WOOD ONE KEEPRICH LTD v. SKY MAGIC LTD AND OTHERS

LDCS 6000/2016

[2018] HKLdT 29

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 6000 OF 2016

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J U D G M E N T

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Background

1.  This is an application for compulsory sale of all the undivided shares of and in the Remaining Portion of Inland Lot No 668 and the Remaining Portion of Inland Lot No 668A (“Lot 1”); and Section C of Inland Lot No 688, Section C of Inland Lot No 688A, Section D of Inland Lot No 688 and Section D of Inland Lot No 688A (“Lot 2”) (Lot 1 and Lot 2 are referred to as “the Lots”), together with the building erected thereon known as Nos 1 and 1A Wood Road, Hong Kong (“the Building”) for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”).

2.  The 8‑storey Building is served by 1 passenger lift and 2 common staircases.  An occupation permit No H133/63 dated 9 August 1963 was issued for the Building granting permission to occupy ground floor (“G/F”) as shops for non‑domestic use and 4 flats on each upper floor from 1^st floor (“1/F”) to 7^th floor (“7/F”) for domestic use.  According to the addition and alteration plan dated 21 March 1997 of the Building, the 4 non‑domestic units on the G/F originally planned in the approved building plans dated 15 June 1962 were subsequently merged to form 2 shops and portion of the original lift lobby on the G/F was also modified to form an extra shop.  It is common ground of the parties’ valuation experts that the said extra shop on the G/F is disregarded in the assessment.  Before trial, the parties’ valuation experts have also agreed the existing use value (“EUV”) of all units in the Building.

3.  Lot 1 together with part of the Building (i.e. No 1 Wood Road) standing thereon was allocated 16 undivided shares, and each of the 14 flats on upper floors and each of the 2 originally planned shops on the G/F before the merger was given 1 undivided share, making up a total of 16 undivided shares.  Lot 2 together with part of the Building (i.e. No 1A Wood Road) standing thereon was allocated 16 undivided shares, and each of the 14 flats on upper floors and each of the 2 originally planned shops on the G/F before the merger was given 1 undivided share too.

4.  The applicant filed the Notice of Application (“the NOA”) on 12 September 2016.  It was subsequently amended on 28 September 2016 and 6 February 2018. At the time of filing of the NOA, the Building was over 50 years old, and the applicant owned 14 out of the total 16 undivided shares (i.e. 87.5%) of Lot 1, and 13 out of the total 16 undivided shares (i.e. 81.25%) of Lot 2.  In the premises, the applicant owned more than the threshold of 80% undivided shares of the Lots required for building aged 50 years or above.

5.  Section 3(1) of the Ordinance prescribes that the minimum percentage of undivided shares that an applicant or applicants should possess before making an application under the Ordinance is 90%.  Section 3(5) of the Ordinance provides that the Chief Executive in Council may, by notice in the Gazette, specify a lower percentage in respect of a lot belonging to a class of lots specified in that notice.  The Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice made under section 3(5) of the Ordinance (“the Notice”) was gazetted on 22 January 2010 and tabled at the Legislative Council meeting on 27 January 2010.  It came into operation on 1 April 2010. Section 3 of the Notice lowered the threshold for compulsory sale, insofar as it is applicable, from 90% to 80%.  Section 4(1)(b) of the Notice specified one of the classes for the purposes of Section 3 being “a lot with each of the building erected on the lot being issued with an occupation permit at least 50 years before the date of the application”.  Since the occupation permit of the Building was issued on 9 August 1963, i.e. more than 50 years before the date of application (i.e. 12 September 2016), the applicable percentage is therefore 80%.

RESPONDENTS Remaining

6.  At the time of application, there were 4 groups of respondents.  Upon the joint application of the applicant and the 1^st respondent (“R1”) by way of Consent Summons filed on 12 January 2017, the applicant has discontinued the proceedings against R1.  At the time of trial, the applicant owned 14 out of the total 16 undivided shares (i.e. 87.5%) of Lot 1 and 15 out of the total 16 undivided shares (i.e. 93.75%) of Lot 2.  There are 3 group of respondents whose units and undivided shares have not yet been acquired by the applicant.

