Secretary for Transport v. Poon Chi Man and Another

LDMR 42 OF 2000

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS REFERENCE APPLICATION NO. 42 of 2000

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J U D G M E N T

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1. Background

The Applicant applied to the Lands Tribunal to determine the amount of compensation payable to the Respondents for the land resumed and disturbance pursuant to relevant sections of the Railways Ordinance (Cap. 519) ("the Ordinance"). The Respondents were the former registered owners of Unit 2 on 17/F of Block B, Wah Kai Industrial Centre, No. 221 Texaco Road, Tsuen Wan, New Territories ("the Property").

2. The scheme for the construction of West Rail (Phase 1) was gazetted on 3rd October 1997 pursuant to Section 6(4) of the Ordinance and objections, including one from the Incorporated Owners of Wah Kai Industrial Centre, were subsequently heard. The West Rail scheme was authorised by the Chief Executive in Council on 22nd September 1998. On 30th June 1999, the notice of resumption of Tsuen Wan Inland Lot No. 53 Remaining Portion on which Wah Kai Industrial Centre ("Wah Kai") was built was affixed on site on 30th June 1999 and gazetted on 2nd July 1999. The reversion date was 2nd October 1999.

3. According to section 32 of the Ordinance, the Applicant's right to compensation in respect of the resumption of land is the right to recover from the Government a sum to be assessed on the basis "as if the claim were made under the Lands Resumption Ordinance (Cap. 124) for land resumed under that Ordinance". Section 10 of the Lands Resumption Ordinance provides for the rules for determination by the Lands Tribunal of compensation payable by the Government.

4. The Applicant made offers to the Respondents on 26th July 1999 and 15th October 1999 respectively for full and final settlement of all claims in respect of the Respondents' interests in the Property but the Respondents did not accept the offer. On 18th August 2000, the Applicant applied to the Lands Tribunal to determine the amount of compensation for the land resumed and disturbance. On 27th November 2000, the Applicant applied to list the case for hearing.

5. The Respondents made via their agent the following claims: -

Heads of claims	Amount
(a) Open Market Value of the Property	HK$630,400
(b) Loss of Rental Income	HK$56,000
(c) Expenses incurred	HK$16,162
(d) Interest	to be assessed
(e) Professional fees	to be assessed

6. At the beginning of the hearing, the Respondents agreed not to pursue item (c) above further. Also, the Applicant and the Respondents agreed that the Applicant would pay compensation for the amount of loss of rental income, namely item (b) above, in the sum of HK$41,900. Also, the Respondents asked the Tribunal to reserve its decisions for Interest and Professional fees. Therefore, the only issue left is the open market value of the Property.

7. Agreement by the parties

The parties agreed that the saleable area of the Property is 77.2 sq. m. There was also no dispute that Wah Kai was an industrial building subject to the Government Lease of Tsuen Wan Inland Lot No. 53 and the user covenant of the same was for industrial purposes. It was also agreed that the date of valuation of the Property was the date of resumption, namely 2nd October 1999.

8. According to the Respondents, the Property was occupied before the reversion to Government by a tenant, Sun Hing Electrical Engineering, under an oral tenancy at a monthly rent of $5,800, inclusive of rates and management fee. The tenant moved out before the reversion.

9. The Applicant and the Respondents respectively called for the expert evidence of Chartered Surveyors, Mr. Pang Ho Chuen Lawrence ("AW") and Mr. Tam Fung Cheung ("RW"). Both carried out valuation by employing the same direct comparison method and their basis of valuation was the same " existing use" with the benefit of vacant possession. Their valuation reports were compiled and produced by the parties as Exhibit AR-1 ("Bundle"). The differences in the valuations of AW and RW were due to their choice of comparable buildings, their choice of comparable transactions, the factors of adjustments and their adopted quantum of adjustments.

