ELTRON DEVELOPMENT LTD v. DIRECTOR OF LANDS

LDLR 4/2013

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LANDS RESUMPTION APPLICATION NO. 4 OF 2013

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J U D G M E N T

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Background

1.  This is an application by the applicant for determination of compensation pursuant to section 10(2)(a) of the Lands Resumption Ordinance, Cap. 124 (“the Ordinance”).  The applicant is the former registered owner of a property comprising as (1) Shop IA (“Shop IA”) on Ground Floor of Chung Nam House, Nos 79-91 Hip Wo Street and Nos 50-58 Mut Wah Street, Kowloon, Hong Kong (“the Building”) and (2) Shop IB (“Shop IB”) on Ground Floor of the Building both registered in the Land Registry as Kwun Tong Inland Lot No 337 (“the Lot”).

2.  Shop IA and Shop IB used to be a single shop unit as registered in the Land Registry as Shop I on Ground Floor of the Building (“Shop I”).  By an agreement for sale and purchase registered in the Land Registry with memorial no UB 7034801 (“the Agreement for Sale and Purchase”), Shop I was purported to be sold to Mr Lai Chik Kun Michael (“Mr Lai”), a director of the applicant. Later, by a nomination agreement dated 8 October 1997, Mr Lai’s interest in Shop I was transferred to the applicant.

3.  Then by a Deed of Partition dated 13 May 2011 registered in the Land Registry with memorial no 11072101680013 (“the Deed of Partition”), Shop I was partitioned into Shop IA and Shop IB (hereinafter collectively referred to as “the Property”).

4.  By a notice of resumption dated 13 February 2012 and published in GN 1296, the Government informed the applicant that the Property would be resumed for implementation of the First Phase of the Kwun Tong Town Centre – Main Site Development Scheme by the Urban Renewal Authority after the expiration of 3 months from the date of the affixing of the notice.  The notice of resumption was affixed to the Property on 2 March 2012 and therefore the Property reverted to the Government at midnight on 2 June 2012.

5.  The applicant received from the Government the offer of $21,532,000 dated 22 June 2012, which includes the value of the Property at $20,764,000. On or about 18 December 2013, the Government increased the offer to $24,097,000 in full and final settlement of all claims arising out of the provisions of the Ordinance or otherwise arising out of the resumption of the Property.

6.  The applicant did not accept the offer. On 27 December 2013, the applicant filed a Notice of Application to Determine Compensation for Land Resumed under the Ordinance requiring the Lands Tribunal to determine the amount of compensation payable in respect of the resumption of the Property.

7.  The applicant and the respondent have no dispute that under 10(2)(a) of the Ordinance, the basis of compensation should be the market value of the Property as at the date of resumption, ie 2 June 2012. They further agreed that the compensation should be determined on the basis of vacant possession despite the Property was subject to a tenancy with some 4 months unexpired as at the date of resumption. However, they cannot agree at the quantum. This leads also to the question on whether the market value of the Property should be determined on a 2-shop basis and/or 1-shop basis. This is dealt with first under the captioned trial before the amount of interest and professional fees under section 17(3) and 10(2)(e)(ii) respectively of the Ordinance being also claimed by the applicant could be settled.

The Evidence

8.  Ms Jo CW Siu (“Ms Siu”) appears for the applicant and Mr Jenkin Suen (“Mr Suen”) appears for the respondent for the purpose of the present application.

9.  On behalf of the applicant, Ms Sat Wei Ling (“Ms Sat”) produced an expert report on valuation dated 14 May 2014 assessing the market value of the Property on the basis of 2 shops in the total sum of $45,210,000 whereas Mr David Nicholas Faulkner (“Mr Faulkner”), on behalf of the respondent, produced an expert report on valuation dated 13 May 2014 assessing the market value of the Property on the basis of single-shop in the sum of $23,075,000.

10.  As a fallback, Ms Sat produced a supplemental expert report dated 14 July 2014 assessing the market value of the Property on the basis of 1 shop in the sum of $35,067,000. Mr Faulkner also produced a supplementary expert report dated 10 July 2014 focusing however only on comments on Ms Sat’s valuation of 14 May 2014. He maintained his valuation of the Property at $23,075,000 as at 2 June 2012.

