DAILY LEADER LIMITED (康圖發展有限公司) 1st Applicant TREASURE ARTS INTERNATIONAL GROUP LIMITED (寶藝國際集團有限公司), DAILY LEADER LIMITED (康圖發展有限公司), TREASURE ARTS INTERNATIONAL GROUP LIMITED (寶藝國際集團有限公司)
TOP LEAD INVESTMENT LIMITED (御領投資有限公司), WONG FUNG CHU （黃鳳珠）, CHAN YAT CHOI, CHEUNG FUK LAM and IP WAI CHING
Mr Benjamin Chain, SC (“Mr Chain”), counsel
DAILY LEADER LTD AND ANOTHER v. TOP LEAD INVESTMENT LTD AND OTHERS
Assessment of EUV of Upper Floor Units
34. In respect of the assessment of the upper floor units, both Mr C Chan and Mr CW Wong agreed to adopt Unit C on 3/F of the Building as the reference unit. They agreed also to adopt 3 transactions in the building at Nos 790-796 Cheung Sha Wan Road as follows:
Ref Unit Workshop Space C on 3/F B1 3/F, 796 Cheung Sha Wan Road B2 3/F, 790 Cheung Sha Wan Road B3 2/F, 796 Cheung Sha Wan Road
35. The two experts also agreed on the adjustments for time, size, headroom and building age. They failed however to agree on the adjustments for location, floor level difference, view and lighting & ventilation.
36. As regards location, Mr C Chan proposed -25% while Mr CW Wong proposed -5%. Mr C Chan attempted to carry out paired analysis as follows to justify his adjustments of -25%:[8]
Ref Unit Workshop Space C on 3/F, Fung Wah Factorial Building 1 3/F, 792 Cheung Sha Wan Road 2 3/F, 796 Cheung Sha Wan Road
37. Subject to minor adjustments to be discussed below, Mr C Chan arrived at an average difference between the two buildings as much as -51.37%.
38. However, for reasons inexplicable, there appeared to be a sudden jerk in value for the building at Nos 790-796 Cheung Sha Wan Road during that January 2013. Earlier on 7 January 2013 and 18 January 2013, the two units, ie 3/F, 792 Cheung Sha Wan Road and 3/F, 796 Cheung Sha Wan Road were sold only for $5,500,000 and $5,900,000 respectively. Following Mr C Chan’s analysis on these earlier figures instead, the difference which may be attributable to location was -42.27%:
39. In spite of the above, having carried out the joint inspection on 2 March 2021, I do not visualise there should be much difference in location for these units on upper floors. In fact, as we shall see, Mr C Chan himself did not consider such similar level of adjustment appropriate when he adopted instead +5% to reflect the difference in location & environment for the land sale comparables at Cheung Sha Wan Road[9]. Perhaps the sale of Workshop Space C on 3/F of the Building in February 2013 was undervalued. There is always a danger in relying on only one comparable in valuation. I therefore agree with Mr CW Wong’s -5%.
40. I also agree with Mr CW Wong that for the purposes of user of the premises which have been converted into non-industrial uses like fitness club, kung fu parlours etc, view and lighting & ventilation are not so important[10]. As Mr CW Wong pointed out during the joint site inspection, occupiers of most of the upper floor premises in the building at 790-796 Cheung Sha Wan Road had covered the windows with papers or blinds; similarly, almost half of the window openings of the corner units on 3/F of the Building were cancelled and replaced with solid wall. Having said that, I note that the units on upper floors of 796 Cheung Sha Wan Road occupy a corner location with advertising potential and I therefore adopt Mr C Chan’s proposed adjustment of -3% for lighting & ventilation or view.
41. The greatest disagreement between the two experts is on the adjustment for floor level difference. Whereas Mr CW Wong proposed an adjustment of 3% per floor, Mr C Chan proposed more significant adjustments largely on the basis of the rateable values of the subject units as well as those at Nos 790-796 Cheung Sha Wan Road[11]:
Rateable Values of Fung Wah Factorial Building for 2018-2019:
Rateable Values of Nos 790-796 Cheung Sha Wan Road for 2018-2019:
42. Mr C Chan also attempted to carry out paired analysis on the basis of previous sales of units in the building at Nos 790-796 Cheung Sha Wan Road. He firstly compared the sales of two units on 5/F and tried to prove that the sale in early 2013 did not outperformed the market movement by reference to the Industrial Price Index prepared by the Rating and Valuation Department (“RVD”):[12]
Premises Date of Transaction Consideration RVD Industrial Price Index Time Adjusted Consideration 5/F, 792 Cheung Sha Wan Road 29 Jan 2010 $2,750,000 255.3 $6,650,000* 5/F, 790 Cheung Sha Wan Road 31 Jan 2013 $4,400,000 617.1 $4,400,000
43. Then Mr C Chan tended to justify the floor adjustment of -30% (for 2 floors) as follows:
Premises Date of Transaction Consideration RVD Industrial Price Index Floor Adjustment Time + Floor Adjusted Consideration 1/F, 790 Cheung Sha Wan Road 26 Apr 2011 $6,000,000 376.6 -30% $6,880,000* 3/F, 790 Cheung Sha Wan Road 7 Jan 2013 $5,500,000 617.1 $5,500,000 3/F, 790 Cheung Sha Wan Road 23 Jan 2013 $7,000,000 617.1 $7,000,000
44. However, at the request of Ms Ngai, Mr C Chan, in the course of cross-examination, worked out the one floor difference between Comparables B1 (3/F) and B3 (2/F) being 3% only[13]. Mr CW Wong also produced an analysis[14] on 3 March 2021 trying to show that there appeared to be a sudden increase in the volume of transactions in the building of Nos 790-796 Cheung Sha Wan Road. Mr CW Wong tried to explain when the owner of its neighbouring building, in the name of Trendy Square Limited (“Trendy”), acquired two G/F premises in 2011, it sparked off the two confirmor sales in early 2013 ie those of 3/F, 792 & 796 Cheung Sha Wan Road. I am not persuaded however these two confirmor sales could be linked to the Trendy’s acquisitions some 1½ years earlier.
45. Incidentally, in the same analysis, I note that the agreement for sale and purchase of 3/F, 790 Cheung Sha Wan Road dated 23 January 2013 in the sum of $7,000,000 as adopted by Mr C Chan for floor adjustment analysis was rescinded in August 2013, resulting in an action commenced by the intending purchaser, Max Win Incorporated Limited against the vendor or confirmor, Zhen Yanyun, DCMP 2216/2013 which was not settled until October 2013. In the meantime, this same unit was then sold in August 2013 at a lower price of $6,600,000. By that time, however, the RVD index had increased to 669.7. Having taken into account the sales of 3/F, 792 & 796 Cheung Sha Wan Road earlier discussed, I consider the sale of 3/F, 790 Cheung Sha Wan Road in January 2013 for $7,000,000 largely reflecting the market condition at that moment.
46. Also, I notice the units on 4/F, 5/F and 6/F of 790 Cheung Sha Wan Road were sold in January 2013, that is:
Premises Date of Transaction Consideration Discount from 3/F 3/F, 790 Cheung Sha Wan Road 23 Jan 2013 $7,000,000 4/F, 790 Cheung Sha Wan Road 29 Jan 2013 $6,000,000 -14.3% 5/F, 790 Cheung Sha Wan Road 31 Jan 2013 $4,400,000 -37.1% 6/F, 790 Cheung Sha Wan Road 31 Jan 2013 $4,400,000 -37.1%
47. Taking these further sales in January 2013 into account, I consider Mr C Chan’s proposed adjustments for floor level are well-supported, bearing in mind that both these comparables and the Building are not served by any lift despite being permitted for use for industrial purposes only unless waiver from the Lands Department is obtained. On the other hand, the comparison between the transactions of Comparables B1 and B3, as suggested by Ms Ngai, is tainted by the fact that Trendy’s interest in the building at Nos 790-796 Cheung Sha Wan Road resumed in the end of 2018; Trendy acquired both B1 and B2, and lately 4/F, 794 Cheung Sha Wan Road in November 2020 for the consideration of $6,600,000. Trendy might be too eager to acquire the units and bid up the prices.
