  Mr. Lau dismissed this as a suitable comparable for the subject site whilst Mr. Yip did not use this at all.  A planning enforcement notice dated 13 December 2000 was registered against this comparable site in the Land Registry.  Although the date of this notice was also about one month from the date of sale of this comparable site, we hold the view, similar to that for Comparable AWS1/C3, that adjustment for the factor of risk of planning enforcement will be required.  Also, we decide that a revision of the additional adjustment to reflect this factor, to the extent of an additional 30%, similar to that for Comparable AWS1/C3, will be made to this comparable in the computation below.

Comparable C2

22. Mr. Lau did not consider this sale comparable.  On the other hand, although there was no planning enforcement notice registered against this site, Mr. Yip opined that an adjustment to reflect the risk of planning enforcement was required for this site.  He suggested a lower percentage of 20% for this factor.  However, we prefer an adjustment of 30% for this factor, to be in line with similar adjustment for other sale comparables except AWS3/C4.

Revised unit rates

23. To conclude, we find that all the 5 sale comparables could still be used, particularly in the absence of other better sale comparables.  Using the analyzed figures in paragraph 46 of the Judgment and after adding, where appropriate, the factor of risk of planning enforcement, we have the following revised adjusted unit rates for the comparables: -

Table 1 - Adjustment of sale comparables - revised

Comparable	AWS1/C3	AWS2/C1	AWS3/C4	AWS4	C2
Unit Rate ($ per sq.m.)	1,674	1,189	1,601	1,615	1,669
Total Adjustment (note 1)	+3%	+21%	+2%	-1%	+35%
Adjustment for risk of planning enforcement	+30%	+30%	0	+30%	+30%
Revised total adjustment	+33%	+51%	+2%	+29%	+65%
Revised adjusted unit rate ($ per sq. m.)	2,226	1,795	1,633	2,083	2,754
Revised average ($ per sq. m.)	2,098

(note 1) details as shown in the table at paragraph 46 of the Judgment

24. The average of the adjusted unit rates of the five sales comparables is found to be $2,098 per sq. m., which is rounded to $2,100 per sq. m.

Alternative investment method for the assessment of values of the subject lots

25. We now turn to consider the assessment using an alternative investment method.  The Applicant submits that we should have undertaken this alternative investment method to completion, as Mr. Lau, the Applicant’s expert surveyor had found this to be the only suitable method, in the absence of suitable sales comparables.  The Applicant contends that even Mr. Yip had agreed that this would at least serve as a useful tool in cross-checking the result of the direct sales approach.  The Applicant further submits that “it is possible (and perhaps probable) that the result obtained from the investment approach … is higher than the current finding on direct sale comparables by a wide margin”, in which case “there will be good reason to believe that there is some serious mistake with the current finding on the level of compensation which has to be rectified.”

26. The Respondent, on the other hand, submits that we were “entitled to ignore the investment approach when it finds that there are sufficient direct sales comparables to use.”  Even if this investment approach was used, the Respondent’s case was that Comparables AWT1 and AWT2 should be rejected altogether.  Also, the Respondent submits that as this method had in fact been fully canvassed during the original hearing, it would be possible for the Tribunal to complete this alternative assessment without the need to call back the experts or to permit the filing of additional expert reports. 

27. The reasons for discarding the use of this alternative investment method have been set out in the Judgment.  After re-consideration, we are satisfied that these reasons remain valid.  However, as even the Respondent’s expert had agreed that this alternative investment method would at least serve as a check to the valuation conducted by the more direct sales comparison method, we shall carry out the valuation of the subject lots using the investment method below, using the evidence already adduced during the original hearing.

