Tin Kung Investment Ltd v. Secretary for Transport

LDRW 16/2001

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Railways Ordinance Application No. LDRW 16 of 2001 

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J U D G E M E N T

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The Background 

1. On 29^th June 2004, the judgement in respect of the captioned application was handed down requiring the Respondent to pay to the Applicant a sum of compensation at $4,683,000 for the resumption of the Applicant properties at Unit A and Unit B on the Upper Ground Floor, Block B of Wah Kai Industrial Centre, Tsuen Wan (known as he Subject Properties”).

The Grounds for Review

2. The decision was not satisfactory to the Applicant, which filed in an application for a review on the following grounds: -

(a)	The Tribunal, in making the above award, failed and refused to consider the decisions previously made in respect of the three Test Cases, namely, the Secretary for Transport v. Poon Chi Man and Ho Sai Mui, LDMR 42 of 2000, Secretary for Transport v. Wong Bun, LDMR 14 of 2001 and Secretary for Transport v. Leung ka Tong and Leung Pun Ching Hang Cindy, LDMR 13 of 2001, which in the opinion of both the Applicant and Respondent were good for guidance.
(b)	The Tribunal failed and refused to consider the property values derived through the Investment Method which is a useful check against the result obtained from the Direct Comparison Method, whereas Comparables 2(a) and 2(b) adopted under the Investment Method were good for comparison to the Subject Properties.
(c)	The Tribunal failed to consider the Sale Brochure of Wah Kai Industrial Centre, which contained lower and upper floor unit sale evidence useful for establishing the value of the Subject Properties.
(d)	The Tribunal erred in holding that Comparables (2) and (3) were not out of line but Comparable S6 was, whereas Comparables (3) and 1(d) being units in the same building were, after adjustments made, of values having a difference up to 47%.
(e)	The Tribunal also erred in holding that the unit sale price of the Subject Properties was the same no matter whether the Subject Properties were combined or remained as two separate units.

3. The ground of review in (e) above was at a later stage of the review hearing withdrawn. The Tribunal therefore needs not give its analysis and deliberation in this respect.

Leave for New Evidence

4. Whilst seeking a review of the Tribunal decision of 29^th June 2004, the Respondent took the opportunity to request that the transaction in respect of Unit 11 &13 on 2/F, Sun Fung Centre on 29^th December 1999, which the Respondent failed to reveal in the original hearing, be taken into account as and when the Tribunal reviews the original valuation. The Applicant emphasised that the omission was not deliberate but out of inadvertence.

5. The Respondent rebutted the Applicant grounds of review and opposed that the Applicant be allowed to include the omitted sale evidence upon review. The Respondent considered that if such evidence is allowed, it might constitute the giving of a second bite of the cherry and was unfair to the Respondent. Having considered the pros and cons of the case, the Tribunal on 27^th August 2004 ordered that the Applicant be allowed to include the omitted sale evidence on the ground that prima facie the omitted sale evidence might affect the overall valuation of the Subject Properties had it not been omitted from the original valuation. In parallel, the Tribunal granted leave to the Respondent to submit its findings and views within 21 days in regard to the new evidence and other evidence related to the review application, which the Applicant only provided to the Respondent a few days before the first review hearing day.

The Final Submissions

6. The Respondent rebuttals are as follows: -

(a)	The four comparables, i.e. (2), (3) (9) and 1(d) are suitable for the purpose Direct Comparison Method. The Tribunal had wrongly adopted +9.4%, which was derived out of the provisional indices from the Rating and Valuation Department, to adjust for the disparity in transaction date for Comparable 1(d). Had it adopted the correct figure of +4.5%, the resultant unit rate for Comparable 1(d) would have been $8,783 per sq. m. This pattern of unit rates gives a mean value of $7,268.50 per sq. m. and the greatest deviation of these four comparables from the mean is limited to roughly 20% with the smallest deviation of only 9.2 %. If the conversion factor of 1/8 is changed to 1/4 for open yard/podium in the case of Comparable (9), the range of deviations is narrowed down to that between 5% and 19.9%. Comparable S10 is 62.98% above the above mean and 34.85% higher than the next lower unit rate, i.e. Comparable 1(d). If the conversion factor of 1/4 is taken, the deviation will be widened further. The inclusion of the new Comparable S10 does not appear justified.
(b)	The Respondent does not accept that given the number of comparable for valuation being sufficient, there is a need to resort to an alternative valuation approach for checking purpose. Nonetheless, it had pursued an analysis on the basis of the appropriate capitalization rate of 13%. If a 13% is adopted to capitalise, the mean derivable under the Investment Approach is $8,155 per sq. m. resulting in a value only 10.6% above the Tribunal award and 12.2% above the revised figure of $7,268.50. Notwithstanding this, the Respondent has doubt regarding the reliability of the rent passing quoted in respect of one of the two comparables, which is a tenancy renewal case. If this comparable is excluded, the resultant unit rate is only 7.2% above the revised figure of $7,268.50 per sq. m. This analysis supports the Tribunal award and the revised valuation above performed by the Respondent.
(c)	With sufficient comparables being available for valuation and an alternative valuation method as a check of the Direct Comparison Method performed, the Respondent does not consider the need for a second check by way of the Value Differential. The Tribunal decision of making no reference to the three Test Cases is likewise not in its view unfair.