11.  In addition, Messrs Sat and Faulkner have prepared a joint statement dated 11 May 2015 (“the Joint Statement”) setting out the areas of agreement and disagreement basically on the particulars of the Property and the comparables to be referred to by the experts. Whereas Ms Sat has revised her valuation both on the 2-shop basis and on the 1-shop basis to $46,200,000 and $39,020,000 respectively, Mr Faulkner, in addition to revising his 1-shop valuation to $23,150,000, produced an alternative valuation on 2-shop basis at $21,260,000.

Particulars of the Property

12.  The Building, completed in 1965 with 9 storeys, was situated near the junction of Mut Wah Street and Hip Wo Street.

13.  Hip Wo Street is a main distributor leading from Kwun Tong Town Centre (which was better known as Yue Man Square) to the upper residential district of Kwun Tong and Sau Mau Ping. There were few shops on the western side of Hip Wo Street and no shops on the eastern side.  The experts agree that pedestrians walking from Yue Man Square to the residential district to the north would also take Fu Yan Street and then turn right or left onto Mut Wah Street which is a local distributor with shops on both sides serving as the main shopping area second only to Kwun Tong Town Centre.  By reference to the exhibits of photographs submitted as well as the joint site inspection, Mut Wah Street appears to be a busy shopping street served by a wide variety of public transport including numerous bus routes.  This street is favoured by banks, jewellery shops as well as a wide variety of local trades and restaurants etc.  Pedestrians walking from Yue Man Square to the north might alternatively take Hong Ning Road which has however a relatively steep gradient; pedestrian flow between Yue Man Square and Mut Wah Street on the eastern side of this section of Hong Ning Road was perhaps interrupted because of the presence of a children playground though at its junction with Mut Wah Street, a McDonald's Restaurant was present.

14.  Prior to the sub-division or partition afore-mentioned, the Property comprises one of the twelve ground floor shop units of the Building arranged like a L-shape with one side abutting Mut Wah Street and the other side abutting Hip Wo Street; though the Property fronted onto Mut Wah Street, it was situated near the corner where the two streets meet and was supposed to have a return frontage onto an open square which was a few steps below street level.  By reference to a photograph taken on 22 April 2012[1], however, this return frontage, if any, was totally obstructed or blocked by a toy shop in the front. When Mr Lai was called to give evidence on 18 May 2015, he confirmed in cross-examination that the toy shop was there when he or the applicant acquired the Property in 1997 and neither he nor the applicant took any action to remove the toy shop.

15.  According to Mr Lai, nevertheless, when the applicant purchased the Property in 1997, the Property had been physically sub-divided into 2 portions.  For instance, by a tenancy agreement dated 11 April 1997, a portion which approximately corresponded to Shop IA was let to a Cho Kwai Chee who operated a clinic for a term of 2 years from 1 July 1997 to 30 June 1999; the remaining portion which approximately corresponded to Shop IB was let to a jewellery shop by a tenancy agreement dated 9 April 1997 also for a term of two years from 25 April 1997 to 24 April 1999.

16.  It is the evidence of Mr Lai that the premises to the west of the Property were then occupied by Kwong On Bank. From the photographs at Exhibit A1 and the map at Exhibit R6, just prior to the resumption, next to the bank premises to the further west was a famous multiple for clothing, then a shoes store, a restaurant, another bank[2], another restaurant, a Saint Honore Cake Shop etc.

17.  It is also the evidence of Mr Lai that in or about 1998, the predecessor of the Urban Renewal Authority, ie the Land Development Corporation, announced that it would launch the Kwun Tong Town Centre redevelopment project.  In fear of the prospect of resumption, Mr Lai suggests though the applicant or its associates are sophisticated retail shop investors in the area, the applicant experienced difficulties in seeking high rent for the Property when the tenancies in respect of the two portions expired[3]. Then on 28 October 2000, the applicant managed to enter into a tenancy agreement for letting the Property as a whole to Hang Fook Jewellery & Gold Limited (“Hang Fook Jewellery”) for a term of 3 years from 16 October 2000 to 15 October 2003.  This tenancy had been subsequently renewed and Hang Fook Jewellery remained as the only tenant of the Property until the date of reversion notwithstanding the Deed of Partition.

18.  In spite of the above, Mr Lai suggests that should the applicant intend to rebuild the partition wall, such works can be done easily at minimal costs[4] without prior approval from the Building Authority.  Mr Lai refers to an Architect’s Certificate dated 6 October 1997 in which Mr Michael WK Yuen, an Authorised Person, took the view that the physical subdivision of the Property into 2 portions would fall within exempted works under the Buildings Ordinance.

