WONG YIK PO and Others v. DIRECTOR OF LANDS

HEADNOTE

Property law - Crown lands resumption - claim for compensation for 6 storey Central/Sheung Wan commercial building - claim for $39.5 million disputed by Crown - - comparative and residual methods of valuation - observations on format of valuation reports and necessity for experts to compare and evaluate results provided by alternative valuation methods - Held: Compensation of $33,000,000 awarded plus interest and costs.

IN THE LANDS TRIBUNAL OF HONG KONG

Crown Lands Reference No. 16 of 1994

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J U D G M E N T

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1. This application for compensation is made pursuant to Section 6(2) of the Crown Lands Resumption Ordinance, Cap. 124 ("the Ordinance"). The Applicants were the Crown lessees in various shares of the Remaining Portion of Section B of Marine Lot No.1, Remaining Portion of Marine Lot No.4 and Section G of Marine Lot No.4 comprising a six storey property situate at Nos. 45 and 47 Wing Lok Street, Hong Kong.

2. The subject property was resumed by the Crown under a Notice of Resumption dated 7th April, 1992 published in Volume CXXXIV Hong Kong Government Gazette on 10th April 1992 as G.N. No. 1245 of 1992. The subject property reverted to the Crown on 10th July 1992. At the date of resumption, the Ground, First, Second and Fifth Floors were let to several tenants. The Third and Fourth Floors were vacant. No claims have been received from any of the tenants.

3. The Tribunal is solely concerned in determining, pursuant to Section 10(2)(a) of the Ordinance, the value of the Applicants interest in the land resumed together with the buildings erected thereon. Under Section 10(2)(a), the relevant date for determining compensation is the date of resumption, namely 10th July 1992. The Applicants claim of $39,500,000 was opposed by the Respondent, who contended that the open market value of the interests resumed was $33,000,000.

4. The subject property was situate on that section of Wing Lok Street between Rumsey Streets and the former Kwong Yuen Street West, at the fringe of the Central Business District. The six storey building erected on the subject property was constructed in 1967. The Ground Floor was used for retail purposes while offices occupied the five upper floors. The subject property was in fact part of a major resumption extending to a number of adjoining Wing Lok Street properties, to facilitate the implementation of Development Scheme H3 of the Land Development Corporation.

5. The Applicant called Mr. Edward S.F.Wong, B Sc., M.Sc. ARICS, to give evidence. Mr. Wong adopted the Rule 20 Valuation Report, originally prepared by Mrs Susanna Kwan, ARICS, AACI. These two surveyors had in fact carried out a joint inspection of the subject property and shared the opinion, for the reasons set out in the Report, that the open market value of the subject property was $39,500,000. The Respondent called Miss Vivian Ng, ARICS, AHKIS,, who gave evidence supporting her Rule 20 Report valuation of $33,000,000.

6. The competing valuations followed a similar approach. They reached a redevelopment value on a cleared site vacant possession basis by both the direct comparison and residual methods. Before going on to consider the valuations in more detail, we would make two general observations. First, the Rule 20 Reports used different units of measurement. The Applicants valuer generally used square feet and the Respondent's valuer square metres. This unnecessarily reduced the ease of comparing Reports. The metric system has been adopted by Hong Kong and should be used in all Rule 20 Reports, unless the Tribunal orders otherwise.

7. Secondly, we accept that because of the limited availability of suitable comparables, both valuers properly went on to carry out residual valuations. However, they failed to analyse or directly compare the results of this twofold approach. Under the comparative method, Mr. Wong arrived at a valuation of $39,432,348 followed by a very similar residual valuation of $39,482,707. Yet there is no comparative analysis of these results, nor any opinion expressed on the particular advantages of either method, in relation to the instant facts. The separate isolated valuations are merely summarily followed by a statement that the open market value is $39,500,000.

8. Miss Ng commenced an analysis of comparables at page 7 of her Report. After referring to certain comparables in Appendix 7, she found they established an accomodation value ("AV") in the range of $19,500 to $23,500 per square metre. The narrative of her Report, continues with little change of emphasis, to residual method calculations. The Report concludes at page 12 with a final valuation calculated solely in accordance with the residual method. There is no reference to the earlier comparative method conclusions.