7. The Applicant gives the following arguments in support of its case: -

(a)	Comparable S10 (the new comparable) should not be regarded as out of line simply because of 34.9% difference in value from Comparable 1(d) as the adjusted value of Comparable 1(d) is 40.3% above that of Comparable (3). Of the three transactions in Sun Fung Centre under consideration for valuation, Comparable (3) is on the low side and clearly stands out of the line of the other two. The suitability of Comparable (3) is questionable.
(b)	Comparable S10 does not have any extra advantage over the Subject Properties in that the Deed of Mutual Covenant (known as the MC”) (see Page 15 of Review Exhibit A2) restricts the removal of any part of the external wall to result in change of the building facade. The height clearance does not permit the entry of trucks into the premises but cars only. The latter is not an apparent advantage in relation to the Subject Properties. The mere more flexible in user of Comparable S10 than the Subject Properties does not attract a higher value as illustrated by the rental difference between the two tenancies at Po Yip Industrial Building.
(c)	The flat roof/podium conversion factor of 1/8 for units on 2/F of Sun Fung Centre is appropriate. Any higher ratio than it is not justified. The flat roof associated with Comparable S10 or others on the same floor has security problem, subject to abuse by others and no temporary parking is in fact permitted. In term of loading and unloading convenience, Comparable S10 and other units on 2/F of Sun Fung Centre are not better off than the Subject Properties.
(d)	The three Test Cases provide good guiding principles for the subject application. Both expert witnesses of the Applicant and Respondent support these principles. The Tribunal should follow these principles as the starting point for the determination of the compensation of the Subject Properties.
(e)	Due to the scant number of comparable, the Investment Method should be adopted as a check to ensure the validity of the end valuation result. The yield of 13% adopted in the Investment Method to arrive at the capital value is with the support from the statistics provided by the Rating and Valuation Department. The result obtainable from the Investment Method supports the adjusted unit rate of Comparable S10.
(f)	The Value Differential obtained for upper and lower floor industrial units should be adopted as a further check to the Direct Comparison Method. The evidence gathered shows that lower floor units with high head-room height and heavy floor loading capacity fetched 82.5% in 1991 and 93.6% in 1993 more than the upper floor units

8. The Tribunal Comments

         (a)      Selection of Comparables

The Applicant holds the view that the Tribunal erred in its selection of comparables. The Tribunal does not find this view acceptable after reviewing the grounds given on Pages 16 and 17 of the Judgement dated 29^th June 2004. The Tribunal remains of the view that Comparable (3) cannot be regarded as out of line before adjustment for its differences to the Subject Properties is made. Moreover, the property agent from Centaline Property Limited who testified for the Applicant in court gave no useful evidence to support that it was sold below market value. The opinion regarding Comparable (9) that the mortgage sale is an under-sale, is also not supported by evidence and merely out of suspicion somewhat similar to the loose view founding on the elements of same address and surname in regard to Comparable S6.

The Applicant holds a further view that Comparable (3) is out of line, as it being located in the same building as Comparable 1(d) and Comparable S10 was sold at an unit rate (and so is the adjusted rate) much lower than the latter two. This view also cannot stand because after adjustment, the differences among all comparables are supposed compensated for. All the adjusted rates should be looked at, compared and considered in entirety but not in piecemeal. If this method to eliminate the so called unsuitable comparables is followed, making adjustments is meaningless and any factors of valuation, e.g. the same floor level, same block or along the same street, can be singled out as an excuse to weed out the unfavourable minority.