7.  The following are the 3 remaining groups of respondents whose units have not yet been acquired by the applicant: -

Respondent		Premises
2nd Respondent	(“R2”)	Front Portion, 6/F, No 1A Wood Road
3rd Respondent	(“R3”)	Rear Portion, 5/F, No 1 Wood Road
4th Respondents	(“R4s”)	Rear Portion, 6/F, No 1 Wood Road

8.  All the respondents entered appearance and they have jointly instructed a valuation expert, Mr Kenneth CY Cheung of Citiland Surveyors Limited (“Mr Cheung”), to prepare reports and valuations for submission to the tribunal, but only R3 and R4s are legally represented in the application.  R2 appeared in person at trial.  R3 and R4s were represented by Mr Liu Chin-yu (“Mr Liu”).

Issues for Determination by the Tribunal

9.  At trial, both R2 and Mr Liu submitted that they had no objection to the grant of an order for sale, but they would dispute about the assessment of the redevelopment value (“RDV”) of the Lots. 

10.  Above all, the tribunal is required to determine the following issues under the Ordinance: -

(i)	Whether the applicant has acquired the minimum undivided shares in the Lots which entitles them to make the application under the Ordinance?
(ii)	Whether the redevelopment of the Lots is justified due to “age” and/or “state of repair” of the Building in accordance with section 4(2)(a) of the Ordinance?
(iii)	What are the respective EUV of all units in the Building as at 27 June 2016 as assessed in accordance with Part 1 of Schedule 1 of the Ordinance?
(iv)	Whether the applicant has taken reasonable steps to acquire all the undivided shares in the Lots on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance?
(v)	If an order for sale should be granted, what should be the reserve price (i.e. RDV of the Lots for the purpose of auction sale)?

Whether the Conditions for Making an Application Under S.3(1) of the Ordinance are Satisfied by the Applicant

11.  Section 3(1) of the Ordinance requires an applicant to possess not less than 90% of the undivided shares in a lot before it can make an application.  As mentioned above, the Building was over 50 years’ old when the application was made.  The applicable threshold is 80%.  I am satisfied that as at the date of application, the applicant had already owned more than 80% of the undivided shares in the Lots.  The application was also accompanied by a valuation report, prepared by Mr Chan Chi Hing Alnwick (“Mr Alnwick Chan”) of Knight Frank Petty Limited, assessing the EUV of each and every units of the Building on vacant possession basis without taking into account of the redevelopment potential of the Lots as at 27 June 2016, which was within 3 months of the application.

12.  I agree that the applicant was entitled to make the application under section 3(1) of the Ordinance.

Whether Development of the Lot is Justified Due to “Age” and/or “State of Repair” of the Building

13.  In determining the application, section 4(2) of the Ordinance empowers the tribunal to make an order for sale if it is satisfied that: -

(i)	the redevelopment is justified due to age or state of repair of the Building; and
(ii)	the applicant had taken reasonable steps to acquire all the undivided shares in the Lots (including negotiating for the purchase of the undivided shares owned by the respondents on terms that are fair and reasonable).

14.  For the age and state of repair requirements, the applicant adduced expert evidence of Mr Chan Yuk Kit James (“Mr James Chan”) of Charterwealth Professional Limited, both a structural engineer and a building surveyor.  None of the respondents had adduced any expert evidence in this connection.  There is no dispute between the parties on the question whether redevelopment of the Lots is justified due to the age or state of repair of the Building.

15.  Mr James Chan conducted both a structural survey and a condition survey and prepared one report in September 2017.  Having considered the evidence of Mr James Chan, I am satisfied that redevelopment of the Building is justified due to its poor state of repair and the disproportionate costs of repair and maintenance.  Although regular repair could extend the life of the Building, repair costs will increase with time.  Further, I opine that maintenance can bring about a modest improvement only to the existing condition, and the Building would remain a sub-standard one.  I am also satisfied that redevelopment of the Building is justified due to the age of the Building.  This 54-year old Building is in a poor condition and has in fact come to the end of its design life.  Its design has become obsolete over time in many aspects both physically and functionally and has failed to conform to modern standards and requirements in many material respects.