19.  The other particulars of the Property, inter alia, are agreed between the parties as per the Joint Statement as follows:

The Comparables

20.  Pursuant to the Joint Statement, the two experts agree the following comparables to be adopted for valuation on 2-shop basis:

* The comparables with the prefix “A” are those adopted by Ms Sat whereas the comparables with the prefix “R” are those adopted by Mr Faulkner.

21.  In fact, the above set of comparables adopted by Mr Faulkner is the same set of comparables adopted by him on the 1-shop basis.  On this latter basis, Ms Sat relies on a different set of comparables as her fallback position.  In this regard, Ms Sat actually adopts one comparable used by Mr Faulkner, ie R2 which also had a subsequent transaction approximately 1 year later, ie A2.5:

22.  The two experts have also set out the adjustment factors that they agreed to be relevant for the purpose of valuation. For some non-disputed adjustment factors, they could even agree on the degree of adjustment, a practice that should be highly encouraged. A summary of their views is set out below:

Analysis of Comparables

23.  Indeed, such debate on whether the valuation of a property should be assessed on a 2-shop basis and/or on a 1-shop basis arose in Mingo Properties Limited v the Director of Lands, LDLR 6 of 2005 (unreported, 26 February 2007) (“Mingo Properties”) and Data Key Limited v Director of Lands, LDLR 6 of 2009 (unreported, 5 August, 2011) (“Data Key”).  Mingo Properties is particularly comparable with the present case in that the actual ownership and occupation of the property to be valued had been for use as one shop for 15 years before the date of valuation.  In both cases, the Lands Tribunal observed, inter alia, that when the summation of the values of the two portions would give rise to a higher value, the 2-shop basis should be preferred to the value of the two portions as a single unit in determining the market value of the two portions; this accords with the principle of determining the “the highest and best use” of properties.

24.  For the above reason, I proceed initially with the determination of the market value of the Property on the 2-shop basis assumption.

Comparable A1.1

25.  This comparable is situated at the busiest section of Hong Ning Road close to a pedestrian crossing. In comparison, this is at a better location than the Property where, by reference to the location plan and photos exhibited[5], parade window shopping would be discouraged by the break of open space close to the junction of Mut Wah Street and Hip Wo Street.  While guard railings were erected in front of the Property, pedestrians crossing Mut Wah Street without using the traffic light crossings further down the street across is possible when the guard railings stopped.[6]  This means pedestrians walking up Mut Wah Street, from Fu Yan Street or Hong Ning Road, could be attracted to cross the road if their destination is not restricted to passing the section in front of the Property, say to the pedestrian crossings across Mut Wah Street or Hip Wo Street where a bus terminal is located

26.  Upon our joint site inspection, I noted this comparable has been combined and occupied together with Shop 4 and Portion A of Shop 21 in the rear as a mahjong parlour.  By reference to the land search record of these shop units, the purchaser of this comparable A1.1 had been the owner of Shop 4 and Portion A of Shop 21 since June 2005, ie some 7 years before the purchase.  No particulars or information regarding the acquisition process was provided.  However, I note Shop 4 and Portion A of Shop 21 altogether are much larger in size than this comparable; the acquisition of the comparable is therefore extremely crucial and advantageous from a tactical perspective since it opens up  Portion A of Shop 21 and nearly doubles the frontage of the entire unit. This transaction is tainted with the possibility of an additional bid from a “special purchaser” ie the owner of Shop 4 and Portion A of Shop 21 who would like to expand his shop space to accommodate a mahjong parlour.  The purchaser might be more willing to pay a premium to secure this comparable.

27.  Although I am skeptical of the reliability of this comparable, I continue to look at the analysis provided by Ms Sat as follows:

* The corresponding adjustments proposed by Mr Faulkner are shown in parentheses

28.  Whereas the two experts do not have dispute on the time adjustment, their views are wide apart on the adjustment on location: Ms Sat suggests -25% and Mr Faulkner suggests -55%.  I have also stated in §25 above that this comparable occupies a much better location but I do not agree with the adjustment proposed by Mr Faulkner; if the magnitude of his suggestion be correct, this comparable should no longer be a comparable at all.  I would only agree -30%.

29.  I have mentioned that the return frontage, if any, of the Property was totally obstructed or blocked by a toy shop.  When the trial proceeded, it appears that the toy shop was there pursuant to a hawkers’ licence issued under the Hawker Regulation, Cap 132AI.