(b)     Adjusted Rate for Comparable 1(d)

As the Respondent pointed out, the adjustment of +9.4% for Time for Comparable 1(d) was based on temporary indices. The final indices confirmed by the Rating and Valuation Department differ significantly. Based on the final indices, the adjustment should be +4.5% and therefore, the adjusted unit rate should be $8,783 per sq. m. instead of $9,215 per sq. m. The Applicant expert witness admitted these mistakes in his valuation during the cross-examination. The Tribunal admits that it had also made the same mistake in regard to the adjustment for Time and accepts that the adjusted rate be corrected as $8,783 per sq. m.

(c)      Comparable S10 v. the Subject Properties

The Respondent considers that Comparable S10 is better in quality than the Subject Properties with a driveway wide enough for trucks leading to its front. The entrance is wide enough for vehicles to get in, too. The present occupier, probably because of his/her own need, did not make full use of this advantage. The premises, in its view, could be put to more beneficial use.

The Tribunal notes the existence of a DMC and the Management Office refusal letter to an application for removal of the external wall (see Review Exhibit RA3). The provisions of DMC prevent the occupiers and owners from changing the design of the building facade. The Tribunal, however, is not sure whether there were external walls separating the podium and 2/F units in the original design and whether the external walls come under the definition of building facade. No building plans were produced to assist in a better apprehension of the situation upon the building being built. Despite the Respondent disagreement, the Tribunal inclines to accept the Applicant submission before the DMC and the refusal letter. The Respondent submission in this aspect is not back up by any evidence.

(d)     1/8 or 1/4 of GFA Value

A convincing ratio should be come out of a survey on the willingness to pay or the proportions actually paid. Otherwise, it may be by an investigation into the utility or productivity in relation to the whole production process. Under different production and economic circumstances, the ratio tends to be at variance. Both parties provide no evidence to support the ratio of 1/4 or the otherwise. The Respondent submission appears hypothetical just intending to prove the possible movement in the case of a change to 1/4. The Tribunal does not wish to go into details for a hypothetical case. The same argument applies to the Respondent suggestion on the parking space values.

(e)      The Three Test Cases

The Applicant gave no new grounds for advocating the Tribunal to refer to these cases. The Tribunal does not find it appropriate to change its decision. The Applicant should have noticed that apart from the reasons given, there are problems for a change in the Tribunal decision. The adjustment factors adopted in the three cases are more or less the same to those adopted by the two expert witnesses in the present exercise. The validity of quite a number of such factors, e.g. the extra premium for retail potential, location and size, have been determined by this Tribunal as questionable. Some, e.g. the headroom height and floor loading capacity, have substantially been modified in the method of reckoning their quantum of adjustment. To follow the principles and to refer as a starting point to the results of the three cases would arouse inconsistency in the valuation for the Subject Properties.

Investment Method as A Check

9. The Investment Method as a check to the valuation result yielded from the Direct Comparison Method or other valuation methods is known to the Tribunal a common practice. The Tribunal holds no strong view as to whether or not the use of the Investment Method to perform a check is a must in the present exercise. The use of only four comparables to arrive at the market value is not perfect and may justify the employment of an alternative method as a check, but if they are perfect market transactions beyond reasonable doubt, it is not an unacceptable number. The Tribunal decision not to analyse Comparable 2(a) and Comparable 2(b) was affected by the manner of the two expert witnesses in the original hearing. They both seemed to indicate that the need for such did not arise in the present exercise, particularly, the Applicant rightly concluded in its final submission that the capital values obtained from the two lettings by way of the Investment Method were not identical to sale prices of other comparables used for evaluation under the Direct Comparison Method.

10. Indeed, the capital value obtained by way of the Investment Method is not an equivalent to the sale price paid by vendors and purchasers. It is never a substitute of the sale price and should not be put side by side with sale prices for averaging to arrive at the market value. The role of the two methods is not the same. The Investment Method as by its name is to enable a comparison among the yields of investing different amounts of money in different properties at different amounts of income obtainable, or at a constant yield rate but different sums of investment and expected income, to assist in the investor investment decision. To serve as a check, it is unrealistic to demand through the Investment Method to come up with a figure same as the sale price because of the leverage effect of the yield rate where a minor variation may result in disproportionate change in the end figure. It should have served to confirm the validity of the sale price when the end figure obtained falls in its proximity.

11. To ensure that the Investment Method can perfectly serve as a proper check, the availability of a correct and accurate yield rate is essential. The yield rate from Rating and Valuation Department on Page 100 of the Pleading Bundle is evidence agreed by parties concerned. No doubt, the rates therein contained represent not just the lower or upper floor units. They are combined rates made up of transactions from both upper and lower floor units. The parties concerned nevertheless have not worked out the respective rates applicable for the two types of industrial properties.