Choice of rental comparables

28. Mr. Lau and Mr. Yip have between them identified a total of five rental comparables, apart from rental comparables used exclusively as fee-paying car park.  We summarize below the experts’ opinion on the suitability of certain comparables, their proposed adjustments to the usable site areas of Comparables AWT2 and RC2, their proposed adjustments to Comparable RC2 regarding the costs of site formation, as well as our findings of suitable adjustments for the two comparables AWT2 and RC2 prior to the usual adjustments that are warranted in order to compare the subject site vis-à-vis the comparables.  After consideration of the factual details of these lettings as well as the differing opinion of the two experts, we decide to include all the five rental comparables.

Suitability of the rental comparables

29. We note that at the original hearing, Mr. Lau opined that Comparables AWT1, AWT2 and AWT3 should be used but since Comparables RC1 and RC2 were not suitable comparables, they should be discarded.  On the other hand, Mr. Yip said that both Comparable RC1 and RC2 are suitable comparables.

30. For Comparable RC1, the permitted user was for open storage, excluding cement, sand, aggregates licensed vehicles and containers.  It was located at the end of a cul-de-sac and next to a hospital laundry building with busy service vehicle traffic.  Therefore, the Applicant submitted that Comparable RC1 was not a comparable to the subject site. 

31. As for Comparable RC2, the Applicant submitted that it was not a suitable comparable mainly because it required substantial works including formation works and construction of structures.  Also, the permitted user of the tenancy for Comparable RC2 includes the mix of a fee paying car park and/or storage of container boxes, and other ancillary facilities (including vehicle repair workshops and office) hence making it not a suitable comparable for the subject site. However, during the hearing, both Mr. Lau and Mr. Yip have assisted the Tribunal by carrying out an estimate of the formation costs for the comparable site.  The details will be set out below.

32. We do not agree to discard Comparables RC1 and RC2 on the grounds put forward by the Applicant.  Firstly, as we said in the Judgment, there is no evidence adduced to show that the values of land for open storage of containers are necessarily higher than that for other types of open storage.  Secondly, we do not agree with the Applicant that the location of Comparable RC1 would render it an unsuitable comparable per se.

33. As to Comparables AWT1 and AWT2, the Respondent submitted that as they were so close to the River Trade Terminal, they should not be considered as suitable comparables.  This was due to the fact that these 2 comparables enjoyed special location advantages to the River Trade Terminal for which the adjustments would be so great as to render them not suitable as comparables.  We do not agree with this contention.  Even though these 2 comparables are close to the River Trade Terminal, we cannot assume that the use of the comparable sites must be necessarily connected with the Terminal.  Whilst there may be location advantage for being close to the Terminal, we do not find that this factor alone justifies the rejection of the 2 comparables.

34. Of the 3 comparables identified by Mr. Lau, Mr. Yip said that AWT2 was not suitable because according to the terms of the short-term tenancy, it could be used as a concrete production plant in addition to open storage use.  In addition, Mr. Yip said that according to the data he obtained from the analysis of sites used as concrete batching plants, these sites invariably fetch higher unit rates than other sites used for open storage.  However, Mr. Yip still assisted the Tribunal by giving his opinion of the adjustments that should be applied to AWT2 in the event that the Tribunal did not agree with him and decided to use AWT2 as well.

35. We do not agree with Mr. Yip that the difference in the user clause of AWT2 would make it an unsuitable comparable.  The actual history of use of the comparable site shows that it was used for open storage rather than concrete production.  This suggests that the value for the alternative use of the site for concrete production would not be higher than that for open storage.

36. As for AWT3, it was a site in Fanling let out by Government on short term tenancy basis, same as for other rental comparables we consider in this case.  It was included by Mr. Lau in his evidence of rental valuation adduced in the hearing.  Mr. Yip did not challenge this as an unsuitable comparable per se.  We agree to include this as one of the rental comparables.

