Asia Rich Incorporation Ltd and Others v. Wealth Step Holdings Ltd and Another

LDCS 15000/2019

[2023] HKLdT 9

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

LAND COMPULSORY SALE MAIN APPLICATION NO 15000 OF 2019

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BETWEEN

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Before: Mr Alex Ng, Member of the Lands Tribunal

Dates of Trial: 8 – 12 and 15 – 18 August 2022

Date of Written Closing Submissions: 8 September 2022

Dates of Reply Submissions: 22 September and 6 October 2022

Date of Judgment: 1 February 2023

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JUDGMENT

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BACKGROUND

1.This is the applicants’ application for an order for sale, for the purposes of redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance, Cap 545 (“the Ordinance”), of all the undivided shares of and in Kowloon Inland Lot No 7306 (“the Lot”) together with the building erected thereon known as Nos 43, 45, 47, 47A, 49 and 49A Hankow Road, Kowloon (“the Building”).

2.The Building is an 11-storey commercial/residential composite building and is served by 2 lifts and 2 common staircases. Occupation permit No K69/59 was issued for the Building on 24 March 1959, granting permission to occupy its ground floor as shops and arcade for non-domestic use and its 1^st floor to 10^th floor as 9 European type flats per floor for domestic use. According to the approved building plans of the Building, there are 5 street shops (i.e. Shop Nos 1 – 5) facing Hankow Road and 19 arcade shops (i.e. Shop Nos 6 – 24) planned on ground floor, and 9 domestic units (i.e. Units A – I) planned on each upper floor from 1^st floor to 10^th floor.

3.The Lot together with the Building standing thereon is allocated 114 undivided shares. Each of the shop units and domestic units is given 1 undivided share, making up a total of 114 undivided shares.

SECTION 3 OF THE ORDINANCE – OWNERSHIP OF THE APPLICANTS

4.At the time of filing of the Notice of Application (“NOA”) on 29 April 2019, there were 15 respondents and the applicants owned 88.5965% (i.e. 101 out of the total 114) undivided shares in the Lot, more than the threshold of 80% required for building aged 50 years or above.

5.After the filing of the NOA, the applicants acquired respective units and interests from 12 respondents (i.e. 1^st, 2^nd, 3^rd, 5^th, 6^th, 7^th, 8^th, 10^th, 11^th, 12^th, 13^th and 14^th respondents) and subsequently discontinued the proceedings against them. The applicants have also discontinued the proceedings against the 15^th respondent, whose interest (if any) has already been represented and reflected in the capacity of the 3^rd respondent.

6.Section 3(1) of the Ordinance prescribes that the minimum percentage of undivided shares that an applicant or applicants should possess before making an application under the Ordinance is 90%.

7.Section 3(5) of the Ordinance provides that the Chief Executive in Council may, by notice in the Gazette, specify a lower percentage in respect of a lot belonging to a class of lots specified in that notice.

8.The Land (Compulsory Sale for Redevelopment) (Specification of Lower Percentage) Notice, made under section 3(5) of the Ordinance (“the Notice”), was gazetted on 22 January 2010 and came into operation on 1 April 2010. Section 3 of the Notice lowered the threshold for compulsory sale of specified classes of lots from 90% to 80%. Those classes of lots include:

“a lot with each of the buildings erected on the lot issued with an occupation permit at least 50 years before the relevant date”

9.Since the occupation permit of the Building was issued in 1959, i.e. more than 50 years before the date of application (i.e. 29 April 2019; the relevant date under the Notice), the applicable percentage is therefore 80%.

10.I am satisfied that as at the date of application, the applicants owned more than 80% of the undivided shares in the Lot. I am therefore satisfied the applicants are entitled to make the present application under section 3 of the Ordinance.

THE REMAINING RESPONDENTS

11.At trial, the applicants owned 98.2456% (i.e. 112 out of the total 114) undivided shares in the Lot. The following 2 respondents (“the respondents”) remain in the present action: -

Respondent		Premises
4th Respondent	(“R4”)	Flat E, 2nd Floor (“R4’s Property”)
9th Respondent	(“R9”)	Flat F, 8th Floor (“R9’s Property”)

12.R4 and R9 are represented by Mr Desmond Leung (“Mr Leung”). They take issue on “age and state of repair” of the Building and valuations including the exiting use value (“EUV”) and redevelopment value (“RDV”) as assessed in the application, and put the applicants to strict proof in respect of the “reasonable steps” to acquire all the undivided shares in the Lot. The respondents have appointed Mr Raymond Lo Man Chiu (“Mr Raymond Lo”) of Leadtops Raymond Limited as their structural engineer, Mr Remus Wong Wai Kong (“Mr Remus Wong) of Leadtops Raymond Limited as their building surveyor and Mr Patrick W C Lai (“Mr Patrick Lai”) of AA Property Services Limited as their valuation surveyor.