Determination of the EUV of all Units in the Building

16.  Under section 4(1)(a)(i) of the Ordinance, if there is a dispute between the parties on the EUV of the units in the Building on the Lots, the tribunal has to determine the values.  Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the Lots who cannot be found, the majority owner of the Lots is required to satisfy the tribunal that the value of the minority owner’s property as assessed in the application is: -

“(A)	not less than fair and reasonable; and
(B)	not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”

17.  The parties initially had dispute on EUV assessments but their valuation experts subsequently agreed on EUV of all units in the Building, which were listed in the Joint Expert Statement of Agreement/Disagreement dated 24 October 2017.  Since there is no dispute among the parties on the EUV and there is no minority owner who cannot be found in the present proceedings, I accept the EUV of the units in the Building as agreed by the parties.

EUV Valuation

18.  The EUV of all units in the Building as at the relevant date of valuation, i.e. 27 June 2016, are appended below: -

No 1 Wood Road	Front & Rear Portion	G/F	$66,160,000
	Front Portion	1/F	$6,560,000
		2/F	$6,810,000
		3/F	$6,850,000
		4/F	$6,880,000
		5/F	$6,920,000
		6/F	$6,950,000
		7/F	$7,390,000
	Rear Portion	1/F	$6,600,000
		2/F	$6,640,000
		3/F	$6,670,000
		4/F	$6,710,000
		5/F	$6,740,000
		6/F	$6,780,000
		7/F	$7,520,000
No 1A Wood Road	Front & Rear Portion	G/F	$60,650,000
	Front Portion	1/F	$6,320,000
		2/F	$6,460,000
		3/F	$6,490,000
		4/F	$6,530,000
		5/F	$6,560,000
		6/F	$6,590,000
		7/F	$6,980,000
	Rear Portion	1/F	$6,200,000
		2/F	$6,230,000
		3/F	$6,270,000
		4/F	$6,300,000
		5/F	$6,330,000
		6/F	$6,370,000
		7/F	$7,040,000
Total:			$313,500,000

19.  The total EUV of the Building is $313,500,000.  The percentage of the total EUV of the Building attributable to R2’s unit, R3’s unit and R4s’ unit would then be 2.102073% (i.e. 6,590,000 / 313,500,000), 2.14992% (i.e. 6,740,000 / 313,500,000) and 2.162679% (i.e. 6,780,000 / 313,500,000) respectively.

Whether the Applicant Has Taken Reasonable Steps

20.  The applicant is under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of all the undivided shares of the Lots under section 4(2)(b) of the Ordinance.

21.  Before the commencement of the present proceedings, the applicant made the 1^st, 2^nd, and 3^rd batches of offers to the respondents on 6 July 2016, 27 July 2016 and 17 August 2016 respectively. After the commencement of the present proceedings, the applicant made the 4^th, 5^th and 6^th batches of offers to the respondents on 8 November 2016, 2 January 2018 and 17 January 2018 respectively. Mr Anthony Chan, counsel for the applicant, submitted that the applicant had taken reasonable steps to acquire the remaining undivided shares of the Lots.  While the offers in 2016 had made reference to the then assessments of Mr Alnwick Chan, each of the two latest offers was higher than the RDV attributable to R2’s unit, R3’s unit and R4s’ unit, as agreed and updated by Mr Alnwick Chan on EUV and RDV.

22.  In assessing the reasonableness of the offers, there is the following guidance from Ribeiro PJ of CFA in Capital Well[1] at [33] and [36]:-

“33. In making that assessment 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. It is obviously necessary to recognise that there will often be differences of opinion on that matter……”

“36. ......We are of course not suggesting that it is necessary for the offer to “beat” the valuation as if it were a payment into court. What the Tribunal must do is to consider whether, in the circumstances of each case, the offer falls within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site……”

23.  I consider that the applicant’s offers, which had reflected the then RDV attributable to the units and were based on professional valuation, do fall within a range of what may broadly be regarded as fair and reasonable.  Although Mr Liu submitted that in some of the RDV assessments Mr Alnwick Chan did not make full use of plot ratio as allowed in the Planning Regulations and his evidence appeared to be tailored to achieve a particular result in the action, I accept Mr Alnwick Chan’s explanation that in a hypothetical development an increase in the area for shops would result in a decrease in the area available for residential flats and vice versa, and building of more areas for residential flats could be more secure with lesser risk from developer’s viewpoint. I consider that it is a matter of professional judgment and selection of development model in the then valuation. There is no acceptable evidence before this tribunal that Mr Alnwick Chan’s assessments were faulted in this regard.