10. Summary of choice of comparables by the expert surveyors

Both AW and RW selected comparables from the following buildings which are industrial buildings located in the vicinity of Wah Kai: -

(a) Po Yip Building ("Po Yip")

(b) Wang Lung Industrial Building ("Wang Lung")

(c) Tsuen Wan Industrial Centre ("Tsuen Wan IC")

(d) Texaco Road Industrial Centre ("Texaco Road IC")

(e) Tak Fung Industrial Cente ("Tak Fung")

RW also selected 3 transactions from Lucida Industrial Building ("Lucida") as comparables for the Property. On the other hand, AW considered firstly, in principle, that Lucida was not an appropriate building for Wah Kai and secondly, even if transactions in Lucida were to be used, 3 other comparable transactions would be more relevant than RW's selected transactions. These 3 comparables quoted by AW were described by Mr. Simon Lui as comparable AC16, AC17 and AC18. We shall consider these for reasons stated below (see paragraph 14).

11. The Counsel for the Respondents, Mr. Simon Lui, summarised in his Final Submission the comparables used by both AW and RW. Altogether, AW considered a total of 18 comparables in 5 buildings (described by Mr. Lui as "AC1" to "AC18") in his valuation report (see Bundle 161 and 170) whilst RW analysed a total of 13 comparables in 6 buildings (described by Mr. Lui as "RC1" to "RC13") in his report (see Bundle 121-130). For ease of reference, Mr. Lui's numbering of the parties' comparables will be adopted in this Judgment.

12. Therefore, a total of about 30 comparable transactions of industrial units were analysed by the two experts. However, there were only four common comparables in these two sets of comparables. They were AC10 (or RC7), AC13 (or RC10), AC17 (or RC13) and AC18 (or RC11). Towards the end of the hearing, the Applicant, upon the Tribunal's request provided schedules of transactions which form the basis of several charts showing the "Price trend of selected industrial buildings in Tsuen Wan" (Bundle 66, 66A and 66B). These schedules were produced as Exhibit AR-4. The Tribunal noticed from Exhibit AR-4 that there were a number of transactions taking place in 1999 that had not been chosen and analysed in either expert's valuation report. Although the Tribunal asked if they found it appropriate to introduce any of these comparable transactions in their valuation, they replied that this was not necessary.

13. Also, the Tribunal noted that both experts had not attempted to add and analyse the other expert's comparables in their valuation although each of them had filed a supplementary report (see Bundle) or additional written comments (Exhibit R-17) commenting on the other expert's choice of comparables and quantum of adjustments.

14. Choice of comparable buildings

The experts AW and RW gave detailed descriptions of the comparable buildings in their valuation reports (see Bundle). The Tribunal also made a site inspection of these buildings and Wah Kai on 20th March 2001, in the company with the counsels and the experts for both parties. Regarding the comparability of these buildings with Wah Kai, we basically concur with AW that the best comparables are the comparable buildings: Po Yip, Wang Lung, Tsuen Wan IC and Texaco IC. For Tak Fung, we find that it was completed in 1993, more than 10 years newer than Wah Kai. It is in a much better physical condition than Wah Kai. As such, it is not a particularly good comparable for Wah Kai. Nevertheless, we also agree with the Applicant that this building should also be included in the valuation because it provides industrial units of similar sizes to Wah Kai.

15. There were debates between the parties as to whether comparables from the sixth building, Lucida, should be included in the list of comparables adopted by the Tribunal. The Respondents AW submitted that Lucida should not be excluded because: -

"(a) when Tak Fung, which is of similar age, was considered as a suitable comparable for Wah Kai;

(b) the common size range of the units in Wah Kai and Lucida offers a direct comparison of the two; and

(c) if the only reason that Lucida should be excluded because owners of Lucida use some of the premises as offices, one cannot ignore the fact that about 4% (in terms of area) in Wai Kai was also used as offices."