48. On the other hand, Mr C Chan gave evidence to prove that Comparable B3 was indeed a mortgagee sale[15] but he could not produce any evidence that may suggest this unit was sold at undervalue[16].
49. Thus, in spite of the above, to the extent that both Mr C Chan and Mr CW Wong considered the three comparables B1, B2 and B3 suitable, my analysis is as follows:
B1 $80,368 -5.0% 0.0% 0.3% 5.7% 1.0% -1.8% -3.0% -3.1% $77,877 B2 $77,465 -5.0% 0.0% 0.3% 2.9% 1.0% -1.8% 0.0% -2.8% $75,296 B3 $84,507 -5.0% -12.5% 0.3% 3.4% 1.0% -1.8% -3.0% -17.1% $70,056 Average: $74,410
50. Although I have arrived at an average of $74,410/m2, as I am of the opinion that Trendy might have bid up the price in the acquisition of Comparables B1 & B2, I am going to place more weight on Comparable B3. Thus, I assess the EUV of the reference unit, being Workshop Space C on 3/F of the Building, at $74,000/m2.
51. With the above being stated, there are still minor differences between the two experts in determining the EUV of the respective units in the Building. In determining the value of the top roof, Mr C Chan proposed the conversion factor of 1/6 whereas Mr CW Wong proposed 1/8. In this regard, I prefer 1/8 as was usually the case.
52. And while the two experts could agree on the internal conditions of the units, they could not agree on the difference between each category: Mr C Chan proposed 3% whereas Mr CW Wong proposed 5%. In view of the relative large size of the units, I agree with Mr CW Wong.
53. The EUV of all the upper floor units of the Building is shown as follows:
54. Thus, the total EUV of the Building is $173,379,000 + $296,275,000 = $469,654,000 and the corresponding share of the interest of R2 and R3 are as follows:
Whether Redevelopment of the Lot is Justified
55. In accordance with Section 4(2) of the Ordinance, the Tribunal shall not make an order for sale unless it is satisfied that redevelopment of the Lot due to the “age or state of repair” of the Building is justified.
56. For the age and state of repair requirements, the applicants have adduced the expert evidence of Mr B Wong, the building surveyor and Mr Mr CM Wong, the structural engineer.
57. Mr CM Wong had conducted a structural assessment of the Building and prepared a report dated 28 May 2020. He found the following defects in the Building[17]:
(i) Cracks and spalling at 406 locations were observed during the visual inspection of the Building.
(ii) Based on the test samples, carbonation has reached the steel reinforcement bars in all of the test samples. Such carbonation will make the steel reinforcement bars susceptible to corrosion as it has destroyed the passive alkaline layer of protection provided by the concrete cover.
(iii) 62.5% of the core samples in the Building have chloride content exceeding 0.40% which is classified as “moderate” and “high” risk of the corrosion. The presence of chloride ions in the concrete helps to create an environment that aids the corrosion of the steel reinforcement.
(iv) The combined effect of severe carbonation and high chloride content creates a higher risk of corrosion. All of the samples in the Building pose a “moderate” and “high” risk of the corrosion to the steel reinforcement.
(v) 86% and 12% of the steel reinforcement bars inspected at open up locations in the Building are notably suffering from “mild corrosion” and “moderate corrosion” respectively. Corrosion of the steel bars would significantly reduce the flexural and shear strength of the structural elements and hence the effectiveness of the structural elements in the Building.
(vi) One out of seven core samples for concrete grade 15.5 MPa failed to meet the minimum design cube strength in the Building. This indicates that the concrete strength of some structural members of the Building does not satisfy the original design intent.
58. Based on the above findings, Mr CM Wong concluded that the deterioration of the structural elements has entered the propagation phase. Once propagation phase is reached, the deterioration will accelerate and additional defects may appear in more locations. Frequent maintenance and repair works may be required in the near future in order to keep the Building in a safe and functional state.
59. Mr CM Wong stated that according to the Code of Practice for Structural Use of Concrete 2013, the design working life of a building is assumed to be 50 years. The Building, completed in June 1960, has well exceeded its design working life. The concrete cover for most of the horizontal structural elements are below the requirements of the Code.
60. Mr B Wong, in his Condition Survey Report dated 29 May 2020, stated that:[18]
(i) The Building is aged physically as shown by 3 signs of obsolescence in appearance:
(a) A plain looking block with monotonous elevations.
(b) The external walls are simply rendered and painted. These low-cost external building finishes were only acceptable in the post-war era but have been out-classed by buildings nowadays.
(c) An overall untidy appearance from piecemeal replacements of the old windows with aluminum units of different types and colours.
(ii) The Building is also aged functionally as it has been suffering from 15 obsolescence aspects which have safety and hygiene implications as compared with the current standards for buildings nowadays:
(a) The design and construction of the structural frames are obsolete as these had only complied with the less stringent structural requirements applicable more than 59 years ago thereby adversely affecting the structural performance of the Building’s structural frames.
(b) The fire services installation is sub-standard due to the following:
i. No automatic fire detection system for all the service rooms;
ii. No automatic sprinklers system is installed;
iii. Incomplete manual fire alarm system without fire service control panel;
iv. Substandard fire hydrant/hose reel system provided to the Building; and
v. No fireman’s lift provided to the Building.
(c) The fire escape arrangements are unsatisfactory with the following deficiencies:
i. No emergency lighting is provided to the two required staircases;
ii. The two required staircases in the Building are not interconnected with each other;
iii. No protected lobby provided for the separation of the units and required staircases; and
iv. No handrail is provided to the central baluster.
(d) The fire resisting construction of the fire escape route is outdated:
i. The concrete cover of the floor slabs is only 12.7mm which is only half of the updated cover thickness for fire resistance;
ii. The existing entrance doors are not fire resisting doors as currently required;
iii. The existing electrical installations and wirings installed in staircases are exposed and not enclosed with fire resisting enclosures; and
iv. The meter room door opening to fire escape route are also not fire resisting doors.
(e) No proper firefighting and rescue stairway is provided.
(f) The Building has no barrier free access facilities of an accessible lift or an accessible ramp.
(g) The Building has no proper refuse disposal system thereby creating convenience, hygienic and fire safety problems.
(h) Equipotential bonding connections are not provided for all exposed metal parts in common area and inside the units as well as shops thereby endangering the safety of occupants and breach the Electrical Code.
(i) The Building has no lightning protection system to protect its occupants and building parts from lightning strikes.
(j) The Building has no building management systems which are commonly provided nowadays for convenience of the users as well as more effective use, operation and maintenance of the Building.
Mr B Wong was of the view that some of the above functional obsolescence cannot be rectified unless the Building is demolished and redeveloped. Before then, the occupiers will have to remain in occupation of a building which is sub-standard or even unsafe by current standards.
(iii) Finally, thought repairable, the rendering on the external wall surfaces and the waterproofing to roof areas have also passed their respective effective life.
61. Mr B Wong was of the view that the Building is in a poor state of repair. He assessed the total cost of repair works at $33,668,458 which amounts to 50% of the construction cost of a new similar superstructure. He considered the repair cost disproportionately high and the Building has reached a state which is beyond reasonable economic repair. He recommended the owners to redevelop rather than repair the Building, particularly the Building does not possess any historical value or architectural merit.
