WEALTH PLAN DEVELOPMENT LTD v. XIU CHUAN LTD AND OTHERS

LDCS 21000/2018

[2019] HKLdT 70

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 21000 OF 2018

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BETWEEN

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JUDGMENT

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BACKGROUND

1.  This is the applicant’s application for an order for sale, for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”), of all the undivided shares of and in New Kowloon Inland Lot No 4474 (“the Lot”) together with the building erected thereon known as Wing Cheong Factory Building, No 121 King Lam Street, Kowloon (“the Building”).

2.  The Building is a 10-storey industrial building served by 1 cargo lift, 1 passenger lift and 2 common staircases. Occupation permit No NK 148/70 was issued for the Building on 24 November 1970, granting permission to occupy its ground floor (“G/F”) as workshops and carparking area for non-domestic purposes, and its upper floors as factories for non-domestic purposes.  According to the approved building plans of the Building, there are 6 factory units and 5 parking spaces planned on G/F, 1 factory unit planned on each of 1^st Floor (“1/F”) and 4^th Floor (‘4/F”), and 2 factory units planned on each of 2^nd Floor (“2/F”), 3^rd Floor (“3/F”) and 5^th Floor (“5/F”) to 9^th Floor (“9/F”). With reference to the assignment plans and the records of the Land Registry, the carpark on G/F comprises 2 portions (i.e. Portion A and Portion B), and each of the 1/F and 4/F are sub-divided into 2 factory units.

3.  The Lot together with the Building standing thereon has 44 undivided shares. Each of the G/F factory units is allotted 1 undivided share, each of the car park portion is allocated 1/2 of 2/44 undivided shares, and each of the factory units on upper floors is allotted 2/44 undivided shares.

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

4.  At the time of filing of the Notice of Application (“NOA”) on 12 September 2018, there were 4 respondents and the applicant owned 38/44 (i.e. 86.36%) undivided shares in the Lot, more than the threshold of 80% required for industrial building located not within an industrial zone and aged 30 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%. 

6.  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. 

7.  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 came into operation on 1 April 2010.  Section 3 of the Notice lowered the threshold for compulsory sale of specified classes of lots from 90% to 80%.  Those classes of lots include:

“a lot that is not located within an industrial zone and each of the buildings erected on the lot -

(i)  is an industrial building; and

(ii)  was issued with an occupation permit at least 30 years before the relevant date.”

8.  Since the occupation permit of the Building was issued in 1970, i.e. more than 30 years before the date of application (i.e. 12 September 2018; the relevant date under the Notice) and the Lot falls within an area zoned for “Other Specified Uses (Business)” under the Cheung Sha Wan Outline Zoning Plan No S/K5/37 dated 16 December 2016 (“OZP’), the applicable percentage is therefore 80%.

9.  I am satisfied that as at the date of application, the applicant owned more than 80% of the undivided shares in the Lot.  I am therefore satisfied the applicant is entitled to make the present application under section 3 of the Ordinance.

THE REMAINING RESPONDENTS

10.  At trial, the applicant owned 86.36% undivided shares in the Lot, and the following 4 respondents remain in the present action: -

Respondent		Premises
1st Respondent	(“R1”)	Unit A on G/F
2nd Respondent	(“R2”)	Unit B on G/F
3rd Respondent	(“R3”)	Units C, D and E on G/F
4th Respondent	(“R4”)	Unit F on G/F

11.  All the respondents are represented by Mr Ross Yuen (“Mr Yuen”).  Mr Yuen submits that the respondents primarily dispute the existing use value (“EUV”) of the Building and the redevelopment value (“RDV”) of the Lot as assessed in the application and put the applicant to strict proof in respect of the other statutory requirements under the Ordinance.

ISSUES FOR DETERMINATION BY THE TRIBUNAL

12.  The issues to be decided in this case are as follows:

1) As at 18 July 2018, what was the respective EUV, as assessed in accordance with Part 1 of Schedule 1 of the Ordinance, of all units in the Building?

2) Whether the redevelopment of the Lot is justified due to age and/or state of repair of the Building in accordance with section 4(2)(a) of the Ordinance?

3) Whether the applicant has taken reasonable steps to acquire all the undivided shares in the Lot on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance?

4) If an order for sale should be granted, what should be the reserve price (i.e. RDV of the Lot for the purpose of auction sale)?

DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING

13.  Pursuant to section 4(1)(a)(i) of the Ordinance, if there is a dispute between the parties on the EUV of the units as assessed in the application, the tribunal shall determine the proper value. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the lot who cannot be found, the majority owner of the lot 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.”

14.  All the respondents are owners of the workshop units on G/F. They rely on the reports and valuations prepared by Mr Patrick Lai (“Mr Lai”) of AA Property Services Limited, whilst Mr Charles Chan (“Mr Chan”) of Savills Valuation and Professional Services Limited is the valuation expert appointed by the applicant.

15.  After a without prejudice meeting, the two valuation experts agree on factual information of the units in the Building.  They also agree on adoption of the same G/F reference unit (i.e. Unit A on G/F) and upper floor reference unit (i.e. Unit A on 5/F), conversion rate for the cockloft of Unit D on G/F, and value of Portion A of Car Park on G/F at $5,600,000 and value of Portion B of Car Park on G/F at $3,200,000.  However, they disagree on selection of some comparables, some adjustments to the comparables, and some adjustments to the reference units.  Further, the parties argue mainly how would the open area adjacent to Unit A on G/F and the factory canteen waivers of Units D and E on G/F be considered in the assessment.

16.  The parties had once argued whether Units D and E on G/F should be valued together, but the applicant is now content to value them as one entity.  From valuation perspective, I consider if merger of the two units can reflect a higher value and was practical as at the valuation date, they should be valued together.  Though, whether their value should then be apportioned for presentation may be arguable.

Selection of G/F Comparables

17.  Mr Chan and Mr Lai propose to adopt 3 comparables and 6 comparables respectively, and 2 of them (i.e. Comparables A1 and A7) are common.  Mr Lai considers that Comparable A2 that is proposed by Mr Chan and is much larger in size should not be adopted in the assessment, whilst Mr Chan has not adopted Comparables A3, A4, A5 and A6 proposed by Mr Lai and all located in the same building W668.  Mr Chan considers that W668 is situated in a much better location with significantly higher pedestrian flow, and it is also arbitrary to split the G/F and 1/F values of Comparables A4, A5 and A6.

18.  I agree with Mr Chan not to adopt Comparables A4, A5 and A6 that comprise both G/F and 1/F, but I agree to adopt Comparable A2 proposed by Mr Chan and Comparable A3 proposed by Mr Lai due to the limited number of relevant comparables.

Adjustments to G/F Comparables

19.  The valuation experts agree on the adjustment for time with reference to price indices, the adjustment for age at 1% per 5-year difference, and the adjustment for frontage at 2% per 1-meter difference, but disagree on some of the adjustments for location, layout, size and headroom.

20.  Regarding the adjustment for location, the valuation experts agree to apply 0% to Comparable A1 and -5% to Comparable A7, but they have not suggested any adjustment rate for the comparables proposed by the opposing party.  I agree with Mr Chan to make nil adjustment for location to Comparable A2, and also agree with Mr Lai to make a substantial adjustment to Comparable A3 at -50%.  Nevertheless, since I consider the location of W668 is much different from the Building, the adjusted unit rate of Comparable A3 should be further reviewed after the 1^st round of assessment.

21.  Regarding the adjustment for layout, the valuation experts agree to apply 0% to Comparable A7 but disagree on the adjustment rate for Comparable A1 (Mr Chan: 5% v Mr Lai: 20%).  I consider the adjustment for layout should make reference to mainly depth and shape of the comparables, and accept the adjustments at 5% to Comparable A1 and 10% to Comparable A2 proposed by Mr Chan, and the adjustment at 0% to Comparable A3 proposed by Mr Lai.

22.  Regarding the adjustment for size, Mr Chan proposes an adjustment rate at 1% per 10m² difference to Comparables A1, A3 and A7 and an adjustment rate at 2% per 10m² difference to Comparable A2 that is much larger in size, whilst Mr Lai suggests a lower rate at 1% per 20m² difference to all comparables. In this instance, I agree with Mr Chan to adopt a higher adjustment rate to reflect the difference in size, but the adjustment rate for the 1^st 100% difference in area can be adjusted at 1% per 10m² and then the remaining area if any can be further adjusted at 2% per 10m².

23.  Regarding the adjustment for headroom, Mr Chan proposes an adjustment rate at 2% per 0.5-meter difference, whilst Mr Lai suggests a lower rate at 2% per 1-meter difference.  I consider that higher headroom is valuable to G/F workshop unit and accept the adjustment rate at 2% per 0.5-meter difference proposed by Mr Chan.