37. To conclude, assuming there was no sale comparables available and we have to rely on rental comparables, we find that all five rental comparables identified and analyzed by either Mr. Lau or Mr. Yip are not of the types that are so unsuitable as to merit a outright rejection, for the purpose of estimating the open market rental value of the subject site for open storage use.  We therefore include them all in our analysis below.  Before that, we will consider the issues of the adjustment for Comparable AWT2 to arrive at its net usable site area, as well as the adjustments for Comparable RC2

Adjustment to the net usable site area of Comparable AWT2

38. For Comparable AWT2, Mr. Lau suggested that since under the conditions of the tenancy governing the use of the site, the entire perimeter area (skirting area) as shown in the tenancy plan was strictly prohibited for use, apparently for the protection of the slopes that formed the site.  Mr. Lau therefore sought to compute the reduction in area due to this prohibition.  He found that the site was effectively reduced to a usable area of some 7,550 sq. m.   Mr. Lau opined that this reduced area should be used for the calculation of the unit rental value for the site.  This he calculated to be $554 per sq. m.

39. On the other hand, Mr. Yip did not agree that the entire perimeter of the site would be unusable at all.  It could be used as the access road to the storage area next to the perimeter.  Nevertheless, Mr. Yip noted that another elongated shaped, non-building and non-storage area at the northwest of the site appeared to have no beneficial use.  He scaled off the area to be about 980 sq. m.  He was prepared to reduce the area of the site (12,700 sq. m.) by this area before arriving at its usable area, at 11,720 sq. m., instead of 7,550 sq. m. as suggested by Mr. Lau.  We find the reasoning of Mr. Yip to be much more reasonable than that of Mr. Lau.  We therefore accept his estimate of the usable area of this comparable site.

Adjustments for Comparable RC2

40. During the hearing, both experts carried out more refined analyses of this Comparable.  Although Mr. Lau did not find this to be a suitable comparable, he assisted the Tribunal by making an assessment of the formation costs of the site, the details of which was set out in his computation sheet at Exhibit A4.  He estimated that the equivalent annual rent to the tenant would amount to $6,187,813, on the basis that a minimum period of 6 months was required for obtaining approvals and completion of the formation and necessary construction works.  Mr. Lau also opined that since there was a condition in the tenancy agreement stipulating that not more than 12,910 sq. m. (equivalent to 33.3% or 1/3 of the site area) might be used for storage of containers, he analyzed the rental transaction of this site using an equivalent storage area of 19,370 sq. m. (which was the summation of the permitted storage area of 12, 910 sq. m. and the remaining ancillary area of 25,840 sq. m. estimated to be worth 1/4 of the value of storage area, or an equivalent storage area of 6,460 sq. m.).  He therefore arrived at an effective unit rental rate (before any further adjustment) of about $319 per sq. m.

41. Mr. Yip carried out similar analysis at Exhibit R13, R13a and R13b, using different scenario of assuming constructing the permitted structure, etc.  Using the analysis which gave the highest effective unit rate (i.e. Exhibit R13b assuming without structure), his estimated equivalent annual rent was $5,587,503.  This differed from Mr. Lau’s estimate of $6,187,813 by only about 10%.  However, Mr. Yip disagreed with Mr. Lau in the latter’s computation of the equivalent storage area.  Basically, Mr. Yip said that the restriction on site coverage was in line with the actual optimum utilization of a site used for open storage of containers.  He adduced the Code of Practice for Container Depots (Exhibit R8) which show that the area dedicated to container storage would not normally exceed above 31%.  Therefore, the restriction stipulated in the tenancy agreement for the site was not a real restriction at all.

42. On balance, we agree with the opinion of Mr. Yip in his understanding of the effect of the restriction stipulated under the tenancy.  Also, we adopt his estimated equivalent annual rent in the analysis of this Comparable.

Summary of rental comparables

43.  We set out in the table below a summary of these comparables,including the unadjusted unit rates of these comparables.

