CHUNG PUI HING AND ANOTHER v. THE DIRECTOR OF LANDS

LDLR 2 OF 2008

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LANDS RESUMPTION APPLICATION NO. 2 OF 2008

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BETWEEN

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J U D G M E N T

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Background

1.  This is an application by the Applicants for determination of the compensation payable to them under section 10(2)(a) of the Lands Resumption Ordinance, Cap. 124. The Applicants are the former registered owners of the property known as Portion B on Ground Floor of Nos. 329 & 331 Shau Kei Wan Road & 3 Nam On Lane, Hong Kong (“the Property”). Before the trial, the Applicants’ entitlement to compensation is no longer in issue. The main dispute remains to be the assessment of the open market value (“OMV”) of the Property at the relevant valuation date of 25 May 2005.

The Property

2.  At the first date of the trial, the parties have agreed to adopt the figure of 2.78 m to be the frontage of the Property for the purpose of this valuation exercise. In addition, the parties have no dispute on the following particulars of the Property: -

(1)The Property was situated at the ground floor of a 11-storey building completed in 1957;

(2)The effective saleable area is 10.31 sq. m.;

(3)The frontage is 2.78 m;

(4)The headroom is 4.12 m;

(5)The best use of the Property is for non-domestic / retail purpose;

(6)The Property was, at the relevant valuation date, leased to a tenant selling fruits.

Other matters not in dispute

3.  At the first day of the trial, the parties have similarly agreed on certain factual details and dimensions of some of the comparables. As a result of these agreements, the following matters are now not in dispute:

(1)Basis of valuation: The amount which the Property if sold by a willing seller in the open market might be expected to realize (section 12(d) of the Ordinance);

(2)Method of valuation: Direct comparison method and assuming vacant possession despite of the existence of the tenancy;

(3)All the measurements (i.e. the saleable areas, frontages and headrooms of various comparables adopted by the parties’ experts are agreed.

The issues

4.  The remaining live issues to be decided in this case are: -

(1)What are the suitable comparables?

(2)What adjustments to the comparables are required to arrive at the adjusted unit rates for the purpose of estimating the appropriate unit rate of the Property?

(3)Finally, what should be the OMV of the Property as at 25 May 2005?

Summary of valuation

5.  Ms. Sat Wei Ling (“Ms. Sat”) and Mr. Lai Wah Chi (“Mr. Lai”) were the valuation experts respectively appointed by the Applicants and the Respondent to give evidence in this case. The parties had no dispute on their expertise in valuation. Prior to the hearing, they had exchanged valuation reports and supplementary reports. Ms. Sat opined that the OMV of the Property was $3,430,000, as opposed to Mr. Lai’s estimate of $2,218,000. During the trial, the two experts adduced revised calculation sheets to reflect various minor adjustments. As a result of these changes, Ms. Sat maintained at the end of the trial her valuation figure of $3,430,000 whilst Mr. Lai slightly revised his figure to $2,118,000.

Basis of Compensation

6.  The Applicants’ rights to compensation are set out under section 10 to 12 of the Lands Resumption Ordinance (Cap. 124) (“the Ordinance”). In particular, under section 12(d) of the Ordinance, the value of the land resumed shall be taken to be “the amount which the land if sold by a willing seller in the open market might be expected to realize.” Both parties agree that the direct comparison approach employed by the two experts is reasonable and appropriate, and should therefore be adopted.

Choice of comparables

7.  There are between the 2 experts a total of 9 comparables, including the 4 common comparable (i.e., AC1/RC1, AC3/RC2, AC5/RC4 and AC7/RC6). In arriving at the OMV of the Property, Ms. Sat has adopted 7 comparables whilst Mr. Lai has adopted 6. All the comparables identified by the 2 experts are set out below, as follows: -

Comp. Ref.	Address	Date of Sale *	Sale Price	Effective Saleable Area (sq. m.)	Unadjusted Unit Rate (/ sq. m.)
AC1/RC1	Shop A on G/F, 117-119 Shau Kei Wan Road	3/11/05	$5,520,000	25.81	$213,871
AC2	Shop 5 on G/F, Sai Wan Ho Plaza, 68 Shau Kei Wan Road	14/10/05	$4,800,000	12.45	$385,542
AC3/RC2	Shop 10 on G/f, Winner Mansions, 23 Nam On Street	22/9/05	$3,000,000	12.82	$234,009
AC4	Shop 4 on G/F, Yeung On Building, 50-54 Shau Kei Wan Road	24/5/05	$2,490,000	9.89	$251,769
AC5/RC4	Shop 19 on G/F, Winner Mansions, 23 Nam On Street	11/4/05	3,200,000	12.82	$249,610
AC6	Shop 5 on G/F, Yeung On Building, 50-54 Shau Kei Wan Road	2/3/05	$2,280,000	10.16	$224,409
AC7/RC6	Shop E on G/F, Kwong Shun Building, 76 Shau Kei Wan Main Street East	7/2/05	$2,360,000	12.06	$195,688
RC3	Shop A9 of Portion A, G/F, Ka Yue Building, 1-7 Nam On Street	23/5/05	$6,730,000	40.32	$166,915
RC5	G/F, Aldrich House, No. 373 Shau KeiWanRoad	3/4/05	$3,780,000	31.03	$121,818