24.  In any event, although the respondents dissatisfied with the applicant’s offers that were in their opinion on the low side, they confirmed at trial that they had no objection to granting an order for sale.  I am satisfied that the applicant had taken reasonable steps to acquire all the undivided shares of the Lots.

Order for Sale

25.  I am satisfied that redevelopment of the Lots is justified in terms of age and state of repair of the Building.  I am also satisfied that the applicant had taken reasonable steps to acquire all the undivided shares of the Lots and had negotiated for the purchase of the respondents’ shares in their respective units on terms that are fair and reasonable.  In the circumstances, I agree that an order for sale should be granted in favour of the applicant.

Reserve Price for the Auction

26.  After the without prejudice meeting held on 11 January 2018, the parties’ valuation experts updated their respective RDV assessments as at 15 December 2017 and prepared a 2^nd Joint Expert Statement of Agreement/Disagreement dated 16 January 2018.  They adopted residual method to assess the RDV of the Lots and opined that the optimum redevelopment on the Lots comprised a commercial/residential composite development, but they had different opinions on design of the hypothetical development, gross development value and some development parameters.  Further, Mr Liu submitted that in setting the reserve price for the auction there should have an additional upward adjustment to the RDV assessment as at 15 December 2017, which was disputed by Mr Anthony Chan.

Hypothetical Development Model

27.  The parties’ valuation experts agreed that the hypothetical development should be a 25‑storey building with retail shops on G/F, 1/F and 2/F served by an exclusive lift accessible on G/F, club house on 3/F and residential flats on upper floors, but they disagreed on detailed design including size of plant room and common area on each floor.  They also disagreed on number of residential flats on upper floors.

28.  At trial, both Mr Alnwick Chan and Mr Cheung had prepared a hypothetical G/F layout plan to explain their respective valuations.  I consider that Mr Alnwick Chan’s plan is relatively clear and persuasive, which can explain satisfactorily his proposed layout of the shops, the plant room, the two entrances and lift lobbies, the corridor and the staircases on G/F.  Whilst, Mr Cheung’s plan is rough and sometimes contradictory to his proposed area in the assessment.  I agree with Mr Anthony Chan that with reference to Mr Cheung’s plan his proposed area for the common parts on G/F is plainly insufficient. Accordingly, I accept the hypothetical layout for non-domestic use on G/F, 1/F and 2/F and the reference shop unit proposed by Mr Alnwick Chan. Since the proposed layout for all floors in the hypothetical building should be coherent, I also accept Mr Alnwick Chan’s proposed plot ratio gross floor areas and common areas for upper domestic floors, except for number of residential flats on each domestic floor. 

29.  Mr Alnwick Chan proposed 2 flats on each domestic floor, whilst Mr Cheung said that smaller residential flats were in demand and therefore the hypothetical building should have 4 flats on each domestic floor.  Although Mr Anthony Chan submitted that Mr Alnwick Chan’s proposal was supported by statistics compiled by a property agency and quoted in a newspaper clipping, I consider that such statistics, which had not studied the relativity of price to supply and sales of residential flats, are not useful in the determination of hypothetical layout of residential flat.  After reviewing the opinion of both valuation experts, I agree with Mr Cheung that in the current market developers would generally build smaller residential flats in a small‑scale development, and therefore prefer Mr Cheung’s proposal to Mr Alnwick Chan’s proposal in this regard.

30.  Mr Anthony Chan further submitted that the common area on each domestic floor proposed by both valuation experts was around 38 square meters only, which could not accommodate 4 residential flats proposed by Mr Cheung.  He contended that more residential flats would mean the need to increase the area of common parts and hence Mr Cheung’s proposed common areas on domestic floors could not be right.  However, the applicant had not provided other evidence in this regard for consideration by the tribunal.  In the absence of evidence which could prove that Mr Cheung’s proposed common areas on domestic floors were wrong, I consider that on balance it is appropriate to assume common area of 38 square meters on each domestic floor in the subject valuation.