24.  The valuation of the G/F reference unit is listed in Appendix I of the judgment.  The average adjusted unit rate of the 4 selected comparables is about $212,643/m², whilst the average without Comparable A3 that has substantial adjustment for location is about $180,541/m².  I consider the adjusted unit rate of Comparable A3 is out of line, and the G/F reference unit should be assessed at $183,000/m², close to the adjusted unit rate of Comparable A1 that is near the Building.

EUVs of G/F Units

25.  By applying the same principles above and before consideration of the open area adjacent to Unit A on G/F and the factory canteen waiver of Units D and E on G/F, the valuation of all the G/F units is listed in Appendix II of the judgment, and the sub-total EUV is determined at $36,250,000.

26.  The valuation experts have no dispute over the adjustment for internal condition. Regarding the adjustment for location, I agree with Mr Chan to make an adjustment at -20% to Unit F on G/F instead of -10% only suggested by Mr Lai.  Further, I consider the return frontage of Units D and E on G/F can be further adjusted at 10% and its lower headroom because of a cockloft thereof can be adjusted at -2%.

Open Area Adjacent to Unit A on G/F

27.  The parties have no dispute that there is government land of about 167.2m² adjacent to Unit A on G/F.  Although the government land is now occupied by the existing tenant, it does not form part of the existing tenancy. 

28.  The valuation experts agree to apply a conversion rate at 1/11 to assess the enhancement in value attributable to the government land, but they differ on the basis how the value is arrived at.  Mr Chan is of the view the conversion rate at 1/11 can be applied only on the basis the government land is part of Unit A on G/F, i.e. something akin to a roof or cockloft, whilst Mr Lai considers that from valuation perspective and in view of market reality approach the government land should in any event command a conversion rate at 1/11 in the assessment.  Mr Yuen submits that Mr Lai’s opinion should be preferred because the government land has been used exclusively by the occupiers of Unit A on G/F without interruption since 1978, the applicant fails to adduce any evidence of risk of enforcement in this regard, and the applicant’s allegation that a tenant may not vacate from the government land when the tenancy comes to an end is speculative.

29.  The government land is not an ancillary area of Unit A on G/F. It is in fact a “convenience” as described by the valuation experts in their respective oral evidence.  In the circumstances, I agree to adopt the market reality approach as submitted by Mr Yuen, but the value attributable to the “convenience” should not be nil as suggested by Mr Chan and should also not be converted at 1/11 as suggested by Mr Lai, which is equivalent to about 25% increase in value.

30.  I accept the submissions of Mr Chain, counsel for the applicant, that under the Land (Miscellaneous Provisions) Ordinance, Cap 28, occupation of government land without permission is a potential criminal offence (i.e. s.6(4); any person occupying unleased land who without reasonable excuse does not cease to occupy the same as required by a notice shall be guilty of an offence), and engaging in the erection of a structure on government land is a criminal offence (i.e. s.6(4A)).  From valuation perspective, I consider risk of enforcement if any is a material consideration.  As at the date of trial, there is no evidence that the present occupation of the government land is subject to any notice for cessation.  However, the occupier should not erect any structure thereon and there will always be risk of enforcement for unauthorized occupation particularly exclusive occupation because no gate being a structure is allowed without permission. 

31.  I am of the view the “convenience” attributable to the government land should have some value.  This is a large piece of land immediately adjacent to Unit A on G/F and is a dead end. Except for occupiers and visitors of Unit A on G/F, there are unlikely any other users who would pass through it. Further, it is a drainage pipe reserve area, which is now not blocked for access and will unlikely be occupied for other purposes by government. Although no structure is permitted to be erected thereon and there is risk of enforcement for unauthorized occupation particularly exclusive occupation, I consider the government land can still benefit Unit A on G/F and prudent purchaser would pay a higher price to acquire Unit A on G/F in the circumstances at say 10% increase in value, which is similar to the benefit of return frontage enjoyed by Units D and E on G/F.  Therefore, after consideration of the open area adjacent to Unit A on G/F, Unit A on G/F should be valued at $8,450,000 x 1.1 = $9,295,000, say $9,300,000.

Factory Canteen Waiver of Units D and E on G/F

32.  The parties have no dispute that Units D and E on G/F have both a factory canteen wavier and a food factory licence, but they appear to operate as a fast food shop and there is no factory canteen use at the premises. Mr Lai considers that the existing fast food operation shows the demand for canteen use, and hence the factory canteen waiver is valuable to Units D and E on G/F and would enhance their value by 40%.  Whilst, Mr Chan is of the opinion that the factory canteen waiver has no value.