* Where there are different dates of sales, the “ASP” dates as identified and reported by Ms. Sat are shown in this table.

8.  In summary, Ms. Sat opined that, apart from the four common comparables, her other comparables (i.e., AC2, AC4 and AC6), all being sales of comparable shops similar in size to the Property should be adopted whilst the other comparables (i.e. RC3 and RC5) adopted by Mr. Lai should be rejected mainly because they were of much larger size than the Property. On the other hand, Mr. Lai rejected Ms. Sat’s comparables mainly on the ground that they were located in Sai Wan Ho area, a locality very different from that of the Property whilst his comparables RC3 and RC5, though about 3 or 4 times the size of the Property should still be accepted as suitable comparables.

Comparables AC2, AC4 and AC6

9  Comparables AC2, AC4 and AC6 are small sized shops all situated on the southern side of Shau Kei Wan Road in Sai Wan Ho sub-area of the Shau Kei Wan district, near the access road to Tai Koo Shing, a large private residential estate in this part of Hong Kong Island. Ms. Sat sought to include these three comparables as suitable comparables for the valuation of the Property whilst Mr. Lai opined that they should all be discarded.

10.  Ms. Sat has provided in her valuation reports a detailed analysis that these are suitable comparables for the following reasons:

(1) The Property is a “small sized” shop of less than 20 sq. m., the supply of which is very limited, both within the Shau Kei Wan district and in the market for shops as a whole, whilst the demand is considerably high because it attracts those tenants who can only afford a relatively low rental outlay;

(2) Despite of the limitation in size, small sized shops are suitable for many kinds of small-scale retail business which do not really require the space of a standard sized shop or a larger sized shop; and

(3) The adoption of these small sized shops as comparables for the Property will render lesser and easier adjustments to the chosen comparables on the factor of quantum/size, hence avoiding the need for large and arbitrary adjustments.

11.  Mr. Lai has severely criticized Ms. Sat for adopting these three comparables on the ground that they are not only located far away from the Property, being about an entire MTR station away, but are located in Sai Wan Ho sub-area which is an entirely different catchment area of Shau Kei Wan district, in the vicinity of more affluent residential developments such as Tai Koo Shing, Kornhill, Lei King Wan and Les Saisons. Hence, the character as well as the purchasing power of the population nearby and the pedestrians / potential shoppers passing through these three comparables are very different from those of the Property or the comparables adopted by Mr. Lai himself.

12.  In addition, the Respondent submits that the “market appreciation analysis” conducted by Ms. Sat (see page 25A of the Trial Bundle) itself already illustrates “the vast difference in character” between the two groups of properties, situated either in the Shau Kei Wan area in the proximity of the Property or in Sai Wan Ho area, which is far away from the Property. The Respondent also rejects Ms. Sat’s explanation to account for this vast difference by attributing it to the size factor.

13.  Moreover, the Respondent submits that the Comparable AC2 is “of such a distinctly high unit value” that it clearly falls out of line with the remaining comparables even if one accepts Ms. Sat’s adjustments for the said comparable. For that reason alone, the Respondent submits that AC2 should be rejected.

14.  After detailed consideration of the evidence adduced by both experts, I am of the view that these three comparables should not be adopted as suitable comparables for the Property because they are clearly further away from the Property than the other comparables. Even though I agree with Ms. Sat that small sized shops should basically be compared with a small sized shop such as the Property in order to avoid the difficulties of adjusting for large size differences between the adopted comparables and the Property, we should not lose sight of the most important factor governing the value of a shop, which is reflected by the maxim, “location, location and location.” Even though these three shops are all fronting onto Shau Kei Wan Road, the main thoroughfare passing through the traditional main shopping street of Sai Wan Ho sub-area of Shau Kei Wan district, I am not satisfied that the shopping potential and thus the values of these three shops are more similar to the Property than the other comparables considered in this case, which are much closer in location to the Property. Therefore, I agree with Mr. Lai that these 3 comparables should not be adopted as suitable comparables in the present exercise, particularly when there are other more suitable comparables for the purpose of comparison.