9. The Respondent's poorly drafted Report was open to the inference that the valuer, without any explanation, had allowed her primary valuation method to be overtaken, if not replaced, by merely a check valuation. When the Tribunal put this to Miss Ng she stated that, despite its omission in the Report she had, using an AV of $21,500 per square metre, arrived at a valuation of $33,557,200 under the comparative method. She explained its similarity to her residual valuation of $32,295,781, was merely a coincidence.

10. Where there is adequate evidence of directly comparable sales, the comparative method of valuation should generally be adopted. However there will be occasions when other methods will be appropriate either as a preferred method or as an alternative or secondary check. The residual method may be preferred where development potential permits buildings of different layout, size or design which could influence value and distinguish the hypothetical development from the comparables.

11. Rule 20 reports should expressly state the valuation methods used. Reasons for using a particular method should be given. The calculations under each method should be separately set out. Before the final valuation is reached, any different results produced by alternative methods should be examined and if possible reconciled. Detailed reasons should be given, where the conclusion reached by one method, is preferred to another. Upon reading Rule 20 Reports, the relevant facts as well as the methodology used in reaching a final valuation, should be crystal clear.

Comparative method valuations

12. We accept that in the present application, both valuers properly used the comparative and residual methods, in their attempts to ascertain open market value. Under the comparative method the Tribunal was mainly concerned with the four undermentioned comparables. The Accomodation Values ("AV") are given in rates per square metre. We confirm the relevant valuation date is 10th July 1992.

Comparable	Address	Transaction	Accomodation
		Date	Value (AV)
1.	49 Wing Lok St/13 Kwong Yuen St.W.	28.2.94	$23,351
2. 3. 4.	68-70 Wing Lok St 33 Bonham, Strand 109-111 Bonham Std	21.8.92 17.2.94 4.5.92	$21,047 $19,484 $13,094

13. The first and third comparables were not market sales but resumption settlements. The first two of these comparables were common to both valuers Rule 20 Reports. Although Mr.Wong was aware of all these comparables, he had not included Comparables 3 and 4 in his Report, because he considered their locations rendered them inappropriate. However, he had referred to a further property situate at No. 41 Wing Lok Street. This comparable, with a very small area, produced a much higher AV and was described as being for reference only.

14. On the basis of the Reports, Comparables 1, 2 and 3 appeared to be helpful transactions while Comparable 4, because of its location and much lower AV, seemed less likely to be of direct assistance. Moving on to the valuers oral evidence, Mr. Wong stated that Comparable 1 was his best comparable. Yet he felt obliged to make a number of adjustments to the primary data, which were based more on his professional opinion, than upon any detailed analysis.

15. The adjustments included +6% for location and +4% for inferior layout. We reject any location adjustment for the simple reason that Comparable 1 was immediately adjacent to the subject property. During cross-examination Mr. Wong endeavoured to justify the location allowance on the basis of differences in frontage but was unable to provide any relevant supporting evidence. Further, any such adjustment should not be made under location but properly classified as a frontage adjustment.

16. The layout adjustment was based on the allegedly less efficent provision of space caused by the L-shaped design. Mr. Wong for Comparable 2 made a -5% adjustment for the converse better efficency of that comparable. However, his large +27% adjustment for inferior location was less credible. On the basis of these two adjusted comparables, Mr. Wong calculated an AV for the subject property of $2,385 per square foot. After applying this AV to the maximum permitted Gross Floor Area ("GFA") of 1,560.8 square metres (16,800 square feet), Mr. Wong arrived at a capital value of the site, with vacant possession, of $40,068,000.

17. Miss Ng considered that Comparables l, 2 and 3 were sufficently similar to the subject property to require little adjustment. No time adjustments were made. We accept that although the transaction dates for Comparables 1 and 3 were 1994, they related to settlements negotiated as at the present relevant resumption date, namely 10th July 1992. The relevant date of Comparable 2 was 21st August 1992, so it was very close to the same resumption date.

18. After finding that in round figures these three comparables supported AVs ranging from $19,500 to $23,500 per square metre, Miss Ng adopted a rate of $21,500 for the subject property. Applying this unit rate to her maximum GFA of 1,560.8 square metres she arrived at a vacant possession open market valuation of $33,557,200. This valuation is significantly lower than Mr. Wong's calculation of $40,068,000.