31.  Accordingly, the areas of exempted gross floor areas for balcony and utility platform should also be adjusted upwards due to the increase in number of residential flats.  In addition, in order to simplify the design of the subject small-scale development, I accept Mr Cheung’s proposal that site coverage on 3/F is the same as that on the upper domestic floors, and therefore the areas of the proposed club house on 3/F should also be adjusted and there will be no flat roof on 4/F.

32.  Based on the above discussions, the hypothetical development model with details of gross floor areas and saleable areas that are adopted by this tribunal are listed in the residual valuation in Appendix III of the judgment.

Gross Development Value – G/F Shops

(1) Selection of Comparables

33.  Mr Alnwick Chan proposed 7 shop comparables and had disregarded 2 of them after his analyses.  Mr Cheung proposed 12 shop comparables and had disregarded 1 of them after his analyses.  In summary, there were 4 common shop comparables (i.e. Comparables 8, 9, 10 and 12), Mr Cheung disagreed to adopt 1 shop comparable (i.e. Comparable 3) proposed by Mr Alnwick Chan, and Mr Alnwick Chan disagreed to adopt 7 shop comparables (i.e. Comparables 13, 14, 15, 17, 18, 19 and 20) proposed by Mr Cheung.

34.  Mr Cheung considered that the location of Comparable 3 is different from that of the subject, but it is relatively close to the Lots.  With the benefit of the joint site inspection on 6 February 2018, I accept Comparable 3 as shop comparable, but there should have adjustment for location.

35.  Mr Alnwick Chan considered that Comparables 13, 14, 15, 17, 18, 19 and 20, which are located on the northern side of Hennessy Road or on the eastern side of Morrison Hill Road, are not relevant comparables because their respective locations in terms of pedestrian flow and nature of trade of shops were different from those of the Lots on Wood Road.  With the benefit of the joint site inspection on 6 February 2018, I agree that these comparables that are located further away from the Lots and have different nature of trade of shops in their respective vicinities are not the best comparables.  Given that there are 4 common comparables and I have also accepted Comparable 3 as comparable and hence there are 5 shop comparables in total, I agree with the applicant to disregard Comparables 13, 14, 15, 17, 18, 19 and 20 in the assessment.

(2) Adjustments to the Comparables

36.  While the parties’ valuation experts agreed on the adjustment factors for age (1% for every 10 years difference), frontage (1% for every 0.915 meters difference), headroom (1% for every 0.61 meters difference) and size (1% for every 9.3 square meters difference) to the shop comparables, they had different opinion on the adjustments for location, layout and return frontage. They agreed on the indices for time adjustment (Private Retail Price Indices in Hong Kong Property Review – Monthly Supplement), but they argued whether or not projection should be made to the latest indices up to the date of valuation.  

37.  Regarding the adjustment for location, Mr Alnwick Chan and Mr Cheung agreed to make an adjustment at +15% to Comparable 12[2], but they had adopted different percentages to other comparables as follows:-

Comparable	Mr Alnwick Chan	Mr Cheung
Comparable 3[3]	+20%	N/A
Comparable 8[4]	-5%	+5%
Comparable 9[5]	-25%	-10%
Comparable 10[6]	-5%	+10%

38.  I agree that the location of Comparable 3 that is not visible from the main street is inferior to that of the reference shop unit, and an adjustment at +20% is appropriate.  I also agree that the location of Comparable 9 that is located along Johnston Road with much heavier pedestrian flow justifies an adjustment at -25%.  Nevertheless, I consider that the respective locations of Comparables 8 and 10 are similar to that of the reference shop unit and hence nil adjustment for location is necessary.  Although Comparables 8 and 10 have frontages abutting on side streets only, they are closer to the business and shopping areas in the district.

39.  In respect of the adjustments for layout, Mr Alnwick Chan adopted nil adjustment to Comparable 9 and an adjustment at -3% to Comparables 3, 8, 10 and 12, whilst Mr Cheung had made nil adjustment to all these comparables.  In making the adjustment for layout, Mr Alnwick Chan had made reference to depth to frontage ratio of each comparable and adopted negative adjustment to those comparables with lesser ratio.  With respect, I disagree that an adjustment for layout is necessary just because of the different depth to frontage ratio, unless the ratio is in the extreme that the layout is very odd.  However, I agree that there should have an adjustment for depth, or layout, and a shop with layout of longer depth is inferior to that with shorter depth because shop front area is generally more valuable.  Hence, with reference to the layout, particularly the depth, of the comparables, I consider that adjustments at -3% should be made to Comparable 3, -2% should be made to Comparables 8, 10 and 12, and -1% should be made to Comparable 9.