62. The respondents did not take any issue on this matter or provide any evidence to the contrary. Thus, I accept the applicants’ evidence in whole. I am satisfied that based on the evidence of Mr CM Wong and Mr B Wong, redevelopment of the Lot is justified due to the age and the state of repair of the Building.
Section 4(2)(b) – Whether Applicant has taken reasonable steps
63. The applicants are under an obligation to take reasonable steps to negotiate on terms that are fair and reasonable for the purchase of the interests of the respondents under Section 4(2)(b) of the Ordinance.
64. By reference to the witness statement of Mr Kam dated 1 June 2020[19], prior to the commencement of the Application, the applicants had through its solicitors, Messrs Woo Kwan Lee & Lo, made an offer to each of the respondents by a letter dated 3 July 2019. The offer was made on the pro-rata share of the EUV of corresponding respondents’ unit to the total EUV of the Building of the RDV of the Lot based on the advice of Savills:
65. Included in the offer letters, Messrs Woo Kwan Lee & Lo explained that the net proceeds of sale in the compulsory sale to be distributed to the minority owners may be less than the offer since there would be deduction of disbursements incurred in the compulsory sale and transaction and undertaking to bear the stamp duty etc.
66. On 25 February 2021, the applicants, through Messrs Woo Kwan Lee & Lo, further made an open offer to the solicitors acting on behalf of R2 and R3:[20]
“1. We refer to the 2nd Joint Statement of the Updated Redevelopment Value of the Building dated 9 February 2021 compiled by the parties’ experts.
2. The RDV as assessed by our expert, Mr Charles Chan, in the 2nd Joint Statement, amounts to HK$596,000,000.00, as opposed to HK$771,000,000.00 which was assessed by our expert on 27 June 2019 when the application was brought for the compulsory sale.
3. As you may be aware, on behalf of our client, by our letter dated 3 July 2019 (“the Letter”), we made an offer to your client, namely (R2 and R3), in respect of the Subject Property to purchase her interests based on the RDV of HK$771,000,000.00.
4. Notwithstanding that the updated RDV of the Building has decreased, we are instructed that our client is prepared to offer purchasing your client’s interest in the Subject Property for the same price as per the Letter for the sum of ($18,807,598 and $14,811,912 respectively referred to as “the Offer”) on the same terms and conditions as per the Letter except the following: -
4.1 The costs and expenses incidental to the transaction pursuant to the Offer shall be borne by the parties themselves while legal costs incurred for the captioned proceedings shall be borne by our client on party and party basis to be taxed if not agreed on High Court scale; and
4.2 The Offer is open for your client’s acceptance up to 3 March 2021.
5. …”
67. On 2 March 2021, ie after the trial began on 1 March 2021, the applicants, through Messrs Woo Kwan Lee & Lo, explained to the solicitors acting on behalf of R2 and R3 again that the offers to R2 and R3 were based on a RDV of HK$771,000,000.00: “Having regard to the following, we opine that your clients must have sufficient information to consider if the offer in the 1st and 2nd Letter is reasonable or not…”[21]
68. It has been the case of the respondents however that the applicants had failed to prove that the purchase prices offered to R2 and R3 respectively in the above offer had taken into account the potential of obtaining the Town Planning Board’s approval of earning an extra 20% plot ratio. By reference to the announcement of reactivation scheme for industrial buildings by the Government in the Chief Executive's 2018 Policy Address to encourage owners to redevelop industrial buildings constructed before 1987, the maximum permissible non-domestic plot ratio (“PR”) would be relaxed by up to 20% on sites located outside “Residential” (“R”) zones in Main Urban Areas and New Towns (“Revitalization of Industrial Buildings 2018 policy”). This Revitalization of Industrial Buildings 2018 policy was further confirmed by the Development Bureau in its paper on “Implementation of Measures under the New Round of Revitalisation of Industrial Buildings” to the Legislative Council’s Subcommittee on Issues Relating to Policy on Industrial Buildings in January 2020[22].
69. Ms Ngai submitted in her closing submission that even in the two letters dated 25 February 2021 and 2 March 2021, the applicants did not reveal whether the RDV of $771,000,000 had taken into account the potential for achieving the plot ratio of 14.4 (ie 12 x (1+20%)). Ms Ngai argued that in the absence of such information, there was no way to objectively consider whether the prices offered to R2 and R3 on 3 July 2019 were fair and reasonable taking into account the factual circumstances at the time of such offers. She further submitted that the latest revision of the RDV by Mr C Chan was grossly undervalued.
70. In addition, Ms Ngai considered necessary to determine whether the prices offered to R2 and R3 were fair between the two given the price offered to R3 was about 26.98% lower than the prices offered to R2.
71. With respect to Ms Ngai, I agree with Mr Kam in his Supplemental Statement dated 26 February 2021[23] that R2 and R3 had since September or November 2019 been legally represented and had retained their own valuation expert who had had various meetings with Mr C Chan. Particularly, as disclosed by the letter from the applicants to the respondents dated 25 February 2021, the previous offers to R2 and R3 were renewed after 2nd Joint Statement of the Updated Redevelopment Value of the Building dated 9 February 2021 compiled by the parties’ experts. In my opinion, R2 and R3 should have no difficulty in getting advice from their own experts that how the applicants’ offers were determined. Indeed, whether $771,000,000 was reasonable or not or had taken into account the potential of achieving the plot ratio of 14.4 had been overtaken by event when the market conditions had changed as alleged by Mr C Chan.
72. In fact, in Wealth Plan Development Limited, supra, at §75, the Tribunal, in carrying the residual valuation for the purpose of determining the RDV, did not directly take into account the potential of achieving the plot ratio of 14.4 but only agreed to reflect the potential in the developer’s profit:
“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.”
Therefore, whether the assessment of $771,000,000 had taken into account the potential of achieving the plot ratio of 14.4 may not be a straightforward answer.
73. In Capital Well Limited v Bond Star Development Limited [2005] 4 HKLRD 363, (2005) 8 HKCFAR 578 which was also cited by Ms Ngai, Mr Ribeiro PJ on behalf of the Court of Final Appeal remarked as follows:
“32. In our view, that argument rests on a misconception as to the nature of the s4(2)(b) requirements and must be rejected. As noted above, the Ordinance stipulates that before the Tribunal can make a compulsory order, the majority owner should try to reach agreement with the minority to purchase the latter’s interest on fair and reasonable terms. It is only after such an offer is made – and rejected by the minority – that the Tribunal may proceed to order a sale by public auction. The Ordinance therefore recognizes that the minority is perfectly entitled to take its own view and to refuse to sell at the price offered even though the Tribunal may regard that price as fair and reasonable.”
74. Further in the following para 33, Mr Ribeiro PJ continued:
“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 recognize that there will often be differences of opinion on that matter. If duly satisfied that the rejected offer was fair and reasonable, the Tribunal may make the order, leaving the value and level of compensation to be determined by the public auction. The auction results may prove that the minority’s assessment was commercially wise. Or they may show that the majority’s offer exceeded what was realised at the auction.” (underlined added)
75. As regards the price being offered to R3 at only about 26.98%, I have scrutinized the approaches by Mr C Chan and Mr CW Wong in assessing the EUV of the respective units in the Building. My view is that the 3% adjustment per floor as proposed by Mr CW Wong was too low when the Building was not served by any lift despite being an industrial building. On the other hand, Mr C Chan’s approach is supported by the analysis of sales of 3/F to 6/F, 790 Cheung Sha Wan Road all happening to be in January 2013. Of course, I drew indirect support also from the rateable values of the Rating and Valuation Department in respect of the Building as well as the building at 790-796 Cheung Sha Wan Road though such rateable values should be adopted in caution as reminded by the Tribunal in various cases.