Comparables RC3 and RC5

15.  Comparable RC3 is a shop facing the bus terminus at Nam On Street nearby. It has a size of about 40.32 sq. m., about 4 times that of the Property. Ms. Sat has rejected this comparable because of its size as it requires substantial adjustment that will distort the accuracy of the assessment of the OMV of the Property. The Applicant also submits that RC3 should be rejected even based on Mr. Lai’s definition of “small shops” (i.e. those with a price tag of below $6 million) as it was then sold for $6,730,000.

16.  Comparable RC5 is a corner shop located on the same side of Shau Kei Wan Road only one block east of the Property. During the trial, Mr. Lai fairly informed the Tribunal that it was possible that certain road widening work was, at the relevant valuation date, carried out along Aldrich Street and certain hoardings were erected outside the comparable. As such, he further accepted these works and erections might affect the sale price of this comparable. For this reason, Mr. Lai said that he would have no objection if the Tribunal were to disregard this comparable for the said reason. On the other hand, Ms. Sat rejected the adoption of RC5 on the grounds that (1) it was, similar to RC4, a standard sized shop whereas the Property was a small sized shop and (ii) RC5 was enjoying a much inferior location than the Property.

17.  However, Mr. Lai opined that these two comparables were still within his category of “small shops”, judging from the scale of their sale prices. In his view, any property with a price tag of “below & around $6 million category” should be classified as “small shops” since they all attracted the same type of investors and as such, should serve as good comparables to the Property. Moreover, this ceiling price tag should be a better criterion for determining the suitability as a comparable for the Property than the size criterion as suggested by Ms. Sat.

18.  I agree with Ms. Sat that these two comparables could not be classified as “small sized shops” (as defined by Ms. Sat in terms of absolute size of such shops) as they show a difference in size of 3 or 4 times (for RC5 and RC3 respectively) when compared with the Property. In addition, I do not accept Mr. Lai’s evidence that the market actually distinguishes and considers whether a shop is a “small shop” solely based on the parameter of the price tag of the shop. I cannot go along with his line of argument. This is because if Mr. Lai were right, the market would not have taken into account the square footage of the shop which would, however, definitely has an important bearing on the type of business such a shop could house. I therefore agree with Ms. Sat that it is the area factor, rather than the minimum price tag factor, that is the necessary characteristic of shops commonly known as “small sized shops”.

19.  Therefore, I agree with Ms. Sat to reject the adoption of both RC3 and RC5 as suitable comparables in this valuation exercise.

Conclusion on the choice of comparables

20.  For reasons stated above, I have decided to reject the Applicant’s comparables AC2, AC4 and AC6, and the Respondent’s comparables RC3 and RC5, hence leaving the common comparables of AC1/RC1, AC3/RC2, AC5/RC4 and AC7/RC6 as to be the suitable comparables in this valuation exercise.

21.  Sometimes, an expert valuation witness or even the Tribunal is concerned with whether four comparables are sufficient for the purpose of assessing the OMV of the Property. In the present case, given the close proximity in location, size and time of the comparables and the Property, I am satisfied that the adjusted unit rates of these four comparables do provide reliable indications for the assessment of the OMV of the Property. I will next consider the experts’ adjustments for these four adopted comparables below.

Adjustments of comparables

22.  The experts are in agreement that in this valuation, adjustments have to be made in relation to the factors of (1) time, (2) location, (3) frontage, (4) quantum/size and (5) headroom. For the factor of headroom, both held the same opinion as to the percentage adjustment to be applied to the comparables. Otherwise, both had different adjustments for the comparables.

23.  They are however in disagreement as to whether adjustments are need in relation to (1) depth, (2) corner factor, (3) width of pavement and (4) visibility. While some factors affect all the adopted comparables, some factors affect some comparables only.