40.  Mr Alnwick Chan adopted an adjustment for return frontage at ‑10% to Comparable 8, but Mr Cheung proposed an adjustment at ‑5% only.  I agree with Mr Cheung that the return frontage of Comparable 8 that faces a 5‑meter wide service lane only is not that so superior.  I consider that Mr Alnwick Chan had made an adjustment overly in this regard and Mr Cheung’s adjustment at ‑5% is appropriate.  Further, since retail property price was on a rising trend from the latest indices in October 17 to the valuation date of 15 December 2017, I agree with Mr Cheung to allow an additional upward adjustment at 0.5% in the time adjustment.

41.  The assessment of the G/F GDV is listed in Appendix I of the judgment.  I consider that Comparable 12 should have lesser weight because it is close to Causeway Bay and has different nature of trade in its vicinity.

Gross Development Value – 1/F and 2/F Shops

42.  Both valuation experts agreed that the average unit rate of the 1/F shops should be 1/3 of the average unit rate of the G/F shops, but they had adopted different methods to assess the value of the 2/F shops.  Mr Alnwick Chan used investment method to value the 2/F shops.  He had firstly compared the 2/F shops with rental comparables and then applied a yield of 3.3% to capitalize the unit rent, and the result would then be about 90% of the average unit rate of the 1/F shops.  Whilst, Mr Cheung considered that the average unit rate of the 2/F shops should be 70% of the average unit rate of the 1/F shops.

43.  I agree with Mr Cheung that the adoption of investment method in this instance is arbitrary because a slight change to the yield would have significant effect on the capital value and Mr Alnwick Chan had not provided any persuasive evidence to support his proposed market yield of 3.3%.  I consider that in the circumstances the arbitrary adoption of investment method is in fact no great difference from the adoption of a percentage subjectively for valuation of the 2/F shops.  Nevertheless, I agree with Mr Alnwick Chan that with reference to the hypothetical design of the commercial podium there should not be a significant difference in the average unit rate between the 1/F shops and the 2/F shops.  I accept that the average unit rate of the 2/F shops is 90% of the average unit rate of the 1/F shops.

44.  The parties also argued over the deferments as proposed by Mr Alnwick Chan.  Mr Alnwick Chan allowed 3 months deferment for the 1/F shops and 9 months deferment for the 2/F shops to reflect longer marketing period caused by the uncertainty and risk of evaluating the market appeal for upper floor retail space, which were disagreed by Mr Cheung.  I agree that marketability of the upper floor shops is generally inferior to that of the G/F shops but the adopted unit rates of the 1/F and 2/F shops should have already taken into consideration of their respective reasonable marketing periods and marketing could commence prior to completion of the building works too.  I do not accept the adoption of deferment and consider that allowing deferment in this instance would double count this factor in the assessment.

45.  The assessment of the 1/F and 2/F GDV is listed in Appendix I of the judgment.

Gross Development Value – Upper Floor Flats

46.  In the selection of residential comparables, Mr Alnwick Chan proposed to compare with One Wan Chai, The Oakhill and L’Wanchai only, whilst Mr Cheung had also looked at The Gloucester, The Avenue, 28 Aberdeen Street, One Prestige and Artisan.  I agree with Mr Alnwick Chan that the other 5 developments proposed by Mr Cheung were far from the Lots, were pre‑sale developments and/or had different characteristics and qualities, and hence they are not relevant comparables particularly when there are enough and other better comparables in the valuation.  On the other hand, I agree with Mr Cheung that the transactions of L’Wanchai in or before August 2017 should be excluded in the assessment because their transaction dates were relatively far from the valuation date and there are also enough and other better comparables in the valuation.

47.  The valuation experts had agreement on the adjustment factors for age (1% for every year), floor (0.25% for every 1 level difference), size (1% for every 9.3 square meters difference), headroom (1% for every 0.3 meters difference) and view (3% difference between open and building view), but disagreed on the adjustments for time, location and facilities (including provision of carparking space). 