13.The applicants are represented by Mr Adrian But (“Mr But”) and Mr Mok Yeuk Chi (“Mr Mok”). They have appointed Mr So Kin Shing (“Mr K S So”) of K S So & Associates Limited as their structural engineer, Mr Benson Wong Sai Ning (“Mr Benson Wong”) of Benson Wong & Associates Limited as their building surveyor and Mr Alnwick Chan Chi Hing (“Mr Alnwick Chan”) of Knight Frank Petty Limited (“Knight Frank”) as their valuation surveyor.

ISSUES FOR DETERMINATION BY THE TRIBUNAL

14.The remaining issues to be decided in this case are as follows:

1) What was the respective EUV of all units in the Building as at 28 February 2019, the valuation date adopted in the application valuation report dated 26 April 2019, as assessed in accordance with Part 1 of Schedule 1 of the Ordinance?

2) Whether the redevelopment of the Lot is justified due to age and/or state of repair of the Building in accordance with section 4(2)(a) of the Ordinance?

3) Whether the applicants have taken reasonable steps to acquire all the undivided shares in the Lot on terms that are fair and reasonable in accordance with section 4(2)(b) of the Ordinance?

4) If an order for sale should be granted, what should be the reserve price (i.e. RDV of the Lots) for the purpose of auction sale?

DETERMINATION OF THE EUV OF ALL UNITS IN THE BUILDING

15.Pursuant to section 4(1)(a)(i) of the Ordinance, if there is a dispute between the parties on the EUV of the units as assessed in the application, the tribunal shall determine the proper value. Section 4(1)(a)(ii) further provides that, in the case of any minority owner of the lot who cannot be found, the majority owner of the lot is required to satisfy the tribunal that the value of the minority owner’s property as assessed in the application is: -

“(A) not less than fair and reasonable; and

(B) not less than fair and reasonable when compared with the value of the majority owner’s property as assessed in the application.”

16.There is no missing minority owner in these proceedings, and the respondents dispute on the valuations as assessed in the application.

17.In the EUV assessment by direct comparison method, the 2 valuation experts agree on the valuation date of 28 February 2019, the valuation of Units A, B and C on 1^st Floor as shop premises, the adoption of the same reference units (i.e. ground floor street shop: Unit 4 on Ground Floor; ground floor arcade shop: Unit 11 on Ground Floor; 1^st floor shop: Unit B on 1^st floor; upper floor domestic flats: Unit F on 5^th Floor), and the particulars and attributes of all units in the Building and the comparables.

18.Although they agree on selection of most comparables, Mr Alnwick Chan has proposed 1 additional comparable (i.e. Comparable U3) in the assessment　of the 1^st floor reference shop unit and 3 additional comparables (i.e. Comparables D6, D7 and D8) in the assessment of the upper floor reference domestic unit. They also disagree on some of the adjustments to the comparables and the units in the Building.

EUV of Ground Floor Street Shops

19.The 2 valuation experts agree on the adjustment for time with reference to retail price indices, adjustment for age at 1% for every 10-year difference (rounded to the nearest integer), adjustment for return frontage facing arcade corridor at 5%, adjustment for headroom at 2% for every 1-meter difference (rounded to the nearest integer), and adjustment for layout to Comparable S3 only at 5%.

20.Regarding the adjustment for location, I agree with Mr Alnwick Chan that the adjustment to Comparable S1, which is much inferior than the reference unit, should be 15% instead of 10% only as suggested by Mr Patrick Lai, and the adjustment to Comparable S4, which is close to the reference unit, should be 0%. However, I agree with Mr Patrick Lai that nil adjustment should be made to Comparable S5, which is located in a relatively busy section of Carnarvon Road and is similar to the reference unit, and 5% adjustment only should be made to Comparable S3, which is inferior than the reference unit but is better than Comparable S1. I am also of the view the adjustment to Comparable S2 should be 10% instead of 15% as proposed by Mr Alnwick Chan and 0% as suggested by Mr Patrick Lai.