24.  The experts’ adjustment percentages for various factors of adjustments for various comparables (as shown in Exhibit AR2(A) produced by the experts during the trial) are summarized below: -

Comp. Ref.	AW/ RW	Head -room	Time	Location	Visibility	Corner Factor	Wide Pavement	Frontage & depth	Quantum / Size	Total
AC1 RC1	AW RW	-1.0% -1.0%	-1.6% -1.6%	+10.0% -10.0%	0% N/A	0% N/A	0% N/A	+12.0% 0%	+15.5% +7.0%	+34.9% -5.6%
AC3 RC2	AW RW	-1.0% -1.0%	-3.0% -3.0%	+15.0% -5.0%	+5.0% N/A	-3.0% N/A	+10.0% N/A	+3.0% -3.0%	+2.5% 0%	+28.5% -12.0%
AC5 RC4	AW RW	-1.0% -1.0%	+6.0% -1.0%	+15.0% -3.0%	+5.0% N/A	0% N/A	+10.0% N/A	+3.0% 0%	+2.5% 0%	+40.5% -5.0%
AC7 RC6	AW RW	0% 0%	+14.0% +8.0%	+35.0% +10.0%	0% N/A	0% N/A	0% N/A	0% 0%	+1.8% 0%	+50.8% +18.0%

AW = Applicant’s witness, Mr. Sat RW = Respondent’s witness, Mr. Lai N/A = Not applicable

25.  These factors of adjustments are considered one by one below.

Heading

26.  This is the only factor of adjustment in which the 2 experts agreed entirely in their adjustments. I accept their adopted adjustments.

Time

27.  Ms. Sat agreed with Mr. Lai in the time adjustments for AC1/RC1 and AC3/ARC2. Both estimated the adjustments on the basis of the private retail prices indices published by the Rating & Valuation Department. I agree to adopt the commonly agreed time adjustments for these two comparables.

28.  For AC5/RC4 and AC7/RC8, Ms. Sat did not use the RVD indices to make adjustments for time. She instead carried out an analysis of “paired sales” of several properties for the first half of 2005 to arrive at a rental appreciation rate of 4% per month for the said period. Mr. Lai responded in his Supplementary Report that Ms. Sat’s methodology was flawed for the following reasons:

(1) The agreement for sub-sale and purchase of Property 1 of Ms. Sat’s analysis could not be obtained with the result that he was not sure whether the two sales were on the same terms and conditions;

(2) The sub-sale agreement of Property of Ms. Sat’s analysis referred to an undertaking by the confirmor that the shop was in possession of a licence;

(3) The agreement for Property 4 of Ms. Sat’s analysis show that it was sold on the basis of a sale and leaseback arrangement;

29.  Most importantly, the Respondent submits that it is safer to use the private retail indices published by a Government department, rather than relying on the small number of shop sales transacted at isolated points of time. The Respondent is worried that the picture of price movement depicted by these few transactions may be distorted. On the other hand, the Applicant submits that the RVD price indices are a generalised index affecting the whole territory of Hong Kong and may not necessarily reflect the local situation in Shau Kei Wan. This criticism always arises when any expert proposes to make time adjustments based on the trend established by the RVD price indices. Nevertheless, after comparing the pros and cons of using the RVD price indices and the result of analysis of a few “paired sales” identified by the expert for one party in this case, I share the view of Mr. Lai that it will be much safer to continue to use the RVD price indices for the other two comparables in the estimation of the adjustments for time. In the circumstances, I adopt Mr. Lai’s computed percentages for AC5/RC4 and AC7/RC8.

Location

30.  The experts for the parties held very different opinion for the 4 adopted comparables as far as their location adjustments are concerned. The Tribunal has the benefit of inspecting the Property and the comparables during the Trial, as well as considering the evidence of both experts, both in chief and in cross-examination. Unfortunately, as usual, neither party adduces any evidence of the Property and the comparables around the relevant valuation date apart from a few photographs taken around that time. In the circumstances, the Tribunal would have to assume that the situation of the Property and the comparables around the said date are similar to those of today.

31.  Having considered all the evidence adduced in this case, I decide to allow for adjustments of 0%, +10%, +10% and +25% for the Comparables AC1/RC1, AC3/RC2, AC5/RC4 and AC7/RC8 respectively.

Visibility

32.  Ms. Sat opined that visibility should be a factor to be considered as this might affect potential customers to the shop comparables in question. Mr. Lai disagreed on the ground that this would amount to double counting of the location factor.

33.  The Respondent submits that it is the “pedestrian flow on the pavement outside the shop that matters, not that on the opposite side of the road.” Also, in any event, particularly “in a localized neighbourhood such as Nam On Street, which is frequented mostly by residents living nearby, visibility from the opposite side of the road is of no relevance whatsoever.”

34.  However, I agree with Ms. Sat that certain adjustments should be allowed for AC3/RC2 and AC5/RC4 as their visibility from the other side of the street or further away are definitely inferior to the Property. I adopt a downward adjustment of 5% instead of 10% as suggested by Ms. Sat for this factor.