30.  In Tsang Foo Keung & Another v Chu Jim Mi Jimmy & Others, HCA 7140/1995 (unreported, 30 June 2015), it appears that such a licence could be succeeded by the next of kin of the licensee upon his death although Reg 19(2) of the Hawker Regulation suggests otherwise. There has also been a long-standing practice to require fixed pitch licence holders to vacate their pitch only if the pitch is on private land, and the owner of the land no longer consents to the presence of the pitch on the land.  See Wu Chee-ling v Urban Council [1996] 1 HKLRD 282. Here, Ms Siu concedes that the toy shop was occupying public Government land.

31.  In Inglory Limited v The Director of Food and Environmental Hygiene, HCAL 87/2011 (unreported, 24 May 2012), the applicant was upset by the alleged encroachment of such a licensed newspaper stall beyond the limits of the permitted stall area.  It was the respondent’s case that it was not their departmental policies to cancel the licence due to conviction of offences relating to obstruction notwithstanding its power under section 125 of the the Public Health and Municipal Services Ordinance.  The respondent there also cited that notwithstanding repeated prosecutions under that section, none of the Magistrates deciding the cases had ever suggested or recommended suspension or cancellation of the licence.  In any event, Lam J (as he then was) was agreeable to the flexible approach of the respondent and the application for judicial review was dismissed.

32.  By reference to §26 of the judgment, it suffices that the Director of Food and Environmental Hygiene (“DFEH”) had given consideration to the opinion of cancellation.  Whereas the applicant’s challenge was premised on the DFEH renouncing the power conferred upon him by the statute (§33 of the judgment), the underlying premise is that the power to cancel the licence lies squarely with the government and the government was entitled to reject taking up the option of cancellation.

33.  Returning to the present case, I note the applicant, even when it became the registered owner of the Property in 1997, saw fit to let the toy shop to continue its status quo.  During cross-examination, Ms Sat conceded she was not aware of and had not allowed for the availability of return frontage in her reports until the preparation of the Joint Statement dated 11 May 2015.  Even at trial she had no idea or knowledge of the prospect of how such a licence could be terminated. Bearing in mind the above, I consider there would be remote prospect of the Property or Shop IA ever enjoying the return frontage if there were no resumption; its value enhancement because of the return frontage should as well be disregarded on the basis of market value.  If this be the case, I note Mr Faulkner has no dispute on the frontage adjustments adopted by Ms Sat.

34.  The next area of difference between the two experts is on quantum adjustment.  Basically their differences are derived from Ms Sat adopting 1% per 1 sq m difference whereas Mr Faulkner adopt the same percentage adjustment but for 2 sq m difference.  It is however noted that Ms Sat also adopt 1% per 2 sq m difference if the assessment be on the single-shop basis; that means Ms Sat considers such more sensitive adjustment is required when the shop area is very small.  I agree with Ms Sat’s approach.

35.  Lastly, this comparable has some 4 steps difference above the pavement level or a prospective customer had to climb the few steps to reach the inside. Ms Sat allows an adjustment of 2% whereas Mr Faulkner considers such adjustment not necessary. I concurs with Ms Sat that the presence of these steps inhibits the accessibility of the premises and discourages prospective customers from entering inside.

36.  In light of the above, if this comparable is otherwise acceptable for the purpose of comparison, its adjusted unit rate should be as follows:

Comparable A1.2

37.  This comparable is situated at the heart of the wet market area where, I agree with Mr Faulkner, there is substantial difference in trading potential and locality from the Property which fronted onto the main street of Mut Wah Street.  In any event, Mr Faulkner suggests in view of the limited trades mix permissible around the wet market, on balance, he has assigned no adjustment for location in respect of this comparable.

38.  Although during our joint site inspection, I noted a barbecued meat shop is also located obliquely across the road from the Property, I am not convinced that the occupier of this comparable, being a fish stall, would be willing to be relocated at the Property, not to mention paying the similar level of rental.  For these shops within the wet market area, the depth and area are not so important as customers would not go inside.  While I agree with Mr Faulkner that it is too difficult to compare apple with orange, I do not agree that there should be no adjustment for location.  There should be advantage for the economies of agglomeration of trades.

