TOPPY YEAR DEVELOPMENT LTD v. DIRECTOR OF LANDS

LDLR 19 OF 2002

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

Lands Resumption Application No. 19 of 2002

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J U D G M E N T

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Background

1. The subject property known as the Ground Floor including the Mezzanine Floor of 117 Catchick Street, Kennedy Town, Hong Kong (“the Property”) fell within the designated resumption area located at Kennedy Town, New Praya, Hong Kong in which the Property together with many other properties were resumed by the Government under the Lands Resumption Ordinance (“the Ordinance”) vide Government Notification No. 2880 dated 4 May 2000, for the implementation of the Development Proposal H12 by the then Land Development Corporation.

2. On 12 May 2000, the Applicant received a letter from the Lands Department notifying her of the resumption and that the Property would be reverted to the Government on 12 August 2000.  On 26 April 2001, the Government made an offer of compensation in the sum of $1,914,000 in full and final settlement of all claims and costs (except interest and professional fees) for consideration by the Applicant.  The Applicant rejected the offer and eventually applied on 31 December 2002 to this Tribunal for determination of the compensation payable to the Applicant under the Ordinance.  The parties failed to reach any agreement as a result of which the application was fixed for hearing before Deputy Judge Wong and Member Lo of the Lands Tribunal.  At the beginning of the hearing on 5 December 2005, the parties informed the Tribunal that there was no legal issue in this case and the parties would raise no objection if the application was to be heard by the Member of the Tribunal alone.  This was agreed by the Tribunal.

3. In the morning of 5 December 2005, the Tribunal was invited by the parties to attend a joint site inspection of the Property and all the comparables.  Then the two experts called by the parties gave evidence in the afternoon of 5 December 2005 and 6 December 2005 after which on 7 December 2005, the parties gave their final oral submission before the case was adjourned.  This Judgment sets out the Tribunal’s determination of the OMV of the Property and the Orders for the application.

Issues before the Tribunal

4. Prior to the hearing, the parties exchanged their experts’ valuation reports.  Both parties were represented by counsels.  Both parties agreed that the issues before the Tribunal were: -

(a)  the suitable comparables for the valuation of the Property;

(b)  the appropriate adjustments for the comparables; and finally

(c)  the open market value (the “OMV”) of the Property?

5. At the beginning of the hearing, it was also agreed that the compensation payable (excluding interest and professional costs) to the Applicant by the Respondent would be the OMV of the Property as at the relevant date of valuation.  The Applicant did not claim for any other loss.

Summary of the experts’ valuations

6. The two experts called by the parties adopted similar direct sales comparison method of valuation but had differences in opinion on what should be the most suitable comparables and the appropriate adjustments for their comparables.  Their valuations, at $3,634,000 and $2,020,000, are about 80% apart.

7. Mr. Tam Fung-Cheung, a registered professional surveyor called by the Applicant filed two valuation reports, a valuation report dated 8 March 2004 and a supplementary report dated 18 June 2004.  Applying an estimated effective saleable area of 53.8 sq. m. to his estimated average adjusted unit rate of $67,553 sq. m. (based on his adopted seven sales comparables).  Mr. Tam estimated the OMV of the Property at $3,634,351, rounded to $3,634,000.  Mr. Tam also opined that the Applicant was entitled to compensation for disturbance loss in the nature of (i) loss of rental values of both the ground floor and the mezzanine floor portions, and (ii) cost of repurchasing other property by the Applicant.  However, at the beginning of the hearing, the Applicant conceded that the Applicant would adopt the effective saleable area of 53.16 sq. m. as estimated by the Respondent’s expert and would abandon all the previous claims for disturbance loss.  Even with this concession, Mr. Tam’s valuation was only reduced very slightly to $3,591,117.

8. On the other hand, Mr. Lai Wah Chi, a registered professional surveyor called by the Respondent in his valuation report dated 12 January 2004 valued the OMV of the Property at $1,994,000.  He opined that he should restrict himself to the three most suitable comparables only, being the three sales comparables at Hau Wo Street (Comparables ARC1, ARC2 and ARC3 the reference numbers of which were those given by Mr. Lui, counsel for the Applicant in his final written submission).  He arrived at this figure by applying an estimated effective floor area of 53.16 sq. m. to the average of his adjusted unit rates of his three sales comparables at $37,500 per sq. m. arriving at the OMV of $1,993,500, rounded to $1,994,000.