76. Thus, having considered that the applicants had 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, I am satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot.
77. By reason of being satisfied that redevelopment of the Lot is justified and that the applicants have 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 applicants.
Disputes on the estimation of the RDV of the Lot
Direct Comparison Method
78. The Lot occupies a corner position with some 39.6m fronting onto Castle Peak Road and 22.3 fronting onto Tai Nan West Street.
79. I understand that Mr C Chan basically relied on following land transactions in the locality in his formulation of the RDV of the Lot:[24]
* Under the draft Cheung Sha Wan Outline Zoning Plan No S/K5/37 dated 16 December 2016, a minimum setback of 2m from the lot boundary abutting Castle Peak Road shall be provided. Under regulation (22)(1) or (2) of the Building (Planning) Regulations (“B(P)R”), the permitted plot ratio for the building on the land may be increased by the additional plot ratio by which the permitted plot ratio is permitted to be exceeded under and in accordance with the said regulation (22)(1) or (2). However, under the Revitalization of Industrial Buildings 2018 policy, any bonus floor area claimed under regulation 22(1) or (2) of the B(P)R is not to be counted towards the proposed increase of non-domestic plot ratio by 20% for redevelopment projects.
80. Mr CW Wong, in rebuttal, stated that Comparables C1 and C2 are significantly different from the Lot in terms of location. In particular, the business and trading potential of the G/F premises along the immediate section of Cheung Sha Wan Road where C1 and C2 are located is significantly inferior to that of the G/F premises of the hypothetical development on the Lot which lies at the junction between Castle Peak Road and Tai Nan West Street. Thus this is a question whether Mr C Chan’s allowance of +5% is adequate.
81. In addition, Comparables C1 and C2 fall within the MTR protection area which is delineated to safeguard the safety and stability of the railway structures underneath. According to the Practice Note for Authorized Persons, Registered Structural Engineers and Registered Geotechnical Engineers (“PNAP”) APP-24[25], plans submitted to the Buildings Department will be circulated to the MTR Corporation Limited (“MTRCL”) for comments. Upon MTRCL’s request, a monitoring proposal has to be submitted to the MTRCL for approval. All proposals for new building and engineering works within the Railway Protection Areas shall be subject to special scrutiny of the Government prior to giving approval to any plans and/or consent for commencing construction works. Every proposal would be assessed individually on its impact on existing railway and related structures/installations and subject to satisfactory compliance with a series of technical requirements[26]. Mr CW Wong opined that it would probably require much longer time and extra costs to demolish an existing building and to construct a new building on land falling within a railway protection area. According to Mr CW Wong, there are uncertainties about the impact on the overall development period and costs required for redevelopment.
82. However, according to PNAP APP-24, the boundary of the railway protection areas is usually set about 30m outside the outer surface of the railway structures. I note that Cheung Sha Wan Road is as much as 40 metres wide[27] where the MTR has been built underneath before the former high-rise buildings thereon Comparables C1 (ie Centennial Building which had 12 storeys) and C2 (ie Belle Tower which had 11 storeys) were demolished. In the absence of particulars or details on how construction of the new building(s) thereon can be affected, I agree with Mr C Chan that effect of the presence or proximity of the railway protection area to the comparables would be minimal. Mr C Chan also drew the Tribunal’s attention to fact that under section 27 of the Railways Ordinance, Cap 519 or section 15 of the Mass Transit Railway (Land Resumption and Related Provisions) Ordinance, Cap 276, compensation would be payable by the Government under the corresponding ordinances even in case there be loss due to (i) any additional expense fairly and reasonably incurred in carrying out building works; and (ii) professional fees and expenses, which loss, expense, fees and expenses are attributable solely to compliance with the amendment required or the condition imposed.
83. My view is further enhanced by Mr CW Wong’s referral to the “Monthly Digest (October 2020)” published by the Buildings Department which showed that two sets of building plans were approved in respect of development of high-rise industrial buildings upon the sites of Comparables C1 and C2 at plot ratio of 12. Further, on 20 November 2020, two town planning approvals (approval nos A/K5/825A and A/K5/826) were obtained regarding the additional 20% plot ratio under the Revitalization of Industrial Buildings 2018 policy; the approved redevelopment plot ratios of C1 and C2 are 14.352 and 13.455 respectively[28].
84. Notwithstanding the above, Mr CW Wong also commented that the corporate purchasers of the two comparables are in fact owned by the same shareholder, First Group Holdings Limited, indicating the possible redevelopment of a merged site. As disclosed in the Town Planning Board papers of A/K5/825A and A/K5/826, such arrangement would be a commercial decision to cater for the owners’ strategic business plan with flexibility to cope with different business circumstances.[29] In my opinion, it should not affect the reliability of the comparables as the analysed accommodation values are very close to each other.
85. In respect of Comparable C3, Mr CW Wong noted that as at the date of signing the agreement for sale and purchase, the purchaser company, Prosper Way Limited, appointed Wong Chi Ho, Eric (“Mr Eric Wong”) (who is a major shareholder owning 46.44% of the two vendor companies) as one of their directors. At the same time, an addition of one new share (on top of the original one share only) of Prosper Way Limited was allotted to Mr Eric Wong. The other shareholder of Prosper Way Limited is KaiLong Capital Holding Limited which belongs to the KaiLong Group (凱龍瑞基金) which is a real estate investment management company. Mr CW Wong doubted if this was an arm’s length transaction that can be relied on as comparable.
86. In reply to Ms Ngai’s cross-examination, Mr C Chan intimated that his company was the estate agent involved in the transaction which, as he learned from his colleagues, was however concluded through negotiation between other shareholders of the vendor companies not involving Mr Eric Wong. Mr C Chan agreed that there were the following two possibilities:
(1) The consideration of $965,000,000 might represent the full market price of the entire interest in Comparable C3 on the face of the transaction. That means the vendors were truly selling 100% interests in Comparable C3 to Prosper Way Limited. In such circumstances, the sale proceeds would be distributed to all the shareholders of the vendors (including Mr Eric Wong), Mr Eric Wong would have to pay a price for acquiring his present interest in Comparable C3 by holding a share in Prosper Way Limited。 Such price paid by Mr Eric Wong cannot be nominal.
(2) It was equally possible that the transaction was a sale of 53.56% of the interests in Comparable C3 by the other shareholders of the two vendor companies to Prosper Way Limited. As such, the consideration of $965,000,000 merely represented the market value/price of 53.56% of the interests in Comparable C3. The other shareholders of the two vendor companies would receive in full their respective proportionate shares in the sale proceeds. Mr Eric Wong merely had to pay a nominal price to acquire his share in Prosper Way Ltd. In another word, Mr Eric Wong brought along with him his interests in Comparable C3 when he joined Prosper Way Limited. If this were the case, the 100% interest in Comparable C3 would be worth $965,000,000 ÷ 53.56% = $1,801,717,700, as a result of which the accommodation value would appears to be unreasonably high.
87. Ms Ngai referred to the company search of Prosper Way Limited in which its two issued ordinary shares are held by KaiLong Capital Holding Limited and Unitas Ventures (BVI) Limited[30]. Mr Eric Wong is not a member of the core team of KaiLong Capital Holding Limited. However, it is unclear whether Mr Eric Wong has any interests or a role to play in KaiLong Capital Holding Limited. On the other hand, the controlling shareholder(s)/person(s) of Unitas Ventures (BVI) Limited cannot be ascertained by the general public. Ms Ngai submitted that, under such circumstances, there is no way for any independent valuation expert to confirm how much interests in Comparable C3 was truly sold by the two vendor companies to Prosper Way Limited. The subject matter of the sale and purchase could have ranged from 53.56% to 100% of the interest in Comparable C3. Ms Ngai submitted it is wholly unsafe and inappropriate to take the consideration of $965,000,000 on its face to assess the RDV of the Lot. I agree.