39.  Thus for the purpose of checking, I proceed to analyse this sale, adopting the -10% adjustment for location but otherwise adopting the same adjustments for other factors proposed by Ms Sat.  The result of the analysis would be as follows:

Comparable A1.3

40.  This comparable, which was only introduced additionally at the beginning of the trial, comprises a corner unit situated next to Comparable A1.2 and is occupied as a butcher’s shop.  While I have commented Comparable A1.2 is not a good comparable, the comparability of this “comparable” is further worse as it is a corner unit with additional advantage not being enjoyed by the Property.  In Data Key, supra, the Lands Tribunal has remarked “It is always the best practice in valuation to compare properties with the minimum adjustments.”

41.  I discard this Comparable A1.3 as it is not a comparable at all, especially when I have included Comparable A1.2 for reference.

Comparable R1

42.  This comparable is situated further away from the Mut Wah Street district, being at a quiet location despite it is in proximity to a public light bus terminal.  Whereas there is no rule in principle against using comparables that are located some distance away from the Property, if there are good comparables situated close to the Property, why should comparables further away be adopted?  Further worse, this comparable appears to be occupied together with the adjoining ground floor unit, a phenomenon which casts doubt on its suitability like Comparable A1.1.  I agree with Ms Sat that this comparable should be discarded..

Comparable R2 (which is also A2.1)

43.  This comparable is occupied as a restaurant at a raised platform along this section of Hip Wo Street. That is, pedestrian going along Hip Wo Street trying to reach this platform has to take a flight of steps and  this should justify a +5% adjustment for accessibility.  I agree therefore with the total adjustment of 20% for location as proposed by Ms Sat.

44.  I agree with the frontage adjustment proposed by the two experts but I prefer Mr Faulkner’s 1% per 2 sq m difference when the size difference between the two shops is large, ie +14.5%; there should be a limit in applying Ms Sat’s formula of  1% per 1 sq m difference.  On the other hand, as this comparable has a depth as much as 10 metres or thereabouts whereas the Property has only 4.91 metres, I agree with the adjustment of 4% for layout proposed by Ms Sat.  Such adjustment was also conceded by Mr Faulkner during cross-examination.

45.  Thus my analysis for this comparable is as follows:

46.  At this juncture, it is interesting to note that if this comparable is analyzed on a single-shop basis, the result would be contradictory to the assumption that the summation of the values of the two portions would give rise to a higher value:

47.  Ms Siu suggests that if Ms Sat’s adjustment at 1% per 1 sq m difference be adopted on the 2-shop basis, the result would be consistent, being $1,114,874/sq m for Shop IA for instance. However, I am not convinced that the adjusted result should have been so radically different because of the subdivision; otherwise, all shop owners would have divided their shops into the smallest units, a phenomenon which is not reflected in the market at least in this section of Mut Wah Street.

48.  It appears that the embarrassing result occurs only when too much emphasis is placed on the adjustment for frontage (eg a difference between -6.7% and 4.9% or 11.6% for Shop IA).  The Tribunal has indeed in Supergoal Investment Limited v Five F Ming House Limited & Others, LDCS 46000/2011 [2014] 1 HKLRD 286 criticized the expert in applying any mechanistic formula in valuation of properties.  At §94 of the judgment, the Tribunal remarked:

“In the case of valuation of a shop, it is well understood that a shop with a wider street frontage (and hence, a bigger shop window) is more valuable than a shop of the same area but with a narrower shop front and a greater depth. This explains why, sometimes, an adjustment for the depth to frontage ratio is required. However, this does not mean that the combination of, say, two standard sized shops of equal frontage and depth (thus yielding 1/2^nd the depth to frontage ratio) would justify a higher unit price. Mechanical application of depth to frontage adjustments clearly defies common sense and market expectation that retail shops with long shop fronts can be subdivided and let/sold more profitably (in terms of unit rate) in parts.”

49.  Of course, at the footnote of the above citation, it was stated:

“In contrast, reverse quantum, i.e. an increase in value for size, may otherwise occur when there is shortage of large units in a locality or where national multiples are prepared to pay a premium in competition for securing their presence.” (emphasis added)

50.  In the meantime, in Tin Kung Investment Limited v Secretary for Transport, LDRW 16 of 2001, (unreported, 29 June 2004), the Lands Tribunal commented that:

‘The number of factors adopted by AW for adjustment is 11 and later reduced to 10 with some original factors taken out and substituted with others. The greatest amount of adjustment made for a single factor is 23% and the greatest in aggregate for a Comparable is 51.1%. The number of factors contained in RW's valuation reports is 9. The greatest amount of adjustment he has proposed for a single factor is 16% and the greatest amount in aggregate is 31.5%