33.  Mr Lai has tried to prove the enhancement in value by analysing 3 transactions including 2 ground floor workshops (i.e. CT1 at Ford Glory Plaza and CT3 at Por Mee Industrial Building) that were used for industrial purposes and another ground floor workshop (i.e. CT2 at Fast Industrial Building) that was permitted and was used for canteen purpose. Although it is discovered that CT3 also has a factory canteen waiver, Mr Lai explained at trial he was aware of this when he prepared the Supplemental Valuation Report.  He said it was not operated as a canteen at the time of transaction and therefore he concludes that its transaction price did not reflect any enhancement value and it is still suitable for comparison.

34.  I consider Mr Lai’s analyses, which have comparison between 2 properties (i.e. CT2 and CT3) both with factory canteen waiver, have adjustments for layout, accessibility, location and etc., and have conversion of the basement area in CT2, are arbitrary, and he fails to prove the enhancement in value if any.  In fact, it is the R3’s evidence that the former owner had not told him about the waiver letters and he did not pay any premium for the factory canteen waiver, the previous tenant was carrying on the business of logistics only and the existing tenant has been using the premises as a food factory.  Further, I also agree with Mr Chan that the restrictions on the factory canteen waiver (i.e. to be used exclusively by the people on the lot, no independent or direct exit to or entrance from public road, and no advertising signboard notice or poster) would substantially impair the trading potential of the existing restaurant operation in such a small area at the premises, and therefore not to assign any value to the factory canteen waiver.

Selection of Upper Floor Comparables

35.  Mr Chan proposes 9 comparables and agrees not to adopt Comparables C1 and C9 after his without prejudice meeting with Mr Lai. Mr Lai proposes 4 comparables and 3 of them are also adopted by Mr Chan.

36.  I agree to analyse Comparable C5 proposed by Mr Lai, which was transacted relatively close to the valuation date, and also agree to analyse Comparables C6, C7, C8 and C10 proposed by Mr Chan.  Although these 4 comparables were transacted in 2017, the differences in time can be adjusted with reference to price index.

Adjustments to Upper Floor Comparables

37.  Mr Chan proposes rates at 1/3 and 1/4 to convert flat roof and roof respectively of the comparables.  He considers the flat roof and roof in aged industrial buildings are likely covered and hence higher rates are adopted to reflect the market reality.  Whilst, Mr Lai proposes conversation rates at 1/6 and 1/8 only.  I am of the view the unauthorized covers over the flat roof and roof if any are subject to enforcement for rectification and the applicant fails to prove they are exempted from enforcement action, and therefore accept the conversion rates proposed by Mr Lai.

38.  The valuation experts agree on the adjustment for time with reference to price indices, the adjustment for size at 1% per 40m² difference, the adjustment for floor at 0.5% per floor (i.e. in aged industrial buildings, units on higher floor would have a lower unit rate), and the adjustment for location.  They disagree on the adjustments for age, headroom, scale and facilities, and top floor.  They also argue whether the comparables should be further adjusted for view, lighting and ventilation, and building condition and management proposed by Mr Chan, and internal condition proposed by Mr Lai.

39.  I agree with Mr Lai to adjust for age at a higher rate of 0.5% per year instead of 0.25% per year suggested by Mr Chan, and to adjust for headroom at a lower rate of 2% per 1-meter difference instead of 3% per 1-meter difference suggested by Mr Chan. Nevertheless, I agree with Mr Chan to adjust for units on top floor of aged industrial buildings that are prone to weathering effects, but the adjustment rate should be 2% only.  Regarding scale and facilities, I agree with Mr Chan not to make adjustment to Comparable C3 in Hang Cheong Factory Building and to make an adjustment at 3% to Comparable C8 in Por Mee Factory Building, but I consider the adjustment rate for Comparables C2, C5, C6 and C7 in Hop Hing Industrial Building should be -3%, and the adjustment rate for Comparables C4 and C10 in Dragon Industrial Building should also be -3%.

40.  Further, I agree with Mr Lai not to make adjustments for view, lighting and ventilation, and building condition and management proposed by Mr Chan.  I consider that view, lighting and ventilation have minimal impacts on value of units in aged industrial buildings, and building condition and management should have already been reflected in the higher adjustment rate for age.  On the other hand, I agree with Mr Chan not to make adjustment for internal condition. Given that internal condition of the comparables is unknown, it is not appropriate to make an adjustment in this regard.