88. Notwithstanding the above, Mr CW Wong had worked out his fallback valuation as follows:
Residual Valuation Method
89. In such regard, I agree that residual valuation method had to be adopted to determine or otherwise counter-check the RDV derived from the direct comparison method. This can be done by deducting development cost (including construction costs, professional fees, finance costs etc) and developer’s profit from the estimated gross development value (“GDV”) of the completed optimum development.
90. Mr C Chan and Mr CW Wong in fact had the common or agreed opinion on most of the aspects in their respective assessment of the RDV of the Lot by the residual valuation method on the basis of plot ratio 14.4[31]. They differed however in respect of the following matters:
(1) The maximum permitted built-over-area of the Lot;
(2) The number of various types of parking spaces to be provided in the hypothetical development;
(3) Layout/design of the G/F of the hypothetical development;
(4) Floor to floor height of the upper floors of the hypothetical development;
(5) Construction period; and
(6) Developer’s profit.
GDV for G/F
91. In arriving at their respective opinion on the GDV of the G/F floor workshops, Mr C Chan and Mr CW Wong in fact referred to the same set of comparables adopted in the EUV assessment. Thus, repeating the exercise but adopting the hypothetical unit as suggested by Mr CW Wong (ie 92m2 in size and 5m in frontage which appear reasonable), I determine the unit rate of the G/F unit as follows:
* I accept Mr CW Wong argument that certain equipment/elements in the new industrial building (such as a better powered electricity supply, a curtain walling outlook etc) cannot be attained in an aged industrial building and cannot be reflected in the building age adjustment which merely accounts for building deterioration.
92. As in the determination of the EUV, I would place more weight on the comparable at Cheung Lung Industrial Building, 10 Cheung Yee Street and determine the unit price of this hypothetical unit at $286,000/m2.
93. At this juncture, it is desirable to resolve the difference between the two experts on the proposed G/F layout.
94. Both Mr C Chan and Mr CW Wong referred to the Hong Kong Planning Standards and Guidelines (Chapter 8) (“HKPSG”) in making their respective proposed numbers of various types of parking spaces. Mr CW Wong’s proposal is summarized as follows:[32]
95. Mr C Chan indeed arrived at similar figures with the exception that he rounded up all the figures. There is no specification in the HKPSG as to whether the end figures in the calculation of parking spaces should be rounded up or down and Ms Ngai submitted that neither expert could say for certain whose calculation is correct.
96. In that regard, Ms Ngai submitted that, after all, the HKPSG is a guideline only, referring for instance to para 7.2.3 at p43 which states that:
“The standards for private parking are set out in detail in Table 11 … While the standards should be followed as far as possible, flexibility may need to be exercised, taking account of the particular factors relevant to individual developments. To assist in the application of this flexible approach more detailed guidelines are set out in the Standard of Intent in Table 11.”
97. In the Standard of Intent at pages i and ii of the HKPSG, the following statements are found:
“1(d) Parking standards for industrial and business development (Section 4)
The overall intention of the standards is to ensure that sufficient parking and loading/unloading spaces are provided to satisfy requirements
In all cases, the level of provision in a development is to be decided by the Authority. The standards serve to provide a guideline on which the Authority will base the decision.
2. … The Authority will need to have flexibility, within and beyond the standard ranges, to meet special circumstances, such as redevelopment in the built-up urban area. The Authority will consider, inter alia …
(g) area and shape of specific site …”
98. Ms Ngai submitted that the differences between the two experts in the proposed number of spaces for the parking of private cars, motorcycles and LGV do not really matter because:
(1) the number of spaces for the parking of private cars (17), motorcycles (1) and LGV (6) proposed by Mr C Chan are located at the 2 levels of basements in his model which accommodates the total of 24 spaces;
(2) Mr CW Wong proposed 16 spaces for parking of private cars, 2 for parking of motorcycles and 5 for parking of LGV, ie a total of 23 spaces which are also to be accommodated in 2 levels of basements;
(3) if all the 24 spaces proposed by Mr C Chan can be accommodated in 2 levels of basements, all the 23 spaces proposed by Mr CW Wong can equally be fully accommodated at the 2 levels of basements.
99. The remaining difference is the number of HGV on G/F. Ms Ngai submitted that Mr CW Wong’s proposed G/F layout should be preferred since it would maximize the saleable area of the G/F workshops and hence, the value (ie GDV) of the G/F of the hypothetical development. To this I agree.
100. In fact, Mr C Chan proposed to locate the vehicular ingress and egress onto Castle Peak Road[33] while Mr CW Wong proposed to locate the same abutting onto Tai Nan West Street[34]. The main argument by Mr C Chan for not locating the vehicular ingress and egress onto Tai Nan West Street is that it is shorter than 30m from the junction of Tai Nan West Street and Castle Peak Road thereby not possible to fulfill the guidelines as stated in the Transport Planning & Design Manual, in particular para 3.6.2.3 and 3.6.2.5[35].
101. Again, it is clearly specified at the outset of the Transport Planning & Design Manual under the section “Foreword” that “the standards contained in this manual should not be followed rigidly but rather treated as a framework within which professional judgment should be exercised to reach an optimum solution.” In light of the captioned circumstances, I consider Mr CW Wong’s proposed vehicular ingress and egress onto Tai Nan West Street not so undesirable as it is located on the downstream side of junctions of Tai Nan West Street and Castle Peak Road rather than on the approach side. See para 3.6.2.1 of the Transport Planning & Design Manual. In comparison, Mr C Chan’s proposed vehicular ingress and egress onto Castle Peak Road contravene the signal control requirement that it should not be located within 60m of the stop line on the major road (ie Castle Peak Road). The 30m requirement stated by Mr Chan is only applicable to “Uncontrolled Intersections” which is not the case at the junction of Tai Nan West Street and Castle Peak Road where traffic lights are installed to control traffic and pedestrian crossings.
102. Then comes the dispute on the maximum built-over-area because of the presence of a right of way over the rear lane (“the Rear Lane”).
103. Mr C Chan suggested that, upon redevelopment of the Lot, the existing strip of scavenging lane at the rear of the Building, ie the Rear Lane cannot be built upon in view of the right of way expressly granted to the lot where the adjoining Easy Tower at 609 Tai Nan West Street[36] now stands. By reference to the photos taken by the experts’ joint site inspection on 4 March 2021[37], three gates are erected at the scavenging lanes around Easy Tower:
(1) One of the gates is erected at the opening of an unbuilt upon lane which is part of the lot occupied by Easy Tower (“the Unbuilt Upon Strip”) onto Wing Hong Street and is locked.
(2) Another gate is erected at the opening of the Rear Lane onto Tai Nan West Street. It was opened at the time of inspection by the experts.
(3) The third gate is erected at the meeting point of the Rear Lane and the Unbuilt Upon Strip.
104. By reference to the Ground Floor Plan of Easy Tower, there is a fairly wide opening onto the Unbuilt Upon Strip between the Cable Chamber (at the corner abutting the Unbuilt Upon Strip and Wing Hong Street) and one of the staircases and next to the turntable[38]. The aforesaid wide opening gives access to the Unbuilt Upon Strip from the interior of G/F of Easy Tower although the gate from Wing Hong Street is locked. The meeting point of the Rear Lane and the Unbuilt Upon Strip is further blocked by temporary structures set up at the Rear Lane as shown in the photo taken at Point 2. It appears that it is not possible to enter the Unbuilt Upon Strip from Tai Nam West Street through the Rear Lane.