Putting before anyone these statistics, there must be the concern whether the Comparables selected for valuation are indeed suitable for comparison.  Making adjustment to compensate for the difference between two properties is not a perfect and effective valuation tool.  What the experts have built in the valuation formula are largely subjective views (and such formula may be manipulated to arrive at an intended result). The subjective views tend to cause error, the risk of which goes in proportion to the quantum of adjustment made. Its application therefore is with limitation.  It is suitable for use only if the two properties are in great similar but in minor place different. In the case where a large number of factors and amount of adjustment as the above are applied in the valuation, the risk of getting the valuation wrong is high. If this fundamental principle of application is not observed, the price of a commercial property in a central business area can be absurdly taken to find out the value of a piece of farmland in the green belt zone through adjustments.  The great total number of factors/amount of adjustment adopted is a sheer indication of the unsuitability of a property for use for comparison to the other. In this regard, the Respondent's counsel has rightly quoted HH Judge Cruden's view in his book entitled "Land Compensation and Valuation Law in Hong Kong".’

51.  In the present case, although the number of adjustment factors does not come up to as much as 9 or 10, the resulting adjustments amount to 52.4% to 57.0% respectively[7].  This points to an alarming signal to doubt whether this transaction can be relied on as a comparable at all.

Comparable R3

52.  This comparable is situated at the upper section of Hong Ning Road (ie further up the steep sloping gradient) with a frontage of 5.03 metres to Hong Ning Road and also a return frontage of 2.4 metres to Shung Yan Street which leads to a Municipal Services Building where a formal wet market is situated.

53.  Looking at its size and layout, I see no reason why if the Property could be subdivided into two smaller shops, this comparable cannot be likewise subdivided.  Therefore, when comparing like with like, there is no need to analyse this comparable vis-a-vis the Property on a 2-shop basis especially when they are roughly of the same size (for instance, when the quantum adjustment suggested by Mr Faulkner is only 1.7%).

54.  In terms of location, I agree with Mr Faulkner that this comparable is inferior; however, I consider the magnitude of adjustment should be much larger.  Although Mr Suen suggests that this section of Hong Ning Road has also a Citibank branch and some few other financial institutions, the latter are finance companies which usually have a much narrower clientele than banks.  Also, they are located further down the road and more readily accessible.  In any event, this comparable is located near the top of the section of the road which is much quieter.  During our site inspection, this comparable unit was occupied by a chiropractor but it is definitely not suitable as a jewellery shop like the Property.  The minimum adjustment I consider appropriate is 50% instead of the mere 20% proposed by Mr Faulkner.

55.  The other adjustment I would add to Mr Faulkner’s at trial bundle (II) page 342-3 would be the 4% for layout because this comparable also has a depth of about 8.4 metres.  Thus my assessment of the market value of the Property on the basis of this comparable is as follows:

56.  Like my comment in §28 and §51 above, the reliability of this comparable is in doubt when the magnitude of location adjustment or resulting adjustment is so high.

Comparables R4and R5

57.  These two comparables are adjoining shops opposite the Municipal Services Building mentioned above.  I agree that because of their relatively narrow frontages when compared with the Property, it is more difficult to be subdivided and therefore should be analysed on a two-shop basis, assuming once again summation of the values of the two portions would give rise to a higher value.

58.  As regards time adjustment, I note the transaction occurred more than half a year earlier than the relevant date. R5 in particular took place nearly as much as 1 year earlier in respect of which the adjustment as agreed by the experts comes up to 26.1% by reference to the Private Retail Price Index of RVD.  Nevertheless, the preparation of an index is more or less an averaging exercise and there is no guarantee that the price trend for the subject location or property necessarily follows the index.  This is particularly the case for shop premises where a slight variation in location would lead to significant difference in value. Therefore, the larger the extent of the adjustment, the higher probability of error would ensue.

59.  I do not agree with the adjustment for location proposed by Mr Faulkner (-20%) as I consider the subject appears to be better though the location between the Property and this comparable is comparatively similar[8]. Pedestrians may be deterred from walking up the sloping street (ie this section of Fu Yan Street) unless they are determined to reach the Municipal Services Building or the residential area in the vicinity.