41.  The valuation of the upper floor reference unit is listed in Appendix III of the judgment.  The average adjusted unit rate of the 8 selected comparables is about $56,834/m².  I consider that the upper floor reference unit should be assessed at $56,800/m².

EUVs of Upper Floor Units

42.  Applying the same principles above including the same adjustment rates for size, headroom and top floor, the valuation of all the upper floor units is listed in Appendix IV of the judgment, and the sub-total EUV is determined at $193,530,000.

EUVs of All Units in the Building

43.  Before consideration of the enhancement in value of Unit A on G/F because of its adjacent open area, the EUV of the Building is determined at $238,580,000 (i.e. $36,250,000 + $8,800,000 + $193,530,000), slightly higher than the applicant’s assessment at $232,770,000.  Each of the EUVs of R1, R2, R3 and R4’s premises as determined is equal to or lower than the respective EUVs as assessed by Mr Chan. Although the EUV of R5’s premises as determined is slightly higher than the EUV as assessed by Mr Chan, the apportionment factor as determined is lower than the applicant’s proposal.  In comparing with the determination above, the applicant has in fact proposed a higher apportionment factor to each of the respondents.

Premises	EUV as determined	Apportionment Factor (determination)	EUV as assessed by applicant	Apportionment Factor (applicant's assessment)
Total	$238,580,000	-	$232,770,000	-
R1	$8,450,000	3.5418%	$8,450,000	3.6302%
R2	$5,440,000	2.2802%	$5,550,000	2.3843%
R3	$5,270,000	2.2089%	$5,380,000	2.3113%
R4	$6,130,000	2.5694%	$6,290,000	2.7022%
R5	$10,960,000	4.5938%	$10,900,000	4.6827%

44.  Given that the differences between the applicant’s assessments and the determinations are not substantial, I consider it is appropriate to adopt the EUVs (without the enhancement in value of Unit A on G/F because of its adjacent open area) as proposed by the applicant in these proceedings, which would not prejudice against all the respondents.

45.  After consideration of the enhancement in value of Unit A on G/F because of its adjacent open area, the EUVs of all units in the Building as at the relevant date of valuation, i.e. 18 July 2018, and adopted by this tribunal are appended below: -

Floor	Unit	EUV
G	A	$9,300,000
G	B	$5,550,000
G	C	$5,380,000
G	D & E	$6,290,000
G	F	$10,900,000
G	Portion A of Car Park	$5,600,000
G	Portion B of Car Park	$3,200,000
1	A	$11,500,000
1	B	$12,570,000
2	A	$11,110,000
2	B	$12,100,000
3	A	$11,390,000
3	B	$12,040,000
4	A & Flat Roof	$10,250,000
4	B & Flat Roof	$10,300,000
5	A	$9,390,000
5	B	$9,810,000
6	A	$9,620,000
6	B	$10,050,000
7	A	$9,300,000
7	B	$10,000,000
8	A	$8,970,000
8	B	$9,000,000
9	A & Roof	$10,600,000
9	B & Roof	$9,400,000

46.  I therefore accept the total EUV of the Building is $233,620,000 (i.e. $232,770,000 - $8,450,000 + $9,300,000).

SECTION 4(2) OF THE ORDINANCE - JUSTIFICATION AND REASONABLE STEPS

47.  Section 4(2) of the Ordinance provides as follows: -

“2. The Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot the subject of the application under section 3(1) concerned, the Tribunal is satisfied that—

(a) the redevelopment of the lot is justified (and whether or not the majority owner proposes to or is capable of undertaking the redevelopment)—

(i) due to the age or state of repair of the existing development on the lot; or

(ii) on 1 or more grounds, if any, specified in regulations made under section 12; and

(b) the majority owner has taken reasonable steps to acquire all the undivided shares in the lot (including, in the case of a minority owner whose whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable).”

48.  The applicant must satisfy this tribunal the above statutory requirements are met; otherwise, an order for compulsory sale would not be granted.

Whether development of the Lot is justified due to the age and/or state of repair of the Building

49.  Mr Dennis Wong Wing Cheung (“Mr Wong”) of Prudential Surveyors International Limited, both a structural engineer and a building surveyor, conducted a structural survey and a condition survey of the Building and prepared a Structural Condition Survey Report and a Condition Survey Report both in March 2019 for the applicant. 