48.  In the adjustment for time, Mr Alnwick Chan adopted the Residential Price Index of Class ABC published in December 2017, whilst Mr Cheung adopted both the Residential Price Index of Class A published in December 2017 and a projection at 1% from the latest index to the date of valuation.  I agree the adoption of Residential Price Index of Class A because Class A matches the size of the hypothetical residential flat.  Since residential property price was on a rising trend from the latest indices in October 2017 to the valuation date of 15 December 2017, I also agree with Mr Cheung to allow an additional upward adjustment at 1% in the time adjustment.

49.  Regarding the adjustments for location, I am of the view that all the selected residential comparable developments are similar to the subject hypothetical development and therefore no adjustment is necessary in this connection.  Although the accessibility to One Wan Chai and L’Wanchai is relatively superior, their immediate living environment is relatively inferior.  Lastly, I agree with Mr Alnwick Chan that adjustments for facilities should be made to One Wan Chai and The Oakhill at ‑3% and ‑4% respectively to reflect their provision of better facilities.

50.  With a view to balance the adjustment for floor and minimize the adjustment for view in the hypothetical development, I prefer to adopt a mid‑floor (i.e. 14/F) unit with building view as the reference residential flat in the direct comparison. While I agree with Mr Alnwick Chan that residential flats on lower floors (i.e. 6/F or below) will have building view only, I consider that about half of the residential flats on mid to higher floors (i.e. 7/F or above) will have building view too.  Since 4 instead of 2 residential flats are assumed on each domestic floor, some residential flats will have open view and some will have view towards nearby buildings.  Correspondingly, the adopted unit rate of the reference residential flat should be further adjusted upwards to reflect the existence of some open view units in the hypothetical development. Assuming that 36 (i.e. 2 x 18) out of the 84 residential flats will have open view and they should be further adjusted at +3% for view as agreed by both Mr Alnwick Chan and Mr Cheung, the additional adjustment in this connection is about 1.29%.

51.  The assessment of the upper floors GDV is listed in Appendix II of the judgment.  In the valuation of the reference residential flat, I consider that the comparables in L’Wanchai with an average adjusted unit rate at $284,202 per square meters should have greater weight because its scale and characteristics such as age, unit size and nil provision of carparking space are much more similar to the hypothetical development.  Although the overall average adjusted unit rate is about $265,654 per square meters only, I consider that the reference residential flat could be assessed at $280,000 per square meters. Then, an average unit rate for all residential flats at $283,500 per square meters (i.e. about $283,000 x (1 + 1.29%)) is adopted in the residual valuation.

Development Parameters

52.  The parties’ valuation experts agreed most of the development parameters including demolition costs, construction costs, development period and etc, but they disagreed on extent of marketing costs and deduction of stamp duty and legal costs in the residual valuation.  I agree with Mr Alnwick Chan that higher marketing costs is common in the market and adoption of 3% of the total GDV as marketing costs is appropriate in the subject residual valuation. I also agree with Mr Alnwick Chan that there could have deduction of stamp duty at 4.25% and legal costs at 0.2% on land costs as they are the necessary expenses in the hypothetical development process.  A successful purchaser in public auction will in any event need to pay stamp duty and legal costs in land acquisition.

53.  However, although the parties’ valuation experts also agreed on developer’s profit at 10% of costs, I consider that if stamp duty and legal costs in land acquisition are taken into consideration in the residual valuation, the developer’s profit on costs should be adjusted downwards to say 7% to reflect the current keen competition for development sites in the market.  Conversely, where the acquisition costs are not allowed explicitly (i.e. Mr Cheung’s residual valuation), I agree that a higher developer’s profit, say about 10% in this instance, should be required in the residual valuation to reflect the relevant costs and stamp duty liability.

RDV of the Lots as at 15 December 2017

54.  Following the agreements between the parties’ valuation experts and the above determinations, the residual valuation of the Lots as at 15 December 2017 is listed in Appendix III of the judgment.