12. In the Tribunal view, the proportion of upper and lower floor units that contribute to the yield rate is about 2 to 1 bearing in mind that industrial buildings elsewhere outside Tsuen Wan, Sha Tin and the urban Kowloon and Hong Kong Island are not similarly tall. Considering that lower floor units may command a lower yield rate by 2% than that of upper floor units, one may easily work out through two algebraic equations (i.e. 0.66x + 0.33y = 13 and x - y = 2) the rate for lower floor units, which is 11.8%. Applying this rate to the case of Comparable 2(a), the capital value is $7822.37 per sq. m. and to Comparable 2(b), it is $8,347.74 per sq. m. (i.e. $1,046.16 x 98.3/104.4 [see Page 102 of Pleading Bundle for adjustment for Time] /11.8%).

13. The Tribunal shares with the Applicant view that similar adjustments as those applied to the four comparables selected should apply. However, the Tribunal, which has given ample explanation on Page 8 to 10, does not agree the adjustment given for Size for Comparable 2(a) by the Applicant. In line with Comparable  (3) and Comparable 2(b), it should be similarly +5% resulting in a total adjustment of +4.7% only. Therefore, the adjusted rates for Comparable 2(a) and Comparable 2 (b) are respectively $8,190 per sq. m. and $8,840.26 per sq. m. which when averaged, give a mean of $8,515.13.

Value Differential

14. The Tribunal holds no opposition to the use of value differential to ascertain the value of the Subject Properties. Valuation itself lacks its own theory. The so-called valuation theories are largely originated from economics, mathematics, and statistics and even borrow from established accounting rules. The use of value differential to ascertain the property value is an approach combining the techniques available from mathematics and statistics. The pre-requisite for its use is that there must be ample and/or reliable statistics. In this regard, the Tribunal shares with the Respondent view on Page 5 of its submission on review dated 9^th August 2004. It says, “ The selective choosing of two, or three, or four, sale transactions is not statistics. As RW has pointed out, a different choice of two upper/lower floor transactions in Sun Fung Centre would yield a completely different picture.” The submission given by the Applicant expert witness on Pages 471 to 475 in relation to 1999 fits neatly with the description in this statement. There are comparables of a number to the satisfaction of both parties, to enable the carrying out of the Direct Comparison Method. An Investment Method has also been performed as a check against the result of the Direct Comparison Method. There is no need for a third approach which due to the reason above given, contains a high risk of error.

Conclusion

15. Comparable (3) is 2.64% above Comparable (2) in the adjusted value. Comparable (9) is 26.81% above Comparable (3) and accordingly is much more above Comparable (2). Comparable 1(d) is 10.67% above Comparable (9). Comparable S10 is 34.87% above Comparable 1(d) and Comparable S6, 27.42% above Comparable S10. Based on the amount of variation, Comparables (2) and (3) obviously can be regarded as one group, Comparables (9) and 1(d) pertain to another, Comparables S10 and S6 are each on their own. The mean of the first group is $6,177.5, and that of the second group is $8,359.5. The third and the last group do not have a mean each involving only one sale.

16. The variation between the mean of the first and second group is 35.32%, between the second and the third is 41.71% and between the third and the last is 27.42%. It is unreasonable to suggest that Comparables (2), (3), (9) and 1(d) belong to one group whereas Comparables S10 and S6 are each in separate groups.

17. With the inception of Comparable S10, the original pattern of values has been altered. The original clear pattern to conclude that Comparable S.6 is out of line and that the first four comparables form one group no longer exists. The Investment Method does support that $8,359.5 per sq. m. is the appropriate unit value for calculation of the compensation. Although one of the comparables adopted by the Investment Method may be capable of letting for more advantageous user and command higher rental, this would not affect the conclusion as made. The Tribunal has not included the resultant unit values obtained from the Investment Method in the calculation. The result yielded from the method serves as a check only. Even if the mean obtained under the Investment Method were to be increased or decreased by 10%, it does not affect the above conclusion.

18. Accordingly, the revised compensation is 634.8 sq. m x $8,359.5 =  $5,306,610.6 or, say, $5,306,600.

19. Orders

We hereby order that: -

(1)	The order made in paragraph 11(1) of the judgement dated 29th June 2004 be withdrawn and substituted by the order in sub-paragraph (2) hereunder;
(2)	The Respondent do pay the Applicant a compensation in the sum of $5,306,600 for the resumption of the Subject Properties; and
(3)	An order nisi to be made absolute in 14 days that the two parties shall each bear their own costs of the review hearing.