Table 2 - A table showing the summary of rental comparables

Comparable Ref.	AWT1	AWT2	AWT3	RC1	RC2
Location	Area 40, Tuen Mun	Siu Lang Shui Area 38, Tuen Mun	Area 48C Wo Hop Shek Fanling	Ho Yeung St., Area 40 Tuen Mun	Mai Po Lung Road Yuen Long
Annual Rent	$1,522,080	$4,183,106	$540,000	$287,000	$2,160,000
Date of Award of Short Term Tenancy	10 Feb. 1999	26 May 2000	14 June 2001	10 Jan. 2002	21 May 2002
Permitted User	open storage or scrap metal yard	open storage (including containers) or scrap metal yard or concrete production	landscape garden or open storage (excluding containers and scrap metal) or fee paying public car park (excluding container vehicles)	open storage (excluding cement, sand, aggregates, licensed vehicles and containers)	a fee-paying vehicle car park and/or storage of container boxes, and such other ancillary facilities (including vehicle repair workshops, office and canteen) as may be approved
Site Area	3,900 m2	7,500 m2 (note 1) or 11,720 m2 (note 2)	2,230 m2	2,970 m2	38,750 m2
Unit Rate	$390/m2	$554/m2 (note 1) or $357/ m2 (note 2)	$242/m2	$97/m2	$319/m2 (note 3) or $144/m2 (note 4)
Unit Rate Adopted by Tribunal	$390	$357	$242	$97	$144

(note 1) after adjustments excluding the non-building, non-storage area stipulated under the lease (per AW’s computations)

(note 2) after adjustment excluding the non-building area stipulated under the lease (per RW’s computations)

(note 3) after adjustments reflecting the costs of site formation etc. and site coverage restriction under the lease (per AW’s computations)

(note 4) after adjustments reflecting the costs of site formation etc. (per RW’s computations)

Adjustments of rental comparables

44.  Before adjustments, the rental comparables show a high range of between $97 and $390 but it is not uncommon that comparables do vary a lot in terms of unit rates.  Besides, it is not correct to compare unadjusted unit rates before deciding whether to discard one comparable or another.  The only conclusion we could draw at this stage is that the rental comparables that we got from the investment approach vary more than the sales comparables that we analyzed earlier on.  In the table below, we summarize our adopted adjustments for the five rental comparables.

          Table 3 - Adjustments of adopted rental comparables (for open storage use)

Comparable ref.	AWT1	AWT2	AWT3	RC1	RC2
Unadjusted unit rate	$390	$357*	$242	$97	$144**
	LT	LT	LT	LT	LT
Location	-3%	-3%	0%	-3%	-5%
Accessibility	-5%	0%	-5%	-5%	0%
Size	0%	+5%	0%	0%	+15%
Layout/shape	0%	0%	0%	0%	0%
Time	-9.2%	+0.2%	+4.8%	+9.7%	+14%
Design flexibility	0%	0%	0%	0%	0%
User flexibility	0%	0%	+10%	+10%	0%
Total adjustment	-17.2%	+2.2%	+9.8%	+11.7%	+24%
Adjusted unit rate	$323	$365	$266	$108	$179

*    unit rate computed by RW after excluding the non-building area stipulated under the lease

**  unit rate computed by RW after making adjustments reflecting the costs of site formation

45. We discuss the adjustment factors for these comparables one by one as follows: -

(1)  Location

Mr. Lau suggested nil adjustment for Comparables AWT1, AWT2 and AWT3 whilst Mr. Yip suggested modest adjustments of –3% for AWT1 and AWT2 to reflect their closeness to the River Trade Terminal.  We accept Mr. Yip’s suggested adjustments for these 2 comparables as well as adjustments of –3% and –5% for RC1 and RC2 respectively. 

(2)  Accessibility

Mr. Lau did not account for this factor.  We agree to Mr. Yip’s suggested allowance of –5% each for AWT1 and AWT3, as well as for RC1.   

(3)  Size

There was little difference between the 2 experts on the size adjustments for AWT1, AWT2 and AWT3.

(4)  Layout/shape

We agree with both that nil adjustment is warranted for this factor.