16. AW in his supplementary report (Bundle 161) commented that Lucida was located on a small site and was designed and built to cater for the contemporary industrial cum office enterprises.

17. In the final analysis, we agree with the Respondent that transactions in Lucida should also be taken as appropriate comparables for the valuation of the Property.

18. Basis for the choice of comparables by the expert surveyors

AW gave evidence that by reference to the "Private Flatted Factories Price Index" compiled by the Rating and Valuation Department (Bundle 157), he noted that the price level was dropping during 1999, prior to the resumption date. AW stated that for this reason, he had, throughout the valuation process, "tried to adopt comparables occurring closest to the date of valuation as far as possible so as to avoid any subjective adjustment." AW also decided that because his comparables were close to the relevant valuation date for the Property, he had not made any adjustment for time for his comparables.

19. AW commented that RW did not in general include the more relevant comparables closer to the date of valuation, or those comparables requiring no adjustment for car parking value or appurtenant roof value. In particular, for example, for comparables in Po Yip, AW found that "the Expert Report (by RW) only adopts sales where unit prices were out of range with the others. All transactions of the Po Yip Building (upper floor units) during the seven months period from May 1999 to the year end, are tabulated here for illustration........." (Bundle 15-160) AW calculated that the unadjusted average of the some 15 transactions between May 1999 and December 1999 was $5,248 per sq. m. Yet RW only chose two comparables, RC1 and RC2, both of which were transacted in May 1999, and comparable RC3 which was transacted even earlier, in February 1999. There was no explanation from RW as to why his 3 comparables were chosen out of so many transactions that took place in Po Yip in 1999. Neither RW nor the Respondents in the submission addressed this criticism.

20. Similarly, for transactions in Tak Fung, AW commented that both comparables chosen by RW were not close to the date of valuation. AW said that if other comparables not so close to the date of valuation were to be adopted, they should also include some other transactions. AW calculated the average of the some 7 transactions between May 1999 and August 1999 to be $5,276 per sq.m. By contrast, the two comparables (RC8 and RC9) selected by RW had unadjusted unit rates of $9,117 and $8,611 per sq. m. respectively. AW further criticised that RW had not included AW's four transactions which had taken closer to the date of valuation and which required no time adjustment. Again, neither RW nor the Respondents addressed this criticism.

21. RW has not accounted for the method of his choice of comparables. He has not explained during the evidence in chief or cross examination as to why, even after being criticised by AW for selectively choosing comparables that suit his valuation, he still decided that his comparables should be adopted in this valuation. Although RW has introduced a time adjustment factor, he has not accounted for his estimates, in the light of the following "Private Flatted Factories Price Index": -

Year 1999	January	110.0
	February	107.4
	March	104.4
	April	98.3
	May	97.7
	June	101.4
	July	98.9
	August	98.6
	September	97.2
	October	93.8
	November	95.4
	December	96.8

22. The Tribunal agrees that the above said Price Index broadly gives an indication of the changes in the price levels of flatted factory units in the market in general. The Tribunal has calculated that based on the above Price Index, there was a drop in price of about 12% between February 1999 and October 1999 (the month when resumption of the Property took place). However, the Tribunal noted that only -4% was estimated by RW to be the time adjustment for, for example, his comparable RC3 that had an agreement date of 22nd February 1999.

23. In addition to the above Price Index, the Applicant has also managed to show that the transactions in many buildings were dropping in price quite substantially during the year 1999.

24. For the above reasons, the Tribunal agrees with the Applicant that the best comparables were those closer to the relevant valuation date. This actually accords with the basic principle of comparison method of valuation. In view of the relative abundance of comparables for this valuation and the movement of price levels in 1999, the Tribunal decides to adopt and rely only on those comparables that were transacted in the second half of 1999. As a result of this decision, six of RW's comparables, i.e. RC1, RC2, RC3, RC8, RC9 and RC12 were discarded from our further consideration in this valuation.