105. Referring to the fact that there is no opening at all on that side of Easy Tower onto the Rear Lane, Ms Ngai submitted that the lessee of the lot on which Easy Tower is built (“the Lessee”) had evinced a clear and unequivocal intention to abandon its right of way (if any) over the Rear Lane. Whereas the Lessee became so in 1997 and Easy Tower was fit for occupation in 1998, there is no evidence showing that the Lessee has done anything between 1998 and now to remove the aforesaid two gates or to ensure that the Rear Lane is free from any obstruction.
106. In her closing submission, Ms Ngai referred to Crossley & Sons Limited v Lightowler (1867) 2 Ch App 478 where the English Court of Appeal had the following to say at pages 482 to 483:
“… The authorities upon the subject of abandonment have decided that a mere suspension of the exercise of a right is not sufficient to prove an intention to abandon it. But a long continued suspension may render it necessary for the person claiming the right to shew that some indication was given during the period that he ceased to use the right of his intention to preserve it. The question of abandonment of a right is one of intention, to be decided upon the facts of each particular case…”
107. Ms Ngai also referred in particular to Williams v Usherwood (1983) 45 P&CR 235 where in developing a housing estate in or before 1934, the developers delineated two plots, on one of which a pair of semi-detached houses was built, then owned by the defendants and on another of which a detached house was built, then owned by the plaintiffs, with a common driveway between them, a right of way reserved in favour of the either party. In spite of the above, the previous owner of the semi-detached houses put up a fence on the land of the detached house as a result of which the only cars to use the driveway were those belonging to the owners of the semi-detached houses and their guests. Later, the previous owner of the detached house had built with its own driveway and garage on its other side. Inter alia, the English Court of Appeal found the right of way had been abandoned by the former detached house owner when the detached house was so built. Ms Ngai submitted that the facts in this case is closely similar to the facts in the present case in relation to the Rear Lane.
108. While abandonment of right should not be lightly inferred, I agree with Ms Ngai that in the present case, the duration of the period of non-user is quite significant. And based on the fact of the present case when compared with Williams, supra, I agree that the Rear Lane has been abandoned as a right of way by the owners or occupiers of Easy Tower.
109. Ms Ngai further referred to the approved building plan for Easy Tower[39] where the area of the Unbuilt Upon Strip which was marked “Right of Way” with a width of 1.524m was included and taken into account in calculating the plot ratio. The site area for the calculation matches the area as shown in the regrant plan for the site[40]. When this regrant plan is compared with the surrender plan for the site[41], it appears that there existed scavenging lanes or rights of way which were wider than the Unbuilt Upon Strip and the Rear Lane. Ms Ngai submitted that if the Lessee did not see it necessary to retain the original width of the rear lane leading to Tai Nan West Street and that if the Building Authority so approved, it is more likely than not that the Building Authority would also approve 100% coverage of the Lot on G/F and the lower few floors including the area of the Rear Lane[42]. Ms Ngai added that the Building Authority is empowered by section 42 of the Buildings Ordinance, Cap 123 to grant an exemption from compliance with the other sections of the Ordinance if such exemption is so required to enable redevelopment of the Lot with full site coverage on the G/F and the lower few floors including the Rear Lane. I agree with Ms Ngai’s submission.
110. There is also a side issue on the provision of a corner splay to reflect the planning intention as shown on the non-statutory Outline Development Plan (“ODP”)[43].
111. Mr CW Wong referred to the successful planning application in respect of Nos 1016-1018 Tai Nan West Street (which is under construction) where corner splays were provided at the respective junctions with Wing Hong Street and King Lam Street to reflect the planning intention in the ODP. A similar corner splay was provided for the development of Easy Tower as required by the Government lease. Mr CW Wong opined that it is reasonable in allowing a corner splay on G/F of the hypothetical development on the Lot.
112. In view of the above, I accept the layout and the dimensions of the G/F units proposed by Mr CW Wong for the hypothetical development[44] with the adjustments as follows:
GDV for Upper Floors
113. In assessing the GDV for the upper floors of the hypothetical development, Mr CW Wong proposed 12 comparables in 4 nearby industrial developments (i.e. W668, Global Gateway Tower, CEO Tower and Kimberland Centre):
114. While Mr C Chan had no objection to adopting these comparables if residual valuation is required, he also agreed with Mr CW Wong on the adjustments applicable save for location and headroom[45].
115. Whereas Mr C Chan applied 0% adjustment for location, Mr CW Wong applied +5%. In such regard, I agree with Mr CW Wong as the proposed hypothetical development will be situated at conspicuously strategic position at the junction of Castle Peak Road and Tai Nan West Street.
116. As regards the headroom, Mr CW Wong adopted the same height as the comparables at 4.5m which tends to be more appealing and maximize the GDV. Mr C Chan disagreed, referring to the Practice Note PNAP APP-159 issued by the Building Authority in October 2016 which states as follows:[46]
“2. In order to deter the misuse of IBs[47] for residential use at building design stage, the Buildings Department has adopted the following measures in processing new proposals (including alteration and addition) for IBs:
…
(d) For an IB with small workshop units (with usable floor area of less than 80 m2) and provided with curtain walls, the outer face of the curtain walls will be taken as the external wall of the building for the purpose of measuring GFA and site coverage;
(e) Proposals for excessive storey heights (exceeding 3.5m) in small workshop units have to be fully justified;
(f) …”
117. Mr CW Wong tried to persuade otherwise by reference to the schematic plans of the proposed new buildings in 4 recent planning applications in Cheung Sha Wan and the adjoining Lai Chi Kok district and that of The Cloud being constructed at 111 Tung Chau Street in the Sham Shui Po district further away:
118. In respect of the above, Mr C Chan referred to the planning approval papers where the Buildings Department made a standard caveat as follows:
“as regards the proposed development scheme, only some basic information and development parameters are provided in the planning application and it is noted that the redevelopment scheme is subject of further refinement when its details are firmed up. Hence, detailed comments on the development potential of the redevelopment under the (Buildings Ordinance) can only be formulated at the plan approval stage under the building regime.”
119. Mr CW Wong responded that PNAP APP-159 does not specify that, in respect of proposals of new buildings with workshop units each with a usable floor area of less than 80 m2 will be necessarily rejected. PNAP APP-159 only states that proposals of a floor to floor height exceeding 3.5m in small workshop units each with a usable floor area of less than 80 m2 have to be fully justified. In other words, such proposal may still be approved by the Building Authority.
120. While the approved building plans for The Cloud are not available for inspection before the building’s completion, Mr CW Wong referred to the marketing materials which show that all of the workshop units there for sale are little tiny and their individual usable floor area is much smaller than 80 m2 but with a headroom of 4.025m[48]. Mr C Chan was unable to explain but referred to the recent sales of units in Vignature at 14 Wong Chuk Hang Road, Aberdeen, Hong Kong where the small units on the upper floors are confined to a headroom of 3.5m. The general building plans for Vignature were approved in July 2018. But on the balance of probabilities, I am prepared to adopt the headroom as well as the adjustments proposed by Mr CW Wong.
121. Hence, I follow Mr CW Wong’s adjustments in assessing the unit value on 14/F of the hypothetical development as follows (assuming a typical unit with saleable area of 42.3m2):
122. Then comes the question on whether a plot ratio up to 14.4 can be assumed for the hypothetical development.
123. In respect of this matter, Mr CW Wong had compiled a schedule showing that under the Revitalization of Industrial Buildings 2018 policy, there had been a total of 48 applications submitted for redevelopment with higher plot ratio[49]; 44 applications were approved and 4 were deferred, which as acknowledged by Mr C Chan, 3 of which were voluntarily deferred by the applicants therein before the applications were presented to the Town Planning Board for consideration. The three applications were not deferred by the Town Planning Board but by the applicants themselves.