50.  None of the respondents adduced expert evidence to rebut the reports complied by Mr Dennis Wong.  

51.  Having considered the reports of Mr Wong, I accept his expert opinion. The Building, being erected 49 years ago, is in poor condition and has come to the end of its design life.  The design of the Building has become obsolete over time in many aspects, both physically and functionally, and fails to conform to modern safety standards and statutory requirements.

52.  I am also of the view the Building is in poor state of repair and the costs of repair to bring the Building to tenable condition is disproportionate to the costs of redevelopment.   I accept the expert’s opinion that even if repair works were carried out, such works would bring about a modest improvement only to the existing condition of the Building and the Building would continue remain a sub-standard one.

53.  By reason of the matters set out above, I am satisfied the redevelopment of the Building is justified.

Whether the applicant has taken reasonable steps

54.  In assessing the reasonableness of the offers, I have considered the case of Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578. In particular, I have considered paragraphs 33 and 36 of the judgment in which   Ribeiro PJ stated: -

“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……”

55.  Prior to the issue of the NOA on 12 September 2018, The applicant has made 4 batches of offer on 5 July 2017, 8 August 2017, 10 November 2017 and 3 September 2018 to the respondents, and after the issue of the NOA, the applicant has made 1 batch of offer only during the trial hearing on 24 October 2019.  In the applicant’s offers on 10 November 2017 and 3 September 2018, the respective offer prices were based on professional valuation and had reflected the then RDV attributable to the respective units as assessed by the then valuation experts appointed by the applicant.  Mr Chain submits that in the circumstances the applicant has proved that the applicant has taken reasonable steps to acquire all the undivided shares in the Lot.

56.  Mr Yuen has once contended the applicant has failed to take reasonable steps to acquire the respondents’ undivided shares in the Lot because no steps have been taken out by the applicant after the NOA until the 4^th day of trial when the respondents have already funded substantial legal costs, but he withdrew this argument in his oral closing submissions and put the applicant to prove the case.

57.  Having considered that the applicant has made offers to the respondents, which were based on professional valuation and had reflected the then RDV attributable to the respective units as assessed by the valuation experts, and the respondents do not take issue with the applicant in this connection, I am satisfied that the applicant has taken reasonable steps to acquire all the undivided shares in the Lot.

RESERVE PRICE FOR THE AUCTION

58.  By reason of being satisfied that redevelopment of the Lot is justified and that the applicant has taken reasonable steps to acquire all the undivided shares in the Lot, I am satisfied an order for sale should be granted in favour of the applicant.

59.  The two valuation experts updated their respective RDV assessments as at 20 September 2019.  They agree to value the Lot by residual valuation method. In their respective residual valuations, they have adopted the same hypothetical development scheme, a 20-storey industrial building with plot ratio of 12 and total gross floor area of 61,112.55m².  They agree on many development parameters, including saleable area on each floor, interest rate at 4% per annum, professional fees at 6%, demolition cost at $9,559,000, demolition period of 9 months, construction period of 30 months, stamp duty on land cost at 4.25%, and the sub-total gross development value (“GDV”) of car parking spaces at $20,900,000. They disagree on selection of some comparables and some adjustments to the comparables. They also have different opinion on marketing cost, construction cost and developer’s profit.

GDV – Industrial Unit on G/F

60.  Mr Chan and Mr Lai propose 2 and 4 comparables respectively, and all these comparables have also been proposed by them respectively in the EUV assessment.  I consider the 4 comparables proposed by Mr Lai, which are all located in the same building W668 and were all transacted in 2016 more than 3 years before the valuation date should be excluded in the GDV assessment.  In the final analysis of the EUV assessment, I have also excluded Comparable A3 the transaction in W668 and consider that its adjusted unit rate with substantial adjustment for location is out of line.

61.  The valuation experts agree on the adjustment for location at 0%, the adjustment for frontage at 1% per 0.5-meter difference and the adjustment for age at 1% per 5-year difference. Moreover, I accept Mr Chan’s adjustment for size at 1% per 5m² difference, adjustment for headroom at 2% per 0.5-meter difference and adjustment for return frontage at 10%.  Since Comparables E1 and E2 have much longer depth, I also agree with Mr Chan to adjust for layout to them at 10% and 15% respectively.  Regarding the adjustment for time, I accept Mr Chan’s proposed figures too, which have reflected the drop in industrial price in recent months and match with the provisional industrial price indices published by the Rating and Valuation Department recently.