21.Regarding the adjustment for frontage, I agree with Mr Alnwick Chan to adopt a less sensitive rate at 2% per 1-meter difference instead of 4% per 1-meter difference as suggested by Mr Patrick Lai, but I prefer to round the result to 1 decimal place.

22.Regarding the adjustment for size, the 2 valuation experts agree on the adjustment rate at 3% per 10-square meter difference, and I prefer the linear approach and rounding to 1 decimal place as suggested by Mr Patrick Lai instead of the threshold approach as proposed by Mr Alnwick Chan.

23.The valuation of the ground floor street shop reference unit is listed in Appendix I of the judgment. The average unit rate of the 5 comparables is about $1,542,944, and the average excluding Comparable S3, which is much larger in size with substantial adjustments, is about $1,595,469. I consider that the adopted unit rate for the reference unit should be $1,560,000 per square meter.

24.The valuation of each street shops on ground floor is listed in Appendix III of the judgment. The same adjustment rates and principles as agreed by the valuation experts or as determined by the tribunal above are applied to the valuation of all street shops in the Building.

EUV of Ground Floor Arcade Shops

25.The 2 valuation experts agree on the adjustments for time, age, frontage, return frontage, headroom and layouts. They disagree on the adjustments for location, size and proximity to entrance only.

26.Regarding the adjustment for location to the comparables which are all located in the arcade of Chungking Mansion, I agree with Mr Alnwick Chan that the adjustment rate should be -5% only instead of -30% as suggested by Mr Patrick Lai. Although pedestrian flow along the subject section of Hankow Road is less than that along Nathan Road and value of street shops of the former should also be lower, I consider that there are not much differences between value of the arcade shops in these 2 arcades because in terms of location both the environment of the arcade and the overall trading potential of the shops within the arcade should be taken into consideration. I am of the view that the environment of these 2 arcades are similar, but the arcade in Chungking Mansion can attract more tourists.

27.Regarding the adjustment for size, same as the valuation of the street shops above, I prefer the linear approach and rounding to 1 decimal place as suggested by Mr Patrick Lai instead of the threshold approach as proposed by Mr Alnwick Chan.

28.Proximity to entrance might sometimes be included in the adjustment for location. However, since my determination on the adjustment for location above has not factored in proximity to entrance of each individual comparable, I agree with Mr Alnwick Chan to make adjustment for this factor accordingly. I also agree with him that, comparing with the reference unit in the subject arcade, all the comparables are relatively far from the entrance of Chungking Mansion.

29.The valuation of the ground floor arcade shop reference unit is listed in Appendix II of the judgment. The average unit rate of the 4 comparables in Chungking Mansion is about $245,198, and the average excluding Comparable A3 which appears out of line, is about $269,255. Nevertheless, I consider that the adopted unit rate for the reference unit in this instance should be $246,000 per square meter, which is the unit rate proposed by Mr Alnwick Chan.

30.The valuation of each arcade shops on ground floor is listed in Appendix III of the judgment. The 2 valuation experts agree on the adjustment for size at 3% per 10-square meter difference and the adjustment for frontage at 2% per 1-meter difference. Nevertheless, similar to the adjustment for size to street shops, I prefer the linear approach and rounding to 1 decimal place. In the adjustment for frontage, I prefer the adoption of linear approach and rounding to 1 decimal place too. I also agree with Mr Patrick Lai the main frontages of Units 17 – 20 should be each 6.43 meters, which face the main passages in the arcade.

31.Regarding the adjustment for return frontage, I agree with Mr Patrick Lai that the additional frontages of Units 17 – 20 facing the back of the arcade cannot bring noticeable benefits to the respective shops. Whilst, with the benefit of site inspection together with the parties, I am of the view the adjustment rates to Units 13 – 20 should be 2.5% only.

32.The 2 valuation experts agree on the classification of internal condition of all arcade shops, but they disagree on the rate for each grade. In this instance, I prefer the less sensitive rate at 2% per grade as proposed Mr Alnwick Chan instead of 5% per grade as suggested by Mr Patrick Lai.