25. Effects of a formal agreement with less than 30 days prior to completion

The Respondents submitted that 8 comparables used by the Applicant, viz. AC2, AC4, AC8, AC10, AC11, AC12, AC14 and AC15, should not be used as comparables for the valuation of the Property because the completion time (from the Formal sale and purchase agreement to Assignment) was too short. The Respondents showed in the Attachment 1 to the Written Submission that the "completion time" of these transactions ranged from 0 day to 23 days. The Respondents stated that they did not dispute that there were legally binding preliminary agreements before the formal agreements were signed in these transactions but these preliminary agreements were not registered in the Land Registry. However, as the completion time was shorter than 1 month, "the purchasers were at a real risk that his interest may be subject to an unknown but with a higher priority 3rd party interest in the property because of the doctrine of relation back" (section 5 of the Land Registration Ordinance, Cap. 128 refers). The Respondents submitted that, because of this risk, the purchaser would be in a position to bargain a better, namely a lower price. Consequently, the Respondents submitted that "it is therefore unreliable for any reasonable surveyor to rely on transaction records with a less than 1 month completion time as comparable for valuation."

26. The Applicant addressed this issue further in his supplementary written submission filed to the Tribunal. During the submission, the Applicant sought leave to file such a submission. The Applicant quoted two cases (Lam Tam Yi v. Chak Wai Man [1993] 1 HKC 537) and (World Ford Development Ltd. v. Ip Ming Wai [1993] 1 HKC 98) which supported the contention that "it is by no means uncommon for parties to agree that the formal sale and purchase agreement should be signed at a date which is less than 30 days from the date of completion."

27. The Tribunal agrees with the Applicant that there was no real risk as such for transactions with completion time shorter than one month. As a result, we do not agree that the AW's 8 comparables with completion time shorter than one month should be excluded on this point alone.

28. Any effect of West Rail scheme on the sale prices of comparables?

The Respondents have submitted that "there is no dispute that abnormal price movement due to the Railway Scheme should be ignored." RW has given evidence that the upward movement of prices for sales of units in Wah Kai may be caused by the relative improvement of the transport facilities of Wah Kai, e.g. the improvement of road network surrounding Wah Kai and the opening of the new airport at Chek Lap Kok. He was further of the view that the active movement of property market in general in 1997 also contributed to the upward movement of prices in Wah Kai. This was supported by the price trend of units in other buildings such as Po Yip and Tsuen Wan IC (Bundle 66A and the actual data for the graph refers i.e. Exhibit AR-4).

29. The Respondents submitted that "the relative improvement of the quality of Wah Kai with respect to other buildings was further demonstrated by the official view of an independent Government Department, the Rating and Valuation Department". To this end, the Applicant replied that "17 units were bought and sold in Wah Kai in 1996 (Bundle, page 175A and the actual data, page 66). Of these, 16 units were priced between $4,139 and $5,114 and one was priced at $6,580. The average for the whole year was $4,750. There is no suggestion by either side that the 1996 prices did not reflect the true open market value. R&V's view, according to R-16, is that there should be a 12% discount from the 1996 average. A's proposed figure of $5,250 represents a 10.5% premium on the 1996 average."

30. The Tribunal is of the view that when direct comparison method of valuation is employed, as is in the present valuation exercise, the sale prices, but not the rental values, are the subject matter of valuation. Therefore, any comparison using rental values as the basis of comparison is considered to be not so appropriate. Also, even if one were to argue that there should be a close relation between capital and rental values and rental values were used as a guide to capital values, one should best analyse direct rental evidence but not secondary evidence such as Rateable Values, which are after all only assessment figures prepared by the Commissioner of Rating and Valuation under the statutory provisions of the Rating Ordinance. In fact, the relative differences between the Rateable Values of different units in Wah Kai and other comparable industrial buildings might be caused, we believe, by the effect of the resumption. For example, the Commissioner of Rating & Valuation, knowing that the reversion of land containing Wah Kai took place in October 1999, might actually decide not to re-value the tenements there but simply to adopt the Rateable Value from the previous year as to be the Rateable Value for the financial year commencing 1st April 2000. This accounts for the same Rateable Values for units in Wah Kai between October 1998 and October 1999.