124. It is further noted that in the two town planning approvals in respect of Comparables C1 and C2 on 20 November 2020 (approval nos A/K5/825A and A/K5/826), the Metro Planning Committee Paper stated as follows:
“6.1 Since March 2019, the Committee has considered a total of 16 applications for minor relaxation of PR and/or BH in the Yau Tsim Mong, Cheung Sha Wan, Kwai Chung and Tsuen Wan areas relating to the Policy, including three applicantions (Nos A/K5/813, A/K5/816 and A/K5/820) in Cheung Sha Wan. Out of the 16 similar applications, 15 applications were approved with conditions. The remaining one (No A/K5/820) for minor relaxation of PR restriction for proposed industrial development, located at northeast to the Site falling within the “OU(B)” zone, was submitted to the Committee for consideration on 18.9.2020. The Committee decided to defer a decision on the application, pending the applicant’s submission of further information and clarification on building design and landscaping treatment especially within the setback areas at pedestrian level under the proposed scheme. In consideration of these applications, the Committee generally indicated support for the Policy to relax the PR up to 20% as it provides incentives to encourage redevelopment of pre-1987 IBs taking account that relevant technical assessments were submitted to support the technical feasibility and there was no adverse comment from relevant government departments.”[50]
125. On the basis of these evidences, I have no hesitation to accept Ms Ngai’s submission that “there is an extremely high (if not 100%) chance of success in obtaining Town Planning Board’s approval for increasing the maximum permitted PR of the Lots from 12 to 14.4.” Therefore, the RDV of the Lot is assessed on the basis of PR 14.4. In such regard, Mr CW Wong had proposed a 24-storey industrial building over 2 levels of basement (subject to 2/F being dedicated as a mechanical floor).
126. Hence, I follow Mr CW Wong’s assessment of the GDV of the upper floors as follows[51]:
Construction Period
127. Both Mr C Chan and Mr CW Wong estimated that it would take 9 months to demolish the Building. Mr C Chan said in the witness box that the 9-month period included the preliminary works such as preparation of documents for obtaining relevant permissions etc. He then proposed a total construction period of 4.25 years (ie 51 months) for constructing the new building with plot ratio 14.4 while Mr CW Wong’s estimate was only 2.5 years (ie 30 months).
128. Mr C Chan could not identify any special circumstances in relation to the Lot which may warrant an unexceptionally long construction period as compared with that by the respondents. Mr C Chan only relied on the judgment in Wealth Plan Development Limited, supra.
129. Ms Ngai referred to Grand Creation Development Limited v Jonathan K Fung, LDCS 3000/2019 (unreported, dated 26 November 2020) where the Tribunal reminded at pains at §20 that:
“… I understand it is very often difficult to find market evidence to justify each adjustment rate objectively and therefore a valuer may have to rely on his/her judgment to determine the adjustment rates. However, I have reservation to apply the adjustment rates employed in previous tribunal cases directly in these proceedings. I am of the view each adjustment rate in each case should be assessed and/or reviewed independently with reference to market evidence and/or the valuer’s judgment. In making the valuer’s judgment, although a valuer may make reference to the adjustment rates employed in previous tribunal cases, they are certainly not the market evidence and therefore should not be applied directly.”
130. On the other hand, it is noted that the application for compulsory sale of the lot forming the development of Kimberley Centre, LDCS 3000/2015 was settled in February 2017. By reference to Monthly Digest published by the Buildings Department, consent for the demolition of the former building on site was issued in January 2016[52], consent to commence building works was issued in February 2017[53] and occupation permit for the redevelopment was completed in November 2018[54]. Kimberly Centre has a total gross floor area of 16,79.162 m2 and a site area of 1,347.1 m2. In comparison, the Lot has a smaller site area of 855.21 m2 and even if a plot ratio of 14.4 is assumed, the total gross floor area is only 12,315.01 m2, which is 37% lesser. In that regard, I agree that Mr C Chan’s estimate was unexceptionally long and Mr CW Wong’s 2.5-year period of construction is preferred.
Developer’s Profit
131. The residual method of valuation is founded on the basis of a classic economic theory which suggests that the value of land as a factor of production depends on the ability of the land to produce revenues in excess of the required payments to all other factors of production. Payments to land are viewed as the residual productivity remaining after all other mobile factors of production have been compensated at their fair market values. It is reasonably expected that developers often use the land residual theory to determine the maximum potential value of a site after subtracting all other non-land costs from the total projected property value. As for any risky enterprise, a profit would be required to compensate for risk.
132. A usual approach for assessing developer’s profit is a certain percentage of the cost outlays, covering:
• Construction Costs;
• Professional Fees;
• Finance cost; and
• Land Cost.
133. In the present case, Mr C Chan suggested that the developer’s profit should be 20% whilst Mr CW Wong commented that 15% is suitable. During cross-examination, Mr CW Wong referred to Wealth Plan Development Limited, supra where 15% was also adopted by the Tribunal. However, as pointed out in §72 above, the Tribunal adopted a plot ratio of 12 in that case in the residual valuation but accepted the developer’s profit at 15% on cost to reflect the potential of increase in plot ratio. In contrast, in the present case, I am persuaded to adopt the increased plot ratio of 14.4 in the residual method of valuation and “there is an extremely high (if not 100%) chance of success in obtaining Town Planning Board’s approval for increasing the maximum permitted PR of the Lots from 12 to 14.4.” The chance of success of obtaining the plot ratio of 14.4 and the headroom as much as 4.5m for the upper floors may not be 100% certain.
134. In addition, by the reference to the time adjustments agreed by the two experts above and to the Private Flatted Factories Price Index, prices of flatted factories have been moving downwards though appearing to have rebounded in recent months:
* Provisional figures
135. Notwithstanding the above, Ms Ngai submitted that the developer’s profit should be viewed and considered from the developer’s perspective, referring to the following in support:
(1) The parent company of the applicants, Eminence Enterprise Limited, in its public announcement – “Possible Acquisition (Disclosable Transaction) and Mandate for Possible Very Substantial Disposal in Relation to the Auction of Fung Wah Factorial Building, Nos 646,648 and 648A Castle Peak Road, Kowloon, Hong dated 6 January 2021 had this to say:
“Although uncertainties in the global economic outlook have been caused by the softening global economic growth, trade war between US and China, and the outbreak of coronavirus disease (COVID-19), the Group maintains a cautiously optimistic view on the property market and will devote resources and efforts in increasing and replenishing its land bank for development …” (underline added)
(2) Shortly after KaiLong Hong Kong acquired site C3, their CEO expressed in their official website that “the purchase (of site C3) was motivated by the recent cancellation of the double stamp duty on commercial properties and the long-term outlook for the market” and “protest, coronavirus pandemic and trade wall: all these risks factors have been priced in. We expect a more stable future in the years ahead”.
(3) The Laws Group through its corporate vehicle, Trendy Square Limited, resumed its acquisition of the properties in Nos 790-796 Cheung Sha Wan Road in early 2019 and bought their 5th properties in the building in November/ December 2020.
(4) There are 48 planning applications for obtaining extra plot ratio for redevelopment of old industrial buildings over the territories since late 2018 with the view to taking benefit of the Revitalization of Industrial Building 2018 policy.
(5) C1 and C2 were acquired in February and March 2020 for redevelopment into new and modern industrial buildings.