33.Regarding the adjustment for proximity to entrance, I prefer the adjustment rates at 10% for Units 6 – 8 and -10% for Units 13 -16 as suggested by Mr Patrick Lai instead of 5% and -5% as proposed by Mr Alnwick Chan, but I prefer the adjustment rate at -35% for Units 21 & 24 as proposed by Mr Alnwick Chan instead of -40% as suggested by Mr Patrick Lai. I am also of the view the adjustment rate for Units 17 -20 should be -20% instead of -15% as proposed by Mr Alnwick Chan and -25% as suggested by Mr Patrick Lai. The adjustment rate for Units 22 & 23 is agreed by the 2 valuation experts at -50%.

34.Further, I agree with Mr Patrick Lai to make adjustment for proximity to toilet, which create nuisance to the nearby shops. I also agree with Mr Patrick Lai the adjustment rate for Units 21 & 24 at -20%, but the adjustment rate for Units 17, 20, 22 & 23 should be -10% only and the adjustment rate for Units 18 & 19 should be -5% only.

EUV of 1^st Floor Shops

35.The 2 valuation experts disagree on the adjustments for time, location, size, street exposure and risk of enforcement. Given that the 2 valuation experts agree to value these 3 units with street exposure on 1^st floor as shops, I agree with Mr Alnwick Chan to adjust for time with reference to private retail price indices instead of private domestic price indices as suggested by Mr Patrick Lai.

36.Regarding the adjustment for location, I am of the view that the comparables are similar to the reference unit and nil adjustment should be made. Regarding the adjustment for size, although the 2 valuation experts agree on the adjustment rate at 2% per 10-square meter difference, I prefer the linear approach and rounding to 1 decimal place as suggested by Mr Patrick Lai.

37.The 2 valuation experts agree on the adjustment for street exposure to Comparable U1 at -15%. I consider that Comparable U2 should be adjusted at -5% instead of 0% as proposed by Mr Alnwick Chan and -10% as suggested by Mr Patrick Lai, and nil adjustment should be made to Comparable U3. On the other hand, I disagree with Mr Patrick Lai to make adjustment for risk of enforcement to the comparables, which are originally designed as domestic units and are now used as non-domestic units, similar to the reference unit.

38.The valuation of the 1^st floor shop reference unit is listed in Appendix IV of the judgment. The average unit rate of the 3 comparables is about $210,034, and the average excluding Comparable U3 proposed by Mr Alnwick Chan with flat roof attached is about $232,326. I consider that the unit rate for the reference unit in this instance should be $215,000 per square meter.

39.The valuation of each 1^st floor shops is also listed in Appendix IV. The adjustment for size is similar to the adjustments to the comparables above. In addition, I am of the view that there should have nil adjustment for view to Units A & C as suggested by Mr Patrick Lai. Although Units A & C are corner units, part of their windows are facing narrow lanes only.

EUV of Upper Floor Flats

40.Mr Patrick Lai has not adopted Comparables D6, D7 and D8 on the ground that these comparables are situated in buildings with many domestic units being converted for non-domestic uses, which is reflected in their lower adjusted unit rates by Mr Alnwick Chan. I consider that they can be analysed in the assessment because there are also conversions of domestic units for non-domestic uses in the Building, but the analysed results should be further reviewed with care.

41.The 2 valuation experts agree on the adjustment for time with reference to domestic price indices, adjustment for age at 1% for every 1-year difference (rounded to the nearest integer), adjustment for floor at 0.5% for every 1-level difference (rounded to 1 decimal place), adjustment for headroom at 2% for every 1-meter difference (rounded to the nearest integer), but they disagree on the adjustments for location, size, view and noise.

42.Regarding the adjustment for location, I consider that all the comparables in the same district with similar accessibility, environment and availability of facilities are similar to the reference unit, and nil adjustment should be made instead of -5% adjustment as proposed by Mr Alnwick Chan and mainly positive adjustment as suggested by Mr Patrick Lai.

43.Regarding the adjustment for size, although the 2 valuation experts agree on the adjustment rate at 2% for every 10-square meter difference, I prefer the linear approach and rounding to 1 decimal place as suggested by Mr Patrick Lai.

44.Regarding the adjustment for view, I agree with Mr Alnwick Chan that Comparables D2 and D3 facing Kowloon Park enjoy much better view and -10% adjustment is justified. In terms of noise, I also agree with Mr Alnwick Chan that nil adjustment should be made to those comparables facing Nathan Road. I consider that noise is not a material factor in the valuation of domestic units in Tsimshatsui, a busy business, shopping and tourist district.