60.  I would however accept the 10% adjustment proposed by Mr Faulkner for visibility when pedestrians’ view to these shops is largely blocked by the minibus station in front of it. Subject to my comment below, I would as well adopt the other adjustments proposed by him at trial bundle (II) page 341-4 though I would add an extra adjustment of 10% for layout because the depth of these comparables extends to 15 metres which is some three times as much as the Property.  My analysis based on Mr Faulkner’s adjustments would then become:

61.  Like what I have commented at §51 above, the reliability of these two comparables is in doubt when the magnitude of resulting adjustments are so high.

62.  Thus, although I have analysed as much as 6 comparables (excluding comparables A1.3 and R1), they are not reliable for various reasons. Particularly in respect of the comparables put forward by Mr Faulkner, either they should be discarded right away (eg R1 or possibly R3) or they have to be placed little weight for the reasons that they are significantly different in terms of locality or very substantial adjustments are required if the comparables are to be included.

63.  Then I proceed to consider the further comparables A2.2 – A2.5 introduced by Ms Sat as her fallback on a single-shop based.

Comparable A2.2

64.  This comparable appears like a quadrant fronting onto the prominent junction of Hong Ning Road and Ngau Tau Kok Road between Yue Man Square and Mut Wah Street. Although this comparable has such an awkward shape, this may to a certain extent be compensated by having slightly larger size, rendering it possible to be sub-divided into two portions like the Property.

65.  Whereas this comparable is suitable for comparing like with like with the Property in terms of its size, regardless of whether it is subdivided or not,  there is marked difference in opinion between the two experts on the adjustment for location: Ms Sat proposes -25% and Mr Faulkner proposes -55%.  Remember I have allowed -30% for comparable A1.1 which is not too far away from this comparable, I would therefore allow the same -30% for this comparable.

66.  The adjustments for other factors are agreed by the two experts except Ms Sat proposes additional adjustments for the “return frontage” and layout at 9.4% and 3% respectively.  I consider the frontage of this comparable is curved in shape but do not agree that it has a return frontage.  I would therefore allow nothing for it.  I accept however the proposed adjustment for layout at 3%.

67.  Thus, the result of my analysis is as follows:

Comparable A2.3

68.  In terms of location, this appears to be the best comparable as it is located obliquely opposite the Property across Mut Wah Street though I agree that this northern side of Mut Wah Street is more busy. The northern side of Mut Wah Street is present with all branded jewellery shops but based on the evidence of Mr Lai and the photo no 5 in Exhibit R4, Hang Fook Jewellery appears to be the only jewellery shop on the southern side prior to resumption.  This may be explicable as I noted in §25 above that the parades of shops were broken by the open space off the junction of Mut Wah Street and Hip Wo Street.  Ms Sat proposed an adjustment of -10% when Mr Faulkner proposes -40%.  I consider -20% is more reasonable.

69.  Nevertheless, this comparable has a mere frontage about 3.87 metres and a depth of 11 metres or thereabout, rendering it not too suitable for subdivision into two smaller units.  I would first analyse this comparable on a two-shop basis like that for comparable R2.  The result of my analysis is as follows:

70.  Again, my analysis on the single-shop basis is as follows:

Comparable A2.4

71.  This comparable, like comparable A2.2, comprises a corner unit of quadrant shape fronting onto the junction of Mut Wah Street and Fu Yan Street.  Its saleable area of 33.44 sq m is very similar to that 37.16 sq m for comparable A2.2 and close to the total saleable area of the Property at 27.8 sq m.  Likewise, I consider therefore this comparable can be easily sub-divided into two smaller units and can be directly comparable to the Property regardless of whether it has been sub-divided or not.

72.  I also consider the location adjustment should be -30%. My analysis, following that proposed by Ms Sat, is as follows:

Comparable A2.5

73.  This is actually in respect of the same property as Comparable A2.1/R2 but a later transaction some 7 months after the relevant date.  As to the use of a comparable transacted after the valuation date, it is well established that a market transaction concluded after the valuation date does not per se bar it from being considered as a comparable[9].