(5)  Time

Similarly, we adopt the same adjustments proposed by the 2 experts for Comparables AWT1, AWT2 and AWT3, and those proposed by Mr. Yip for RC1 and RC2.

(6)  Design Flexibility

Mr. Lau suggested no adjustment for this factor while Mr. Yip suggested that for AWT2, the restriction on the use of its perimeter area would affect the design flexibility of the internal layout of the site; hence, a +10% adjustment would be warranted.  We find this to be unnecessary as the site, with an area of 12,700 sq. m., could easily make use of the perimeter area for access purpose without affecting the design flexibility.  

(7)  User Flexibility

Mr. Lau suggested that adjustments of +5%, +3% and +10% were warranted for Comparables AWT1, AWT2 and AWT3 respectively.  On the other hand, Mr. Yip suggested nil, -30% and +5% respectively for these 3 comparables, and +10% for RC1.  We find that there would be no need for adjustment for AWT1, AWT2, RC2 whilst a +10% is warranted for each of AWT3 and RC1 as the user condition. 

Reconciliation of adjusted unit rates derived from the rental comparables

46. The range of adjusted unit rates of these five comparables is very big, with the lowest one (Comparable RC1 at $108 per sq. m.) being less than one third of the highest one (Comparable AWT2 at $365 per sq. m.)  The average of all five is about $248 per sq. m., close to Comparable AWT3, one of the three comparables originally identified by Mr. Lau to be suitable comparables.  The total adjustments adopted by the Tribunal for these five comparables range only between +24% for Comparable RC2 and -17.2% for Comparable AWT1.  In the end, we decide to adopt the average adjusted unit rate as the unit rental for the purpose of assessment of the subject lots in the investment approach.

Appropriate yield to be adopted in the capitalization of the unit rental

47. In the original hearing, the two experts in adducing their evidence held different views as to the appropriate yield that should be adopted.  Mr. Lau reported that according to the Rating & Valuation Department’s Property Review, the market investment yields for September 2000 for office (Grade B) stood at 7.4%, retail properties at 7.8% and flatted factories (upper floors only) in the N.T. at 13.1%.  Mr. Lau admitted that that the market yield for open storage land was less secure than that for residential and commercial properties.  However, as there was only a limited supply of land that could be put to open storage use, he considered that an appropriate yield for the subject site should fall between the respective yields for office and factory units.  Nevertheless, Mr. Lau opined that in view of the differences in the vacancy rate of office and private storage space, it would not be unreasonable to assume that a margin of about 1.5% over and above the office yield would provide a sufficient and safe hedge against the risk associated with the return expected of open storage and parking land in the New Territories (Bundle AR-1 page 54 refers).  Therefore, Mr. Lau opined that a rate of 9% should be applied (which would be in line with the yield used by the Lands Tribunal in the case of Yuen Long Fish Merchant’s Association Limited v. Secretary for Transport,unreported case, LDMR No. 44 of 2000).

48.  Mr. Yip cited a section of Hong Kong Property Review 2004 and commented that the “Private Storage” properties in the Property Review referred to premises designed or adapted for use as godowns, or cold stores, and includes ancillary offices.  As such, they are different from the open storage sites such as the subject site and the comparables.  Therefore, it was incorrect to quote the vacancy rate of “Private Storage” premises in the Property Review as an indication of the vacancy rate of open storage land in the N.T.

49.  Mr. Yip also quoted the case of Yuen Long Fish Merchant’s Association Limited in which the Lands Tribunal considered that the yield of agricultural land for an open car park use should fall within the yields for office and flatted factories.  Mr. Yip opined that the yield of agricultural land for open storage use should also fall within this range.  Using the said Hong Kong Property Review figures, Mr. Yip calculated that the average yield for office and flatted factories was 10.03%.