62.  The valuation of the G/F unit is listed in Appendix V of the judgment.  The average adjusted unit rate of the 2 comparables is about $246,455/m².  I consider that the G/F unit should be assessed at $247,000/m², same as that proposed by Mr Chan. 

GDV – Industrial Units on Upper Floors

63.  Mr Chan proposes 18 comparables in 4 nearby industrial developments (i.e. W668, Global Gateway Tower, CEO Tower and Kimberland Centre), whilst Mr Lai agrees to adopt 5 of them only that were all transacted in 2019.  With a view to increase the number of comparables, I consider that the assessment can cover the transactions in or before April 2018, including Comparables F1, F2 and F3 in W668, Comparables F6, F7, F8 and F9 in Global Gateway Tower, Comparables F14 and F15 in CEO Tower and Comparables F16, F17 and F18 in Kimberland Centre.

64.  The valuation experts agree on the adjustment for headroom at 2% per 1-meter difference and the adjustment for floor at 0.5% per floor (i.e. in modern industrial buildings, units on higher floor would have a higher unit rate). Although I agree units on higher floor may enjoy better view and lighting and ventilation, I am of the view these 2 factors would not have material impacts on industrial price.  In addition, since I consider these 2 factors should have already and largely been reflected in the adjustment for floor, I prefer not to adjust for them as suggested by Mr Lai.  On the other hand, I agree with Mr Chan not to adjust for loading capacity.  While all comparables have loading capacity of 100lbs/ft², I consider the same should also be assumed in the hypothetical development.

65.  Regarding the adjustment for location, I consider that comparables in W668 along Castle Peak Road should be adjusted at -7.5%, and comparables in Global Gateway Tower, CEO Tower and Kimberland Centre along Wing Hong Street should be adjusted at -3%, the midway figures proposed by the valuation experts. Further, I consider size should also be adjusted at the midway rate at 1% per 20m². Nevertheless, I accept Mr Chan’s adjustment for age at 1% per 1-year difference instead of 0.5% per 1-year difference suggested by Mr Lai.

66.  Regarding the adjustment for scale and facilities, I agree with Mr Chan not to make adjustment to comparables in W668, which is a small scale industrial developments similar to the hypothetical development on the Lot, and to make adjustment at -3% to comparables in Global Gateway Tower and CEO Tower, which are larger in scale.  Nevertheless, the adjustment to comparables in Kimberland Centre should be -1% as suggested by Mr Lai.

67.  Similar to the valuation of the G/F unit, I also accept Mr Chan’s adjustment for time, which have reflected the drop in industrial price in recent months and match with the provisional industrial price indices published by the Rating and Valuation Department recently.

68.  The valuation of the upper floor reference unit is listed in Appendix VI of the judgment.  The average adjusted unit rate of the comparables in the 4 comparable developments is about $156,107/m².  I consider that the upper floor reference unit should be assessed at $160,000/m², and this can also be applied directly to the valuation of all upper floor industrial units as suggested by Mr Lai.  In fact, Mr Chan has also proposed to adopt the same average unit rate at $160,000/m² for all upper floor industrial units. Accordingly, I also adopt the unit rates for flat roof and roof at $26,667/m² and $20,000m² respectively proposed by Mr Chan.

Marketing Cost

69.  Mr Chan and Mr Lai propose marketing cost at 3% and 1% respectively on the GDV.  Although I agree with Mr Chan that marketing of new development would incur greater cost and in addition to agency fee there are expenses for advertising and production of marketing materials, I consider the marketing cost in this instance should be 2% only on the GDV, a lower rate as compared with that for marketing of new residential development.

Construction Cost

70.  The valuation experts agree the level of finishes and specification of the hypothetical development should be commensurate with the comparable developments in the GDV assessment (i.e. W668, Global Gateway Tower, CEO Tower and Kimberland Centre).  Mr Chan makes reference to the building cost data of “Industrial/Office Building” in the range of $16,600 to $21,200/m² and adopts a rate at the higher end of $21,200/m².  In his assessment of construction cost, he also adds costs for air-conditioning, site formation and external works at rates of $2,550/m², $435/m², and $5,900/m² respectively, and adjusts for development scale at +10%.  Whilst, Mr Lai is of the view reference should be made to building cost data of “Industrial Building” of “Better Quality High Rise” at a rate of $15,000/m² only.  Although Mr Lai has further added costs for curtain walling at a rate of $2,550/m² and central air-conditioning at a rate of $2,480/m², he considers the site formation cost should be at the lower end rate of $240/m², there should be no cost for external works and the development scale should be adjusted at +5%.