9. In his supplementary valuation report dated 18 June 2004, Mr. Lai reviewed his valuation including revising some of his adjustments for the above said three comparables, as well as seeking to adjust three other comparables (Comparables AC1, AC2 and AC3, again using the reference numbers given by Mr. Lui, counsel for the Applicant).  Mr. Lai estimated the average of his revised, adjusted unit rates of Comparables ARC1, ARC2 and ARC3 to be $37,961 per sq. m., and the average of his adjusted unit rates for Comparables AC1, AC2 and AC3 to be $38,073 per sq. m.  However, on further analysis, Mr. Lai opined that since Comparable AC1, being geographically furthest away from the Property was situated in a location having a character “very different from that around the Property”, it should be discarded as a comparable.  In addition, Mr. Lai also opined that in light of the differences in time between the relevant valuation date and the transaction dates of Comparables AC2 and AC3, which would therefore require “great adjustment in time”, these two comparables should also be discarded.  Moreover, Mr. Lai concluded that even if these three additional comparables as well as another comparable at “26 Praya Kennedy Town” were adopted and taken into account, the average of his adjusted unit rates of all eight comparables was estimated to be $38,859 per sq. m., which was very close to the average of his revised, adjusted unit rates for the three best comparables (i.e. Comparables ARC1, ARC2 and ARC3) at $37,961 per sq. m.  Therefore, in the final analysis, Mr. Lai applied his estimated effective area of the Property to the above average adjusted unit rate based on the three best comparables in arriving as his revised OMV of $2,020,000.      

10. The two experts did not vary further their opinion as well as their valuation during the course of evidence in chief and cross-examination in the hearing. 

Valuation parameters agreed by both parties

11. It was common ground that the date of valuation of the Property was 12 August 2000.  The parties also agreed that the effective area of the Property should be taken as 53.16 sq. m., after taking into account the value of the mezzanine floor by converting that into the effective area of the Property.  There were also no disputes on the factual data, including the effective areas, frontages and headrooms for the Property as well as for all the comparables.

Choice of the best comparables

12. During the hearing, there was no dispute between both parties that the comparable at “26 Praya, Kennedy Town” was not a suitable comparable.  I do not disagree with this conclusion.

13. Belcher’s Street was (and still is) the busiest thoroughfare in Kennedy Town, not only in terms of vehicular traffic but also in terms of pedestrian flow as well.  The experts did not disagree on these facts although they differed in opinion as to whether the differences between the Property and the two comparables fronting onto Belcher’s Street (i.e. Comparable ARC4 and Comparable AC1) would warrant their rejection as suitable comparables in this valuation exercise.  Before adjustments, these two comparables fetched the highest and the second highest unit rates (i.e., $126,662 per sq. m. for Comparable ARC4 and $85,910 per sq. m. for Comparable AC1).  Also, the total adjustments adopted by Mr. Lai for Comparables ARC4 and AC1 were –62% and –55% respectively whilst the total adjustments adopted by Mr. Tam for these two comparables were –43% and –7% respectively. 

14. Therefore, since both experts were of the similar view that Comparable ARC4 warranted substantial overall adjustments of between –43% and –62%, and since Comparable ARC4’s unadjusted unit rate of $126,662 per sq. m. was so substantially higher than those of all the other six comparables (which together fetched an average unadjusted unit rate of only $58,443 per sq. m.), both of them actually agreed that this comparable was substantially different from that of the Property.  For this reason, although Mr. Tam opined that Comparable ARC4 should still be adopted as one of the suitable comparables, I disagree with him but find that this comparable should be discarded.   

15. On the other hand, for the other comparable fronting onto Belcher’s Street, Comparable AC1, Mr. Lai opined that it was also situated in another busy stretch of the street, near its eastern end.  He actually adopted an even more substantial adjustment of –55% for location for this comparable (as against –25% for Comparable ARC4, the other comparable fronting onto Belcher’s Street and –35% for AC2, the Cadogan Street comparable).  On the other hand, Mr. Tam only allowed a relatively lower adjustment of –15% for location of Comparable AC1, similar to what he applied to all but one of the other comparables.  As for the other factors of adjustments as well as the overall adjustment for Comparable AC1, the two experts actually held very different view but most of the difference was attributable to the location factor.  As such, I do not find it necessary to discard Comparable AC1 at the outset. 

16. In fact, I find that Comparable AC1 is so close to the Property in all respects that other than for location and headroom, Mr. Tam did not find it necessary to allow for any adjustment whereas for Mr. Lai, he also did not make adjustment for any factor other than the very substantial adjustment of –55% for location and very minor adjustments of –1% and +1% for age and headroom respectively. 