19. On the evidence we find that Comparables 1, 2 and 3 are all relevant and reliable transactions and require only relatively minor adjustments. Comparable 1 requires a -5% adjustment for the absence of a return frontage. The maximum site coverage for upper floors of any development will only be about 60%. This will substantially limit and may even elminate, any adverse impact of efficency or building costs, for this L-shaped site. We allow a +2% adjustment which may well prove to be generous.

20. Comparable 2 requires an upward adjustment of +5% to allow for its slightly inferior location. This comparable is further away from Central. Further, unlike the subject property, it does not have the advantage of being located between two separate Mass Transit Railway exits. Neither valuer gave assistance on the appropriate adjustment for the inferior location of Comparable 3. We allow on the evidence 10% for this factor.

21. These various allowances produce adjusted AVs for Comparable 1 of $22,560 per square metre; Comparable 2 of $22,099 per square metre; and for Comparable 3 of $21,432 per square metre. These calculations support an AV of $22,000 per square metre for the subject property. This produces under the comparative method, an open market value of $34,337,600 (GFA 1560.8 square metres x AV $22,000 per square metres). This may be rounded up to $34,340,000.

22. The vacant possession open market site value, requires to be discounted for the time required to obtain possession of the cleared site and increased for term interest. This represents the value of the existing tenancies. Before proceeding to make those necessary calculations we will go on to consider the evidence relating to the residual valuations.

Residual method valuations

23. The fact that two of the four comparables already considered were not market sales but resumption settlements, reasonably led both valuers to carry out residual valuations. Their adopted variables and main differences may be summarised as follows:

24. This summary indicates that the main differences between the valuers, centre on the adoption of different rates for the ground and upper floors. We will first consider the evidence of ground floor shop premises and then go on to review the evidence on upper floor office space.

Ground floor shop premises:

25. Mr. Wong relied on two and Miss Ng on five shop comparables. Mr. Wong's Shop Comparable 1 was situate at 8-10 Wing Lok Street and sold on 5th December 1991 for $9,000,000 which produce a unit rate of $175,184 per square metre ($16,275 per square foot). Mr. Wong made upward adjustments of +29% for time and +5% for layout, to arrive at an adjusted rate of $234,752 per square metre ($21,809 per square foot).

26. Shop Comparable 2 in Mr. Wong's list was also the third shop comparable in Miss Ng's list. It was situate on the Ground Floor of 77 Wing Lok Street and sold on 20th November 1992 for $6,650,000. This equates to a unit rate of $170,426 per square metre ($15,833 per square foot). Mr. Wong's net +15% adjustment was made up of -4% for time; +5% for age; -3% for location; +7% for layout; +5% for frontage; and +5% for depth. On the basis of these two comparables, Mr. Wong adopted a unit rate of $215,280 per square metre ($20,000 per square foot).

27. After considering five comparables, Miss Ng arrived at a very much lower unit rate of $130,000 per square metre. The first two of her comparables were situate at No. 31 and No.55 Wing Lok Street. They respectively produced unadjusted unit rates of $94,077 and $91,241 per square metre. The unit rate of the her third comparable, being Mr. Wong's Shop Comparable 2, had an unadjusted rate $175,856 per square metre). Miss Ng's fourth comparable at No.111 Wing Lok Street had an unadjusted rate of $185,667 per square metre. Her fifth comparable at No.11 Wing Lok Street, being the Tribunal's decision in Cheung Lung Cheong, David v. Director of Lands CLR No.6/93, had an unadjusted unit rate of $129,168 per square metre.

28. After adjustment, Miss Ng found her four market comparables fell into two groups. The first and second comparables produced a range from $110,7567 to $135,471 per square metre. A higher range of $168,294 to $170,899 was achieved by her third and fourth comparables. Miss Ng attributed this clear division to an element of hope value shared by owners and investors, in anticipation of increased trading potential, upon completion of the Land Development Corporation Scheme.

29. Mr. Wong, in addition to limiting his shop evidence to two comparables, made large net upward adjustments of +34% and +15% which on the evidence were excessive. Mr. Wong's tendency to over adjust is shown by the different tStreet. reatment of the valuers common shop comparable at No.77 Wing Lok Mr. Wong's +15% adjustment may be contrasted with Miss Ng's -Mr. 6.3%. Wong's adjustments included a total of +17% for location, layout and frontage. Miss Ng allowed +5%. There should clearly have been a minus adjustment for size. Miss Ng allowed -5%. Mr. Wong made no size adjustment.