45.The valuation of the domestic reference unit is listed in Appendix V of the judgment. The average unit rate of the 8 comparables is about $134,039, and the average excluding the 3 comparables proposed by Mr Alnwick Chan is about $140,263. I consider that the adopted unit rate should be $137,500 per square meter in this instance.

46.The valuation of each domestic unit in the Building is listed in Appendix VI of the judgment. The same adjustments for floor and size above are applied. The adjustment for lighting and ventilation is agreed by the 2 valuation experts.

47.Regarding the adjustment for view, I agree with Mr Patrick Lai that building view and open view should be adjusted at 3% and 5% respectively instead of 5% and 10% as proposed by Mr Alnwick Chan. Regarding the adjustment for internal condition, I prefer the less sensitive rate at 2% per grade as proposed Mr Alnwick Chan instead of 5% per grade as suggested by Mr Patrick Lai.

48.I agree with Mr Patrick Lai to make adjustment for top floor, which is subject to the effects of heat from sunlight and the potential of water leakage in such old building, but the adjustment rate should be -3% only instead of -5%. I also agree with Mr Patrick Lai to make adjustment for noise to Units F, H and I from 1^st floor to 4^th floor, which are seriously affected by the nearby air-conditioning units, but the adjustment rates to the units on 3^rd floor and 4^th floor should be reduced to -3.5% and -2% only instead of -5% for all affected units.

49.In addition, I agree with Mr Alnwick Chan to deduct the reinstatement costs of Unit E on 1^st Floor, which was subject to a Superseding Notice, and Unit B on 9^th Floor, which was subject to a Building Order, only in the valuation, and disagree with Mr Patrick Lai to further deduct the reinstatement costs of other unauthorized structures and/or alterations. The applicant’s position is that deduction should only be made where a Building Order has been issued, and the deduction for Unit E on 1^st Floor is only a concession for the sake of avoiding unnecessary arguments.

50.Given that the units are valued on an “as is” basis as at the valuation date, I consider that the hypothetical purchaser of the unit in the Building would normally take into consideration the reinstatement cost associated with Building Order only because there is generally an urgency in compliance with the Building Order. Other unauthorized structures and/or alterations (if any) would be considered in the adjustment for internal condition.

EUV of All Units in the Building

51.The EUV of all units in the Building as at the date of valuation, i.e. 28 February 2019, and adopted by this tribunal are appended below: -

Floor	Unit	EUV		Floor	Unit	EUV
G	1	$53,200,000		G	13	$3,800,000
G	2	$32,560,000		G	14	$4,500,000
G	3	$38,700,000		G	15	$4,320,000
G	4	$44,370,000		G	16	$3,800,000
G	5	$53,200,000		G	17	$4,990,000
G	6	$5,370,000		G	18	$4,380,000
G	7	$4,900,000		G	19	$5,350,000
G	8	$5,160,000		G	20	$4,900,000
G	9	$3,380,000		G	21	$2,260,000
G	10	$4,010,000		G	22	$1,940,000
G	11	$4,110,000		G	23	$1,860,000
G	12	$3,380,000		G	24	$2,150,000
					Sub-total:	$296,590,000

Floor	Unit	EUV		Floor	Unit	EUV
1	A	$11,960,000		1	C	$13,240,000
1	B	$11,380,000			Sub-total:	$36,580,000