17. In addition, I do not agree with Mr. Lai that because all the comparables other than the three comparables located at Hau Wo Street (i.e., Comparables ARC1, ARC2 and ARC3) were transacted further away in terms of time, they should be disregarded.  All in all, the dates of their transactions were not too far away as to warrant outright rejection.  Besides, as submitted by the Applicant, the time adjustments estimated by both experts, which were in turn based on indices prepared by the Rating & Valuation Department indicated that no great adjustments for time were required.  Finally, if Mr. Lai’s opinion to discard all other comparables but relying solely on the three transactions at Hau Wo Street were accepted, any possible error in terms of the adopted adjustments for location between the Property and Hau Wo Street comparable would have a very serious bearing on the overall valuation figure. 

18. Therefore, after detailed consideration of all the evidence adduced by the parties, the opinion of the two experts as well as the submission of the two parties, I come to the conclusion that the most suitable comparables should be all the comparables identified, considered and analayzed by the two experts, with the exception of Comparable ARC4 and the comparable at “26 Praya Kennedy Town”.

Adjustments of the chosen comparables

19. The two experts agreed that six factors of adjustments were relevant for the comparables although they held different opinion as to the levels of adjustments as well as, for certain factors, even directions of adjustments.  Before the hearing, the parties informed the Tribunal that the experts had sought to reduce their differences in the adjustments adopted as far as possible as a result of which they had the same view on the appropriate adjustments of time for all the comparables, where necessary.

20. I agree with the experts that the six factors of adjustments were relevant for the comparables.  I summarize below the appropriate adjustments I adopt for the six suitable comparables: -

21. I set out below my reasons for the adoption of appropriate adjustments in respect of the six factors of adjustments: -

Location

I find that the adjustments made for this factor by both experts were too extremes.  Therefore, I generally allow for adjustments somewhat in between their estimates.  In particular, I do not agree that Comparable AC1 warrants a substantial adjustment of –55% as suggested by Mr. Lai.  On the other hand, I also find that the downward adjustment should be more than Mr. Tam’s estimate of the usual –15% as that adopted for most of the other comparables.  At the end, I adopt a percentage of –25% for Comparable AC1.

Age

Mr. Tam opined that regardless of the age of the comparables, no allowance for this factor would be required.  He also suggested that even allowing for the cost of carrying certain outstanding repairing works for the Property, which was older than all the other comparables, the effect would be minimal.  On the other hand, Mr. Lai allowed a downward adjustment of –5% for all comparables other than Comparable AC1 for which he allowed –1%.  On balance, I accept Mr. Lai’s view and the suggested adjustments for all with the exception of Comparable AC1.  As for Comparable AC1, in view of the relatively new age of the building, I find that no adjustment is required.

Frontage

There was agreement between the two experts on this factor, with the exception of Comparable ARC1, ARC2 and AC2.  I adopt Mr. Tam’s estimate for Comparable ARC2 and Mr. Lai’s estimates for Comparables ARC1 and AC2

Headroom

Generally, I find that Mr. Lai’s allowances for the difference in the headroom between the Property and the comparables to be too modest whilst the allowances suggested by Mr. Tam to be too much (with the exception of Comparables AC2 and AC3).  Therefore, for these two comparables, I adopt the suggested adjustments of Mr. Tam whilst for the other comparables I adopt adjustments somewhat in between the suggested adjustments of the two experts. 

Size/Layout

The differences in size between the Property and some comparables are quite substantial.  Therefore, I agree with Mr. Lai that higher adjustments are more appropriate for Comparables ARC1, ARC2 and ARC3.  At the end, I agree to adopt Mr. Lai’s suggested adjustments for these three comparables.  For the other three comparables, I adopt the same estimates suggested by the two experts.

Time

The two experts agreed to adopt the same set of adjustments for all the comparables as far as this factor of adjustment is concerned.  I find it reasonable to adopt their agreed estimates.

22. In summary, I estimate the average of the adjusted unit rates of all the adopted six best comparables to be $53,340 per sq. m. (see above table).  Applying this to the agreed effective area of the Property of 53.16 sq. m., I arrive at a value of $2,835,554, which is rounded to $2,836,000.  This I determine to be the OMV of the Property.

Orders

23. Accordingly, I order that the Respondent do pay the Applicant compensation for the resumption of the Premises in the sum of $2,836,000.  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.