30. We find that Mr. Wong's adjusted unit rates are far too high. The higher range of two of Miss Ng's comparables, apparently favourably reflects, the legally irrelevant affect of the resumption Scheme. On the evidence we accept as more reliable Miss Ng's lower range of $110,767 to $135,471 per square metre. We confirm that the Tribunal in the prior cited decision, for a neighbouring property with the same resumption date, reached a unit rate of $129,168 per square metre. After reviewing all these factors we find that the appropriate unit rate for the present residual valuation is $130,000 per square metre.

Upper floor office premises:

31. Mr. Wong relied on three office comparables situate at No.1 Rumsey Street, Nos.8-10 Wing Lok Street and Nos. 28-34 Wing Lok Street. These sales transactions from March to May 1992, produced a $56,,651 per square metre ($5,263 per square foot) to $74,024 per square metre ($6,877 per square foot) range of unadjusted unit rates. After adjustment he arrived at an average rate of $66,672 per square metre ($6,191 per square foot). This averaged rate was in fact very close to the adjusted rate of what Mr. Wong described as his best comparable at Nos.8-10 Wing Lok Street, namely $66,425 per square metre ($6,171 per square foot). This led Mr. Wong to adopt a rate of $6,200 per square foot ($66,737 per square metres).

32. Miss Ng referred to twenty seven office comparables within four different buildings, situate at Nos.255-257 Des Voeux Road, 1 Rumsey Street, No.6 Wing Lok Street, Nos.28-34 Wing Lok Street and Nos.8-10 Wing Lok Street.

These buildings included the three containing Mr. Wong's comparables. The majority of the transactions occurred between July and August 1992 and therefore did not require time adjustments. Miss Ng's unadjusted unit rates were from $58,000 to $73,000 per square metre. This led her to adopt a rate of $62,000 per square metre for office space.

33. Mr. Wong's attempt to support his higher office unit rates erroneously forced him to to rely on three earlier individual sales of strata title office units. Two of those sales occurred four months before the relevant valuation date. Yet within those same buildings, Miss Ng was able to discover far more current comparables, including several where the sales took place in the same month as the resumption.

34. We accept Miss Ng's opinion that the best office comparables were in the similar sized Lloyd's Commercial Centre at Nos.8-10 Wing Lok Street. Miss Ng unlike Mr. Wong, considered it unnecessary in the case of much larger comparables, to make an adjustment for size. In principle we accept Mr. Wong's provision for size adjustments, if we prefer rather different rates.

35. We propose to deduct 7.5% for size from the unadjusted rates for Miss Ng's larger office buildings. The comparables within the remaining building, Lloyd's Commercial Centre, do not require adjustment because it is of similar size. After these adjustments are made we arrive at per square metre unit rates of $61,975, $67,525, $59,663 and $58,000 respectively. We find that the evidence supports a rate of $62,000 per square metre for the upper floor office space.

Gross development value:

36. The next step in a residual valuation is to estimate the gross development value of the hypothetical development. Mr. Wong's estimate was $69,766,200 while Miss Ng arrived at a figure of $59,746,420. There is no material difference in saleable area, between Mr. Wong's 850.61 square metres for the upper floors and 57.53 square metres for the ground floor compared with Miss Ng's 851.16 square metres for the upper floors and 53.65 square metres for the ground floor. We have already found that the appropriate floor unit rates are $130,000 per square metre for the ground floor and $62,000 per square metre for the upper floors. These figures produce a gross development value of $59,746,420 which, for the purposes of a residual valuation, can properly be rounded up to $60,000,000.

37. The valuers valuation format, accorded with some other residual valuations, produced in previous cases. However, the Tribunal on a number of occasions has invited valuers to follow a better alternative residual approach. The Tribunal most recently set out its views in Niceboard Development Ltd v. China Light & Power Co. Ltd [1994] HKDCLR 69 and in particular at pages 93 to 95. Basically the format should reflect the fact that profit and risk relate to total outlay at cost.

38. We confirm that a proper analysis should be undertaken and explained to support the variables used in the valuation, particularly the profit and risk factors to be adopted. This profit factor should properly be shown as a percentage of total cost. Interest being part of the total cost, should always be included as a cost item.

39. The total cost should therefore include interest on land and development costs. This is a preferable approach to that adopted in the past by too many valuers, who have attempted to allow for interest, by deferring the value over a development period. Unless the development period is less than one year, compound interest calculated with annual rests, should be preferred to simple interest. Where the development period is less than one year simple interest may be more appropriate.