74.  Indeed, the time adjustment in respect of this transaction is even smaller at -16.0% instead of 20.8% for Comparable A2.1/R2.  Thus every other adjustment otherwise being the same as that for Comparable A2.1/R2, my analysis on the 2-shop basis is as follows:

75.  Alternatively, my analysis on the single-shop basis is as follows:

The Valuation

76.  The following shows the analysed result of all the comparables:

77.  From the above table, the analysed result falls into two ranges: one slightly above $1,400,000/sq m and the other around $1,100,000/sq m or below.  It is unfortunate that nearly all the comparables put forward by the parties on the 2-shop basis are not reliable.  Thus the comparables left are A2.2, A2.3, A2.4 and A2.5 with adjusted unit prices ranging from $1,104,817/sq m to $1,467,777/sq m.  In comparison, they are comparables with least adjustments so that the extent of arbitraries, distortions, variances and inaccuracies can be minimized[10].

78.  In this regard, the analysed result for comparable A1.1 appears not to be outside the range and I am prepared to add it back to the comparable list.

79.  Also from the result, it appears that the difference between the 2-shop basis and the single-shop basis is not significant.  I agree that there would be separate market demands for mini-shops as well as ordinary shops but here I find the demand for mini-shops is not dominant.

80.  Firstly, although the applicant alleges that threat of resumption since 1997/98 would affect the marketability of the Property, the applicant managed to secure a high-end tenant, Hang Fook Jewellery, in 2000 and such state of affairs continued for 12 years until the resumption in 2012.  As Mr Lai has conceded the applicant or its associates are sophisticated retail shop investors in the area, there is no reason why the Property could not be let to two separate tenants if such would provide a higher yield.  Here, I agree with the submission of Mr Suen that if the threat of resumption has any impact on the use of the Property, the demand for mini-shops or ordinary shops would be similarly affected; indeed, I consider the demand for ordinary shops would have been more affected because small or mini-shops tend to be more versatile, requiring less capital investment and usually less concerned with the threat of resumption for years to come.

81.  Secondly, by reference to the Photo Nos 5 & 6 in Exhibit R4 and observation from my inspection, both sides of Mut Wah Street were/are occupied by ordinary shops instead of the mini-ones, a phenomenon which demonstrates that the latter have been unable to outbid the former.

82.  Thus, the assumption I made in §24 above is rebutted and the existing use as jewellery shop should be regarded the highest and best use of the Property and therefore comparable A1.2 (or comparable A1.3) should not be regarded as comparable.  This being the case, it is the evidence of Mr Lai that for such a small size of the Property, a jewellery shop like Hang Fook Jewellery would not bother to have an additional return frontage for security reason; this reinforces my view that the value of the return frontage, if any, apart from the reasons mentioned in §33 above, should be minimal.

83.  Thus I have altogether five comparables as follows:

* The average of the analysis for this comparable is taken because of its small size, it is not appropriate to compare with the Property on a single-shop basis.

84.  Therefore, the market value of the Property is assessed as follows:

27.8sq m x $$1,259,399/sq m =	$35,011,292
Say	$35,000,000

Conclusion

85.  I have determined the value of the Property, for the purpose of section 10(2)(a) of the Lands Resumption Ordinance, in the sum of $35,000,000.

Orders

86.  Accordingly, I order that the respondent do pay the applicant compensation for the Property in the sum of $35,000,000. The matters of professional fees, interest and costs shall be adjourned to a date to be fixed, with liberty to apply for any other ancillary and consequential matters.

[1] 2^nd photo in Exhibit R1.

[2] Chiyu Banking Corporation Limited.

[3] It is the evidence of Mr Lai that Cho Kwai Chee did not exercise the renewal option reserved in the tenancy agreement for a further term of 2 years though he stayed over for a few months.

[4] Mr Lai states the amount would be about $10,000 in 1997 whereas Mr Faulkner estimates the amount would be about $50,000 as at the relevant date.

[5] See particularly the last photo in Exhibit A1 and the first photo in Exhibit A2.

[6] Exhibit A1. 

[7] If Ms Sat’s adjustment at 1% per 1 sq m difference be adopted, the resulting adjustments will even be more drastic.

[8] R5 is occupied by a Saint Honore Cake Shop which might have been relocated from its previous location from Mut Wah Street after the resumption.

[9] See Good Faith Properties Limited and Others v Cibean Development Company Limited, LDCS 42000/2011 (unreported, dated 31 May 2013), at §97 and Cruden, Gordon N, in Land Compensation and Valuation Law in Hong Kong, 3^rd edition (2009), pp. 606-608.

[10] Although the total adjustment for comparable A2.4 appears to be large, no time adjustment is required and the main adjustment comes from that for location which I find is consistent with that for comparables A2.2 and A2.3, the latter of which being closest to the Property.