50.  However, Mr. Yip opined that with the future improvement of road network to the Mainland China (e.g. the Shenzhen Western Corridor), the future demand for open storage sites, especially in the northwestern part of New Territories, would be quite uncertain.  Having regard to this factor, Mr. Yip opined that it would be reasonable to add a 2% risk premium on the average yield for office and flatted factories.  This gave a yield of about 12% as to be the appropriate investment yield for the subject site for open storage use. 

51.  Also, we note the Respondent’s submission that “although land which can be used for container storage without planning permission became fewer since 1991, this does not imply that supply of land for container storage must necessarily decline.”  Whilst the Respondent pointed out that RC2 is just one example where Government grants out new land to be used for the purpose of container storage so that the bare assertion of shortage of supply is not made out, we note that all the rental comparables that we are considering in this case are all but Government land let out on short term basis for storage and/or other commercial uses commonly associated with bare land in the New Territories. 

52. As said before, the difficulties in choosing an appropriate yield, in the absence of actual direct empirical evidence from the market on the yield of open storage land, is one of the reasons that the investment approach was not to be preferred to the direct sales approach.  For instance, although the differences in the suggested yields from Mr. Lau (9%) and Mr. Yip (12%) was a mere 3%, the resulting difference in the multipliers to be applied to the estimated rental values amounts to 33.33%, (being the differences in the multipliers of 11.11 and 8.33 respectively). 

53.  Having regard to the opinion of the two experts and the market evidence as shown in the Property Review, we adopt an estimated investment yield of say 10% (a multiplier of 10) in this case.  Hence, the estimated unit value of the subject lots would be determined as follows: -

Estimated unit rental for the subject site (per sq. m.)                   $248

Adopted multiplier (using 10%)                                                 x 10

Estimated unit value for the subject site (per sq. m.)                   $2,480

Reconciliation of values from (i) direct sales comparison approach and (ii) investment approach

54.  Using the direct sales comparison approach, we find the estimated value for the subject site at $2,100 per sq. m.   On the other hand, when the investment approach is used, the estimated value is $2,480 per sq. m.  The unit value based on the latter approach is only 118% of that from the former approach.  We can say that this is within the reasonable range of values that any valuer may find when employing different approaches of valuation for the same piece of land such as the subject site.  This is certainly not the case, as suggested by the Applicant in his submission, that if the value obtained on cross check by investment approach was so substantially higher from the value obtained on direct sales comparison approach, one may conclude that the value arrived at by direct sales comparison was not reliable and should be abandoned.  On the contrary, this narrow margin confirms that the check valuation using the investment approach supports our valuation of the subject site using the direct sales comparison approach.

55.  For reasons stated in the Judgment, the Tribunal, as always the case in the past, prefers the use of direct sales comparison approach.  This remains true here.  We also find that the value obtained from the direct sales comparison approach is supported by the value obtained from the alternative investment approach.  Therefore, we conclude that our revised valuation in this review show that the unit value of the subject site, for the purpose of this resumption valuation, should be the value obtained using the direct sales comparison approach, i.e., $2,100 per sq. m.

Summary of revised total compensation payable to the Applicant

56.  Thus, following the valuation methodology adopted in the Judgment, we apply the revised assessed unit rate of the resumed lots and re-estimate the open market value of the resumed lots and the diminution in value of the southern portion of the subject site due to the resumption, as follows:

Total area of land resumed	3,835 sq. m.
Revised estimated market value unit rate	$2,100 per sq. m.
Revised estimated market value of land resumed		$8,053,500
Area of the remaining southern portion of the subject site	2,412.8 sq. m.
Revised estimated market value unit rate	$2,100
Estimated diminution in value	x 30%   $630 per sq. m.
Revised diminution in value of the southern portion of the subject site		$1,520,064
Total compensation		$9,573,564
		Rounded to $9,570,000

Conclusion

57. Accordingly, we hereby order that the amount of compensation as ordered in the Judgment be varied to the sum of $9,570,000.  As to the costs of the review application, it is adjourned to a date to be fixed together with the other consequential matters.