Corner Factor

35.  Ms. Sat opined that a downward adjustment of –3.0% should be warranted for AC3/RC2. Mr. Lai disagreed and said that the factor had already been reflected in the adjustments of return frontage and location. I agree with Mr. Lai and do not allow for this corner factor adjustment for AC3/RC2.

Pavement Width

36.  Ms. Sat adopted an adjustment of +10% for this factor of adjustment for Comparables AC3/RC2 and AC5/RC4 whilst Mr. Lai said that this amounted to double counting of the location factor. Besides, Mr. Lai said that there was no evidence that the wider the pavement width, the higher would be the number of pedestrians patronizing the shop. The Respondent also submits that, “as long as the pavement outside a shop is wide enough for pedestrians to comfortably stop by and shop, it does not really matter how wide or how narrow the pavement is”. Therefore, in the present case, since the pavement outside the Property, as well as those abutting the 4 adopted comparables all allow pedestrians to comfortably stop and do the shopping, no separate adjustment is warranted.

37.  I agree with Mr. Lai and decide not to allow for any adjustment for this factor.

Frontage & depth

38.  Ms. Sat adopted an adjustment of 4% for every 1 m difference in frontage whilst Mr. Lai adopted an adjustment of 2% for every 1 m difference in frontage. Therefore, Mr. Lai’s adjustment was about half of Ms. Sat’s. Moreover, for any difference in frontage of less than 1m, Mr. Sat used a linear approach in arriving at the percentage adjustment but Mr. Lai opined that for a difference of less than 1m, no adjustment should be allowed. Mr. Lai held this view because he said that for any difference of less than 1m, it would be difficult if not impossible for any one to notice the difference. Hence, no adjustment should be warranted.

39.  I accept Ms. Sat’s proposed adjustments for this factor as this appears to me to be more reasonable.

Quantum / Size

40.  The two experts agreed that the larger the shop premises, the lower would be its unit rate. Ms. Sat adopted a rate of 1% for every 1 sq. m. difference in area whilst Mr. Lai adopted a rate of 5% for every 10 sq. m. difference. Mr. Lai further opined that the adjustment for this factor should be a “stepwise” one but not linear. Ms. Sat disagreed and pointed out that the rate as adopted by Mr. Lai would not reflect the small sizes of the adopted comparables.

41.  The main difference arises for AC1/RC1 as the difference in area between the Property and AC1/RC1 is largest. In light of the sizes of the adopted comparables in this case, I prefer to adopt Ms. Sat’s adjustments than Mr. Lai’s as her adopted adjustment percentages appear to me to be more reasonable .

Summary of adjustments adopted by the Tribunal

42.  I summarize in the table below all the adjustments I allow for the adopted comparables.

Comp. Ref.	Head -room	Time	Location	Visibility	Corner Factor	Wide Pavement	Frontage & depth	Quantum / Size	Total
AC1/ RC1	-1.0%	-1.6%	0%	0%	0%	0%	+12.0%	+15.5%	+24.9%
AC3/ RC2	-1.0%	-3.0%	+10.0%	+5.0%	0%	0%	+3.0%	+2.5%	+16.5%
AC5/ RC4	-1.0%	-1.0%	+10.0%	+5.0%	0%	0%	+3.0%	+2.5%	+18.5%
AC7/ RC8	0%	+8.0%	+25.0%	0%	0%	0%	0%	+1.8%	+34.8%

43.  Applying the total adjustment percentages to the unadjusted unit rates of the 4 adopted comparables give the following adjusted unit rates:

Comp. Ref.	Unadjusted unit rate (/ sq. m.)	Total adjustment	Adjusted unit rate (/ sq. m.)
AC1/RC1	$213,871	+24.9%	$267,125
AC3/RC2	$234,009	+16.5%	$272,620
AC5/RC4	$249,610	+18.5%	$295,788
AC7/RC8	$195,688	+34.8%	$263,787
		Average	$274,830

Assessment of the OMV of the Property

44.  I adopt the average of the adjusted unit rates of the 4 comparables, at $274,830er sq. m. and apply that to the Effective Saleable Area of the Property of 10.31 sq. m. in arriving at the OMV of the Property at $2,833,497, which is rounded to $2,834,000.

Orders

45.  Accordingly, I order that the Respondent do pay the Applicants compensation for the resumption of the Property in the sum of $2,834,000. The matters of professional fees, interest and costs shall be adjourned to a date to be fixed by the Registrar, with liberty to apply for any other ancillary and consequential matters.