71.  Other than the building cost data, there is no evidence and expert opinion of quantity surveyor on construction cost in these proceedings. Having considered the opinion of the valuation experts, I am of the view the level of finishes and specification of the comparable developments are better than those of standard industrial building and justify a higher cost similar to that of industrial/office building but at a rate of say $20,000/m². On the condition that the comparable developments are equipped with split-type air-conditioners only, I consider a rate of say $1,000/m² is reasonable. I also consider the cost for site formation should be at a rate of say $300/m² and there is no cost for external works because there will be no landscaping works on the flat roof of the hypothetical development.  Nevertheless, I agree with Mr Chan to adjust for development scale at +10%. Accordingly, construction cost for the hypothetical development is assessed at $144,000,000.

Developer’s Profit

72.  In addition to allowing stamp duty and legal cost on land cost at 4.25% and 0.1% respectively, Mr Chan proposes developer’s profit at 25% on cost, whilst Mr Lai suggests a rate of 15% only. In view of the current social movements in Hong Kong, both valuation experts agree that there should have an increase in risk for industrial development and therefore a higher rate for developer’s profit in the residual valuation, but they differ in opinion of what is the reasonable rate.  On the conditions that stamp duty and legal cost on land cost have been allowed in the residual valuation and the GDV as adopted has already reflected the recent drop in industrial price, I am of the view the developer’s profit as at the valuation date but before consideration of the potential increase in plot ratio as commented by Mr Lai should be say 20%.

73.  I agree with Mr Lai that, under the new government initiative of “Measures to Revitalize Industrial Buildings” implemented since early 2019, the Lot has the potential to attain a maximum plot ratio of 14.4, i.e. 20% over the plot ratio permitted under the OZP, without the payment of premium to the government. The increase in plot ratio is subject to approval of the Town Planning Board on a case-by-case basis and the maximum non-domestic plot ratio allowed under the Building (Planning) Regulations, and it is applicable to industrial building constructed before 1987 and located outside residential zones in main urban areas and new towns only.

74.  The Building was built in 1970.  The Lot falls within an area zoned for “Other Specified Uses (Business)” under the OZP.  The government lease of the Lot has no height restriction, and the height restriction under the OZP is 130 meters above the Hong Kong Principal Datum. Having considered all these factors, the Lot appears to be benefited from the new policy.

75.  The increase in plot ratio by 20% if any would have substantial financial benefits, but in any event it is subject to approval of the Town Planning Board on a case-by-case basis, and so far there is no evidence of such approval.  In these proceedings, the parties have not called for opinion of town planning expert. Nonetheless, based on the evidence and opinion of the valuation experts before this tribunal, I accept the developer’s profit at 15% on cost proposed by Mr Lai, which reflects the potential of increase in plot ratio.

RDV of the Lot as at 20 September 2019

76.  Based on the agreement between the two valuation experts and the above determinations, the residual valuation of the Lot as at 20 September 2019 is listed in Appendix VII of the judgment.  The Lot is assessed at $395,000,000, equivalent to an accommodation value of about $64,621 per square meter (i.e. about $6,003 per square foot).

ORDERS

77.  For reasons given in this judgment, I have set out reasons why I am satisfied an order for sale should be granted and I therefore make the following orders: -

1) All the undivided shares in the Lot, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lot;

2) Mr Lee Kwok Yung and Ms Yam Chiu Wing, nominated by the applicant, be appointed trustees (“the Trustees”) to discharge the duties imposed on them as trustees by the Ordinance in relation to the sale of the Lot;

3) The Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Hau, Lau, Li & Yeung Solicitors and Notaries dated 30 October 2019;

4) For the purposes of the sale of the Lot by public auction: -

a) the sale of the Lot 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 $395,000,000;

5) Subject to further extensions that the tribunal may subsequently allow upon the application of the purchaser of the Lot or its successor in title, the redevelopment of the Lot and the Building shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot becomes the owner of the Lot; and

6) Liberty to the applicant, the respondents, and the Trustees to apply to the tribunal for further directions.

COSTS

78.  Following Good Faith ^[1], 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 the date of this judgment.

Appendix 1

Appendix 2

Appendix 3

Appendix 4

Appendix 5

Appendix 6

Appendix 7