Floor	Unit	EUV		Floor	Unit	EUV
1	D	$5,653,000		6	C	$10,000,000
1	E	$6,755,000		6	D	$5,794,000
1	F	$5,545,000		6	E	$7,075,000
1	G	$6,322,000		6	F	$6,066,000
1	H	$6,601,000		6	G	$7,041,000
1	I	$7,222,000		6	H	$7,333,000
2	A	$9,047,000		6	I	$8,509,000
2	B	$9,681,000		7	A	$9,272,000
2	C	$9,804,000		7	B	$9,926,000
2	D	$5,679,000		7	C	$10,052,000
2	E	$7,075,000		7	D	$5,822,000
2	F	$5,535,000		7	E	$6,825,000
2	G	$6,704,000		7	F	$6,097,000
2	H	$6,692,000		7	G	$6,933,000
2	I	$7,549,000		7	H	$7,371,000
3	A	$9,094,000		7	I	$8,384,000
3	B	$9,730,000		8	A	$9,319,000
3	C	$9,846,000		8	B	$9,975,000
3	D	$5,708,000		8	C	$10,299,000
3	E	$6,968,000		8	D	$5,851,000
3	F	$5,765,000		8	E	$7,147,000
3	G	$6,603,000		8	F	$6,248,000
3	H	$6,968,000		8	G	$7,108,000
3	I	$7,707,000		8	H	$7,408,000
4	A	$9,140,000		8	I	$8,601,000
4	B	$9,779,000		9	A	$8,949,000
4	C	$9,897,000		9	B	$9,372,000
4	D	$5,736,000		9	C	$9,745,000
4	E	$7,004,000		9	D	$5,765,000
4	F	$5,885,000		9	E	$7,183,000
4	G	$6,636,000		9	F	$6,157,000
4	H	$7,117,000		9	G	$7,142,000
4	I	$7,866,000		9	H	$7,296,000
5	A	$9,187,000		9	I	$8,810,000
5	B	$9,828,000		10	A	$8,001,000
5	C	$9,949,000		10	B	$8,319,000
5	D	$5,765,000		10	C	$8,795,000
5	E	$7,183,000		10	D	$5,845,000
5	F	$6,036,000		10	E	$6,997,000
5	G	$6,670,000		10	F	$6,000,000
5	H	$7,296,000		10	G	$6,967,000
5	I	$8,066,000		10	H	$7,251,000
6	A	$9,225,000		10	I	$8,417,000
6	B	$9,877,000			Sub-total:	$663,862,000

52.I therefore accept that the total EUV of the Building is $997,032,000 (i.e. $296,590,000 + $36,580,000 + $663,862,000); the share of R4’s Property should be 0.7096% (i.e. $7,075,000 / $997,032,000) and the share of R9’s Property should be 0.6267% (i.e. $6,248,000 / $997,032,000).

SECTION 4(2) OF THE ORDINANCE - JUSTIFICATION AND REASONABLE STEPS

53.Section 4(2) of the Ordinance provides as follows: -

“2. The Tribunal shall not make an order for sale unless, after hearing the objections, if any, of the minority owners of the lot the subject of the application under section 3(1) concerned, the Tribunal is satisfied that—

(a) the redevelopment of the lot is justified (and whether or not the majority owner proposes to or is capable of undertaking the redevelopment)—

(i) due to the age or state of repair of the existing development on the lot; or

(ii) on 1 or more grounds, if any, specified in regulations made under section 12; and

(b) the majority owner has taken reasonable steps to acquire all the undivided shares in the lot (including, in the case of a minority owner whose whereabouts are known, negotiating for the purchase of such of those shares as are owned by that minority owner on terms that are fair and reasonable).”

54.The applicants must satisfy this tribunal the above statutory requirements are met; otherwise, an order for compulsory sale would not be granted.

Whether development of the Lot is justified due to the age and/or state of repair of the Building

55.Mr Leung submits that the applicants have failed to satisfy that the redevelopment of the Lot is justified due to “age” or “state of repair” of the Building. On the ground of “age”, the applicants have failed to show that the Building has reached the end of its physical life, and have also failed to prove economically that there is significant increase in RDV which is attributed to matters of obsolescence. On the ground of “state of repair”, the Building does not pose any danger to the residents or public at large. Further, due to the inclusion of unnecessary / excessive items and the unreliable cost estimation, the applicants’ experts have inflated the repair costs, and in any event the repair costs represent a very low level as compared to the EUV and a reasonable owner would find it worthwhile to repair the Building instead of going ahead of redevelopment.

56.In response to the respondents’ arguments, Mr Mok replies that end of physical life should not be the benchmark for “age”, and the “economic lifespan” tests have been doubted by the Court of Appeal in Fineway Properties v Sin Ho Yuen Victor [2010] 4 HKLRD 1. After Fineway, the tribunal has already clarified that the tribunal would not just look into “physical age” alone. The exercise is to holistically consider all relevant factors concerning the age of the existing development, including its designed life, the existing physical conditions, the obsolete design, the amount required to maintain it, and these factors are not meant to be exhaustive. While comparison with the “modern-day” standard should also be one of the considerations to be taken into account, the repair costs are substantial and the aged and obsolete features of the Building are irreparable. Mr Mok submits that Mr K S So and Mr Benson Wong have already proved that the redevelopment of the Lot is justified due to both “age” and “state of repair” of the Building.