Additional Adjustment to the RDV of the Lots as at 15 December 2017

55.  Mr Liu submitted that if an order for sale is granted by the tribunal, auction of the Lots will likely be held sometimes later.  Hence, since the property market is on the rise, it would not be unfair and unjust for the tribunal to adjust the reserve price taking the date of the tribunal’s decision as the reference time, which had once been determined in Intelligent House Limited v Chan Tung Shing & Others [2008] 4 HKC 421.  Mr Liu further submitted that, based on Mr Alnwick Chan’s RDV valuations, RDV had an increase of 22.2% over a period of 18 months between June 2016 and December 2017, which is equivalent to an average monthly increase of about 1.2%.  Whilst, based on the indices provided by the parties, there is evidence to show that the property market is on the rise, and there is also no evidence to suggest that the market trend will likely to behave differently in the coming six months or so after December 2017.  Therefore, with reference to the judgment in Intelligent House it would not be unjust and unfair for the tribunal to fix the reserve price by adding a further 7.2% (i.e. 1.2% x 6 months) to the RDV as at 15 December 2017.

56.  Mr Anthony Chan replied that Mr Liu’s suggestion is misconceived and should be rejected. He submitted that the evidence before the tribunal might show the property market had been on the rise, but they were not the evidence that the property market “is on the rise” as claimed by Mr Liu or that it will rise.  It is not the duty of the tribunal to predict which way the market will go.  The respondents should not be allowed to simply pray in aid of there being no evidence to suggest the market trend will change.  The respondents should have the burden of proof that the property market will continue to rise, but such would involve moving from the realm of valuation into prediction.  Further, Intelligent House is distinguishable on the basis that it was common ground in this case that the property market was on the rise, but there was no such agreement in the present proceedings.  I agree.

57.  Since there is no concrete and persuasive evidence before this tribunal that there should have an increase in RDV from the date of valuation as at 15 December 2017, I agree to adopt the RDV as at 15 December 2017, which is the latest assessment available for the tribunal’s consideration, as reserve price for auction of the Lots.

58.  In accordance with the above discussions, I consider that the market value of the Lots reflecting the redevelopment potential on its own, i.e. the RDV of the Lots, as at 15 December 2017 is $485,000,000, equivalent to an accommodation value of about $130,333 per square meter, which should be the reserve price for auction of the Lots.

Order

59.  By reason of the above, this tribunal comes to the following decisions: -

(i)	This tribunal is satisfied that redevelopment of the Lots 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 undivided shares in the Lots including those of the respondents;
(ii)	All the undivided shares in the Lots, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lots;
(iii)	Mr Tam Tak Hing and Mrs Li Lau Lai Hing Joanna, nominated by the applicant, be appointed the trustees (“the Trustees”) to discharge the duties imposed on them as trustees by the Ordinance in relation to the sale of the Lots; and the Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs King & Company dated 4 January 2018;
(iv)	For the purposes of the sale of the Lots by public auction:-
	(a)	The sale of the Lots be on the particulars and conditions of sale the same or substantially the same as those set out in the draft Particulars and Conditions of Sale to be approved and initialed by the tribunal; and
	(b)	The reserve price be set at $485,000,000;
(v)	Subject to further extensions that the tribunal may subsequently allow upon the application of the purchaser of the Lots or its successor in title, the redevelopment of the Lots and the Building shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lots becomes the owner of the Lots; and
(vi)	Liberty to the applicant, the respondents and the Trustees to apply to the tribunal for further directions.

Costs

60.  Following Good Faith[7], I make a costs order nisi that the applicant do pay costs of these proceedings to the respondents on High Court scale, with certificate for counsel, including any reserved costs, to be taxed if not agreed.  Unless any parties apply by summons to vary, the costs order nisi shall be made absolute upon expiry of 14 days from today.

[1] Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578, [2005] 4 HKLRD 363

[2] Shop C, G/F, Sun Tao Building, Nos 12-18 Morrison Hill Road

[3] Shop 15, G/F, Wah To Building, Nos 17-21 Burrows Street & Nos 22-30 Cross Street

[4] G/F, Bel Trade Commercial Building, Nos 3 Burrows Street

[5] G/F & M/F, No 218 Johnston Road

[6] Shop C, G/F, Kwong Sang Hong Building Block CD, No 188 Wan Chai Road

[7] Good Faith Properties Ltd and Others v Cibean Development Co Ltd [2014] 5 HKLRD 534