31. We have calculated from the actual sales data provided by the Applicant that in the years 1996 and 1997, there were about 42 sales of units in Wah Ka and their average sale price was about $5,729. The respective figures for the years 1996 to 1998 were 51 and $6,195. However, it is difficult to derive from these crude statistics the open market value of the Property at the relevant valuation date. The prices may fluctuate due to various factors such as the changes in the infrastructure, the changes in the surrounding environment, the changes in the property market in general, especially post-1997 and as suggested by the Applicant the effects of the West Rail resumption.

32. Nevertheless, both experts AW and RW decided not to choose transactions in Wah Kai as the basis of their direct comparison method of valuation for the Property. There is therefore no need for this Tribunal to consider the sale prices of actual transactions in Wah Kai any further.

33. For comparable transactions in other buildings analysed by the experts AW and RW, there was no suggestion that they might be affected by the West Rail resumption scheme.

34. Choice and percentage of adjustments

AW in his analysis used the "summation" method of adjustments whilst RW used the alternative "sequential" method of adjustments whereby the total adjustment percentage was arrived at by multiplying each adjustment percentage. However, the former method is more commonly adopted by the valuation profession in Hong Kong, so much so that even the Counsel for the Respondents did not realise that RW had used the sequential method until he was so informed by RW in the middle of his submission. Since both methods provide similar results and for the sake of simplicity and ease of comparison between the figures used by AW and RW, the Tribunal has adopted the summation method in the analysis of the comparables.

35. On the whole, the adjustments of AW are preferred to those of RW. The major factors of adjustments and the adopted quantum of adjustments, where necessary, are discussed below: -

The experts for both parties have adjusted their comparables in respect of factors of location, age of building, building facilities, floor level, size of unit, existence of internal toilet facilities, time difference, and environment/view. The first three factors are affecting the comparable as against Wah Kai as a whole whilst the latter five factors are affecting the individual comparable units as against the Property. AW further elaborated and sub-divided the factor of building facilities into several factors, viz., accessibility for container vehicles, loading facility, lift facility and corridor width. The experts in giving evidence in chief and cross examination have spent considerable time on these factors. The Tribunal has also during the site inspection been asked to give particular attention to these factors.

Location

We agree with RW that Wah Kai enjoys in general a better location when compared with the comparable buildings. However, RW's adjustments for some comparable buildings were too excessive.

Age of Building

There is little disagreement between AW and RW on the factor of age. Their adjustments were within a narrow range. We have on the whole accepted their adjustments.

Facilities

There is also little disagreement between the parties on this factor, with the exception of Tsuen Wan IC and Texaco IC where AW and RW suggested similar percentages of adjustments but in different directions. Regarding the provision of parking, loading and unloading (including facilities for containers), we agree with the observation and findings of AW that these two comparable buildings are indeed superior to Wah Kai.

Floor level

We agree with AW that for industrial units, usually the higher you go up, the less is the value. This is because of the importance of vertical movement of goods and stocks. AW's adopted adjustment of 0.3% per floor is considered to be reasonable and accepted in the valuation.

Size

We agree with RW that size allowance has to be given especially if the comparable unit is over 150% of the subject Property in area. We adopt the following "rule of thumb" adjustments for comparable with size of:

(i) between 150% to 175% of subject: +5%

(ii) between 175% to 200% of subject: +7.5%

(iii) between 200% to 300% of subject: +10%

(iv) over 300% of the subject : +12.5%

Internal Toilet

AW has allowed +5% for the absence of internal toilets for units in Tsuen Wan IC. We agree with this adjustment.