57.Although I may not agree with each and every finding, expert opinion and submission of the applicant, I accept that the redevelopment of the Lot is justified due to both “age” and “state of repair” of the Building. I prefer the conclusions and recommendations of the applicants’ experts to those of the respondents’ experts.

58.The Building, being erected more than 63 years ago, is in poor condition and has come to the end of its design life. The design of the Building has become obsolete over time in many aspects, both physically and functionally, and fails to conform to modern safety standards and statutory requirements. I am also of the view the Building is in poor state of repair and the costs of repair to bring the Building to tenantable condition is disproportionate to the costs for constructing a new similar superstructure. Even if repair works are carried out, such works will bring about a modest improvement only to the existing condition of the Building and the Building will continue remain a sub-standard one.

59.In terms of structural assessment, I agree with Mr Mok that the starting point is that the existing building does not have to become dangerous before an order for sale can be made. Although Mr K S So accepts that the Building has no concern of imminent danger, it suffers from many inherent deficiencies which the repair items and costs recommended by the experts would not address.

60.I agree with Mr K S So that in the subject assessment structural engineering expert should not rely on mainly the average value(s) as adopted by Mr Raymond Lo, but should examine and review the weakest point(s) of the structural frame. Even if parts of the survey results are above standard, these cannot assist the respondents to infer that the overall condition of the Building should be acceptable. A few major defects could lead to an unacceptable condition.

61.As shown in Mr K S So’s test results of cement content in the columns, 8 out of 10 tested column samples suffered from cement content deficiency and 5 of them suffered from deficiency of cement content ranging from 21% to 58%. The inherent deficiency in cement content in the columns is severe and cannot be remedied by the repair items. Further, in addition to 7 out of 10 tested beam samples suffering carbonation depths exceeding the concrete cover, 5 of them showed that carbonation depth had penetrated beyond all the embedded reinforcement bars; and in addition to 8 out of 10 tested slab samples suffering carbonation depths exceeding the concrete cover, 6 of them suffered carbonation depths beyond all the embedded reinforcement bars. Carbonation has already reached the reinforcements of the structural elements and it is an irreversible process.

62.The corrosion problem of the reinforcement bars of the Building is irreversible and cannot be rectified by the repairs too. Mr K S So have selected 30 locations (i.e. 10 on columns, 10 on beams and 10 on slabs) for reinforcement corrosion survey, while Mr Raymond Lo have commissioned only 2 open up tests on columns and 2 open up tests on beams without any on the slabs. Mr K S So found that 60%, 85% and 74% in the open-up test locations of columns, beams and slabs respectively are moderately corroded with a loss of sectional area from 10% to 30%. Even if Mr Raymond Los’s test results are added in the analysis, 47.5% and 64% of the bars in the columns and beams respectively are suffering moderate corrosion.

63.I agree with the applicants that the comparison with the 2013 Concrete Code, which has then newly addressed robustness and ductility, is relevant and should be one of the considerations because it can review to what extent the existing building falls short of modern-day standard. However, one should not put much reliance on such comparison in the assessment because all buildings built before the promulgation of this code would generally not be in compliance. The same principle also applies to the comparison with design working life because all buildings over 50 years would very likely have passed their design working life too.

64.Although I agree with Mr Raymond Lo that the structural form and the details of the Building have already allowed some basic provisions in robustness and ductility, I consider that more stringent requirements of robustness and ductility are necessary. I am also of the view that the ETABS test carried out by Mr Raymond Lo, a computer model that shows the lateral deflection under codified wind load, cannot assess robustness and ductility effectively because this model can prove mainly the requirements of deformations due to wind only.

65.Further, I agree with Mr Mok that the respondents’ reliance on the Mandatory Building Inspection Scheme (“MBIS”) is misplaced. Compliance with MBIS if any cannot be readily taken to mean that the Building’s physical life would be automatically extended for 10 years after completing the relevant works as required under the scheme. Government control like MBIS may sometimes set the minimum requirements only, and these minimum requirements can never be assumed as a guarantee of the building condition before the next enforcement date.

66.In terms of building conditions survey, similar to the structural assessment, I am of the view that the comparisons with modern-day standard are relevant, but their importance in the assessment should not be over exaggerated as all old buildings would to a certain extent not be in compliance with the current codes. Nevertheless, I agree with the applicants that the Building has physical and functional obsolescence and some of them cannot be rectified by way of repairs (i.e. such as absence of barrier-free-access, no proper refuse disposal system and no management / recreational / access facilities). More importantly, as revealed in the structural assessment, deterioration of the structural frame in the Building has entered into propagation phase. The Building was not well maintained in the past, and its existing condition is not satisfactory which would require substantial repairs.