136. With respect, the above information does not assist the respondents. As I stated in §130 above, the purpose of incorporating the element of developer’s profit is to reflect the truth that for any risky enterprise a profit is required to compensate for risk. Real estate development, industrial or otherwise, is always subject to risk. More specifically, by reference to para B2.2.3.1 at p47 of the “Valuation of Development Property”, 1st Edition, October 2019, a guidance note published by the Royal Institution of Chartered Surveyors, “The nature of the development, and the prevailing practice in the market for the sector, helps to determine the selection of the profit margin, or rate of return, and the percentage to be adopted varies for each case.”
137. Having reviewed the above, I consider the appropriate developer’s profit should be 20%. Those “optimistic remarks” from the parent companies of the applicants and KaiLong Group as cited by the respondents are mere wishful thinking, if not sales talks that tend to be self-serving.
138. As the other parameters for the residual method of valuation were agreed by the two experts, on the basis of Mr CW Wong’s hypothetical development, the residual valuation of the Lot is set out in Appendix I of this judgment. The Lot is assessed at $773,573,000, equivalent to an accommodation value of about $63,141/ m2which is quite close to the value of $801,000,000 arrived at §88 above by the direct comparison method (by Mr CW Wong).
139. I shall adopt the value of $800,000,000 as the reserve price for auction.
Other Incidental Matters
140. The applicants proposed to appoint Mr Lee Kwok Yung, Solicitors of Messrs Hau, Lau, Li & Yeung, Solicitors & Notaries, as the sale trustee. Based on the information on his background and experience as set out in their letter dated 23 March 2021, I am satisfied that he is a proper person to be appointed as trustee to discharge the duties imposed on trustee under the Ordinance. The remuneration package proposed in the said letter appears reasonable.
141. The applicants have prepared a set of draft Particulars and Conditions of Sale of the Lot. Subject to any amendment that may become necessary as a result of our ruling on the arrangement of auction above, the particulars and conditions of sale of the Lot by public auction submitted by the applicants are also reasonable.
Order
142. This Tribunal make the following orders:
(1) This Tribunal is satisfied that the redevelopment of the Lot is justified due to the “age” and “state of repair” of the Building and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot including those of the 2nd & 3rd respondents;
(2) All the undivided shares in the Lot, the subject of the Application herein, be sold by way of a public auction for the purposes of the redevelopment of the Lot under s.4(1)(b) of the Land (Compulsory Sale for Redevelopment) Ordinance (“the Ordinance”);
(3) Mr Lee Kwok Yung of Messrs Hau, Lau, Li & Yeung, Solicitors & Notaries, nominated by the applicants, be appointed trustee (“the Trustee”) to discharge the duties imposed on trustees under the Ordinance in relation to sale of the Lot and the Trustee 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& Notaries, dated 23 March 2021.
(4) For the purpose of the sale of the Lot by public auction under section 5(1)(a) of the Ordinance:
(i) The sale of the Lot be on the particulars and conditions of sale substantially the same as those in the draft Particulars and Conditions of Sale to be initialed and approved by the Tribunal.
(ii) The reserve price be set at $800,000,000.
(iii) 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 shall become the owner of the Lot.
(iv) Liberty to the applicants, the 2nd & 3rd respondents and the Trustee to apply to the Tribunal for further direction(s) under the Ordinance.
Costs
143. In accordance with the compensation approach as determined by the Court of Appeal in Good Faith Properties Ltd and Others v Cibean Development Co Ltd [2014] 5 HKLRD 534, the respondents are entitled to costs notwithstanding the outcome of the Application.
144. Accordingly, I order that the applicants do pay the respondents’ costs in these proceedings on High Court scale with certificate for counsel, including any costs reserved, to be taxed if not agreed.
145. Last but not least, the Tribunal thanks the Counsel for their assistance.
| Lawrence Pang | |
| Member | |
| Lands Tribunal |
Mr Benjamin Chain, instructed by Messrs Woo Kwan Lee & Lo, for the 1st and 2nd applicants
Ms Nancy Ngai, instructed by Messrs K B Chau & Co, for the 2nd and 3rd respondents
1st respondent’s attendance was excused.
[1] See Bundle B4/1511.
[2] See Bundle A4/1793, Exhibit A2 and R2A.
[3]See Bundle B4/1795 & 1796 and R2A.
[4] At trial, Mr CW Wong clarified that this transaction was not truly comparable to the reference unit. He adopted this “comparable” simply because there were extremely limited number of transactions of G/F workshops in the subject area.
[5] See Exhibit A2.
[6] In Wealth Plan Development Limited, supra, the adjustment was -50% but in the present case, my proposed adjustment is +50%: X x (1-50%) x (1+50%) ≠ X
[7] Also, the total absolute adjustment is 47.6%.
[8] See Bundle B5/1811.
[9] Mr C Chan explained in his 2nd Joint Statement with Mr CW Wong dated 9 February 2021 that: “Although Castle Peak Road commands higher pedestrian flow than Cheung Sha Wan Road and thus the G/F units in the subject site command higher unit rate, the majority of saleable area falls in upper floor units, which is much less sensitive to difference in pedestrian flow.” See Bundle B7/2400.
[10] I agree with Ms Ngai’s submission that the non-conforming uses of the upper floor workshops in the Building is really a red-herring as the 3 common comparables, B1, B2 and B3 are occupied for similar uses.
[11] See Exhibit A3.
[12] See Exhibit A13.
[13]
is compared with $7,418,000.
[14] See Exhibit R7.
[15] See Exhibit A10.
[16] If this sale of Comparable B3 were undervalue, the analysis as requested by Ms Ngai would not be as small as 3%.
[17] See Bundle B3/1049.
[18] See Bundle B1/83-88.
[19] See Bundle A/50-68.
[20] See Bundle C/294-1&2 and 294-9&10.
[21] See Bundle C/294-17&18.
[22] https://www.devb.gov.hk/filemanager/en/Content_3/dev20200122_LC_Paper_e.pdf
[23] See Bundle A/61-63.
[24] See Bundle B6/2417.
[25] See Bundle B5/2030.
[26] See Appendix A of PNAP APP-24.
[27] In accordance with the setback requirement under the draft Cheung Sha Wan and Sham Shui Po Outline Development Plan (Northern Part) No D/K5A/1B, for the purpose of street widening and streetscape improvement, the proposed development along this section of Cheung Sha Wan Road has to incorporate a full-height building setback of 2m. See Bundle B5/2070.
[28] See Bundle B5/2069-2141.
[29]See Bundle B5/2081 & 2118.
[30] See Bundle B7/2751, 2757-2758.
[31] Mr C Chan only adopted this residual valuation method as fallback.
[32] See Exhibit R10.
[33] See Exhibit A4.
[34] See Exhibit R10.
[35] See Exhibit A14.
[36] Easy Tower stands on a corner site bounded by Tai Nan West Street on the northeast and by Wing Hong Street on the northwest.
[37] See Exhibit A15.
[38] See Bundle B6/2440A.
[39] See Exhibit R14.
[40] See Bundle B5/2171.
[41] See Bundle B5/2168.
[42] Under regulation 20(3) of the Building (Planning) Regulations, the site coverage for a non-domestic building exceed the permitted percentage site coverage to a height not exceeding 15 m above ground level.
[43] See Bundle B5/1937.
[44] See Exhibit R10.
[45] There was also a minor difference of 0.1% for size adjustment which I consider negligible.
[46] See Bundle B6/2429.
[47] IB stands for “Industrial Building”.
[48] See Exhibits R12 & R13.
[49] See Exhibit R3.
[50] See Bundle B5/2074 & 2111.
[51] See Exhibit R1.
[52] See Bundle B7/2815.
[53] See Bundle B7/2820.
[54] See Bundle B7/2831.