40. On this particular residual basis, we determine open market land value as follows:

Gross development value	$60 million
Less Profit and risk (15% of total outlay)	7.83 M
Total outlay (100/115 x $60M)	52.17M

Less Developments Cost

(i)	Demolition	0.15 M
(ii)	Construction (1560.81 m2 @ $7000 m2)	10.93 M
(iii)	Fee 6% of (i) & (ii)	0.66 M
(iv)	Interest on building costs - 1 yr @ 8.5% of (i),(ii) & (iii)	1.00 M	12.74 M

Land & Interest

39.43 M

Less

Interest on land for 2 years @ 8.5% (PV = .84946)

5.93 M

ESTIMATED OPEN MARKET VALUE OF LAND

$33.50 M =======

Determination of Compensation

41. This residual valuation for the land closely approaches our comparative method calculation of $34,340,000. Although the valuers agreed that 15% was the preferred profit and risk factor, they supplied no supporting analysis. Our primary approach remains the comparative method but we take into account that some of the comparables were only settlements. This elevates the weight to be given to the residual calculations but does not reduce the primary importance of the comparative method. After giving both valuations due weight, we determine the open market site value of the subject property at $34,000,000.

42. It remains to consider, on the basis of the existing tenancies, the discounted value of the subject property including provision for term interest. The Ground Floor was let for 3 years from 16th January 1992 at a monthly rent of $36,000. Under a break clause the Applicants terminated the tenancy on 3 months notice which expired on 30th September 1992. The First and Second Floors were let on monthly tenancies at rents of respectively $5,000 and $4,800 per month. The Third and Fourth Floors were vacant. The Fifth Floor fixed tenancy expired on 30th June 1992 but the tenant thereafter remained in possesion on a monthly tenancy at a rent of $10,500 per month.

43. Mr. Wong capitalised the Ground Floor rent at 7.5% for 0.23 years and the Upper Floor rents at 7.5% for 0.06 years, to arrive at term interest of $109,613. To this latter figure he added his discounted land value of $39,373,094 to reach $39,482,707. This was rounded up to his valuation of $39,500,000.

44. Miss Ng capitalised the total term income of $56,300 per month or $675,000 per annum, for 3 months at 12%. This higher capitalisation rate was adopted because she considered that for a short period of 3 months there would be no rental growth. Term interest was calculated at $157,280. Her estimated redevelopment value of $33,295,781 using a PV factor of 0.9798 (PV 3 months @ 8.5%) was discounted to $32,623,206. Term interest of $157,280 was then added to produce a valuation of $32,780,486, which she rounded up to $33,000,000.

45. The appropriate period to allow for vacant possession, should correspond with the time it will legally take to recover possession. The break clause may have permitted the Ground Floor to be recovered on 3 months notice. However, the monthly tenants on the upper floors were entitled to a minimum of 6 months statutory notice, pursuant to the provisions of Part V of the Landlord and Tenant (Consolidation) Ordinance, Cap,7. Mr. Wong erred in allowing 0.6 years while Miss Ng was wrong to allow a period of only 3 months.

46. The total term income therefore requires to be capitalised at 7.5% but for a period of 6 months. The site value requires to be discounted at 8.5% for a period of 6 months. The calculation therefore is as follows:

Term income for 6 months @ $56,300 per month paid in advance at 7.5% (0.625% per month) is $56,300 + ($56,300 x YP for 5 instalments) (4.9072) = $56,300 + $276,275 = $332,575 therefore:
Capitalised value of term income	$332,575
Plus reversion as PV of site value of $34M for 6 months @ 8.5% = $34M x .95855 = Discounted site value	$32,590,800
Open market value	$32,914,375
SAY	$33,000,000
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47. On the basis of these findings we determine the the compensation payable by the Respondent to the Applicant to be $33,000,000. Leave is reserved to the parties to apply to have the rate of interest thereon, if not agreed, determined by the Tribunal, pursuant to Section 17(3A) of the Crown Lands Resumption Ordinance. There will be an order nisi that the Respondent pay the Applicant's costs, on the High Court party and party scale, to be taxed if not agreed; to become absolute if no application is made to the contrary, within 14 days. Liberty to apply is reserved for any other consequential matters.

Dated this 15th day of May 1995.