Environment / View

AW and RW differed on this issue. AW allowed no adjustment for this factor whilst RW allowed an adjustment of between +3% and +8% when comparing the comparable unit with the subject Property. We also agree with the opinion of AW that no adjustment is necessary.

Time

AW opined that there was no need to allow for the differences in time because all his comparables were chosen on the basis that they were close to the relevant valuation date. This is agreed.

36. Adjustments of comparables

As explained earlier in this Judgment, some of the comparables quoted by RW has been discarded from further consideration as they were transacted not close to the relevant valuation date. We set out in Table 1 below the adjustments made by AW and/or RW to each of the remaining comparables. The corresponding adjustments adopted by the Tribunal are set out in the said table as well.

Table 1 - Adjustments of comparables by the Tribunal

(I) Po Yip Building Comparables

(II) Wang Lung Industrial Building Comparables

(III) Tsuen Wan Industrial Centre Comparables

(IV) Texaco Road Industrial Centre Comparables

(V) Tak Fung Industrial Centre Comparables

(VI) Lucida Industrial Building Comparables

37. Summary of adjustments of comparables

Applying our adjustments to the unadjusted unit rates of the comparables, we arrive at the after adjustment unit rate for each comparable. They were tabulated in the Table 2 below: -

Table 2 - Estimation of after adjustment unit rates

38. Reconciliation of values

Both AW and RW used a similar method of calculating the appropriate unit rate for the valuation of the Property. Both calculated the after adjustment unit rate for units in each comparable building. They then took an average of these after adjustment unit rates in order to arrive at the appropriate unit rate. AW at the end excluded the average adjusted unit rates from Tak Fung (for its being much newer) and Tsuen Wan IC (for having the relatively lower adjusted unit rates) and then calculated the average of the remaining adjusted unit rates. RW took a simple arithmetic average of his after adjustment unit rates from the six comparable buildings he analysed. We shall adopt the method similar to that used by RW but we shall also counter check the final figure using the approach adopted by AW.

39. From Table 2 above, we find that the after adjustment unit rates (per sq. m.) of the comparable units from the six comparable buildings are as follows: Po Yip - $5,770, Wang Lung - $6,117, Tsuen Wan IC - $5,039, Texaco IC - $5,860, Tak Fung - $6,034 and Lucida - $7,361. Taking an average of these figures give a value of $6,030 per sq. m.

40. If, as suggested by AW, Tsuen Wan IC were excluded in the calculation in view of its being the lowest in the league, the average of comparables in the remaining 4 buildings would become $6,228. Furthermore, if we were to discard the comparables from Tsuen Wan IC and also from Tak Fung and Lucida (the latter two because they are much newer buildings and are in the first place not particularly good comparables for Wah Kai), we would find the average figure to be $5,916.

41. In the circumstances, we decide that it is not right to exclude Tsuen Wan IC in the calculation just because the after adjustment unit rate from the comparables in that building is the lowest. Instead, we follow RW's approach and give equal weight to each comparable building. Therefore, we decide it to be appropriate to adopt a figure of $6,030 per sq. m. for the purpose of valuation of the Property. Applying this adopted unit rate to the agreed saleable area of the Property gives a figure of $465,516 which, we estimated, is the open market value of the Property as at the relevant valuation date.

42. Summary of compensation payable to the Respondents

The following compensation amounts are payable to the Respondents: -

(a) Open Market Value of the Property	$465,516
(b) Loss of Rental Income (agreed)	$41,900
(c) Expenses incurred (agreed)	Nil
	_________
Total compensation	$507,416
Rounded to	$508,000

43. Order

Accordingly, the Applicant is ordered to pay to the Respondents compensation in the sum of $508,000. The matter of professional fees, interest and costs be adjourned to a date to be fixed by the Deputy Registrar, after consultation with the Counsels' diaries. Liberty to apply is reserved for any other consequential matters.