67.Although there is record of MBIS inspection in 2017, there was no record of compliance. 13 MBIS and 15 Mandatory Window Inspection Scheme (“MWIS”) notices remained to be outstanding and uncompiled with as at June 2021. Many of these notices were issued either in 2013 and some had been replaced with superseding notices. There were also some building orders / notices involving unauthorized building works which were either outstanding or newly issued and registered from 2019 onward. With reference to the minutes of the Incorporated Owners Committee, although some repair works were done, there are no relevant costs shown under the documents and the works performed were minor and piecemeal in any event which did not remedy the deficiencies or defects identified by Mr Benson Wong. I agree with Mr Mok that all these findings reflect the general lack of proper repair and maintenance of the Building throughout the years.

68.In assessing the repair costs, Mr Remus Wong has firstly adopted “habitable condition”. He considers that “habitable condition” is a standard which is commensurate with the standard when the occupation permit is issued and would compile with the safety and hygiene aspects in the Buildings Ordinance, and this is different from the “tenantable condition” as proposed by Mr Benson Wong, which includes the additional requirements of comfort and convenience. Nevertheless, Mr Remus Wong finally conceded to include some repair works conducted to individual units into his suggested costs of repairs and adopted “tenantable / habitable standard” at trial, which in his opinion can actually accords with the standard of “tenantable condition”.

69.I am of the view that, the “tenantable / habitable condition” or “tenantable condition” as suggested by Mr Remus Wong, which has no clear definition, is ambiguous, and the “habitable condition” would to a certain extent set the minimum standard only, which cannot meet the general demand nowadays. Whilst, Mr Benson Wong defines “tenantable condition” to be “that the building should be fit for the use by its occupiers and visitors in the sense that it is safe and hygienic, and provides a standard of comfort and convenience which is reasonable in the present-day circumstances for the type of building in question”, which has long been accepted by the tribunal.

70.Anyhow, except the costs for replacement of lifts, I prefer the total repair costs as proposed by Mr Benson Wong to those as suggested by Mr Remus Wong. I agree with Mr Benson Wong to carry out a full scaffolding and hammer-tapping covering the entire façade because the Building is more than 63 years of age and its external surface rendering have been subject to weathering for such years, while there is no record of repair of external rendering and windows sealants done in the past. I have reservation on the heavy reliance of Rapid Infrared Thermographic Survey (“RTIS”) by Mr Remus Wong in this instance because, due to site constraints and long distance range, RTIS could not properly scan the majority portion of the external walls of the Building.

71.I also agree with Mr Benson Wong to carry out compete re-roofing instead of partial repair of the roofs as suggested by Mr Remus Wong. There are signs of water seepage throughout the ceiling of the top floor units, indicating that the waterproofing membrane of the roof has become generally defective. While there is no record of waterproofing replacement, the original waterproofing is old and should has passed its effective life. In addition, I agree with Mr Benson Wong to include the repair costs for plastering / painted wall finishes on walls, beams and ceilings, which conform with the “tenantable condition” as adopted in the assessment.

72.I have doubt on replacement of lifts in this instance because they had once been replaced not very long ago in 2004, but the difference between the two estimated costs by the experts is $3,529,000 only. Even if $3,529,000 is taken out from Mr Benson Wong’s proposed costs of $36,111,632, the total repair costs (i.e. before adjustments for preliminaries, professional fees and supervision costs) would still be as high as $32,582,632, about 32.1% of the construction costs for constructing a new similar superstructure.

73.The parties have argued extensively over the accuracy of costs estimation. While Mr Benson Wong relies on the estimation of Mr K C Tang, a quantity surveyor, Mr Remus Wong adopts the cost rates from the platform of Urban Renewal Authority. However, with reference to each item of the repair costs proposed by them respectively, the main dispute between them is indeed not owing to the difference in unit rates, but rather owing to the difference in repair items and extent, which have been discussed briefly in the above paragraphs.

74.Lastly, in addition to the comparison with the construction costs for constructing a new similar superstructure, I have no objection to compare the repair costs with the EUV as suggested by Mr Remus Wong, which can be an indicator to estimate the willingness of the owners to spend costs on repair. However, I am of the view that 3.27% (i.e. $32,582,632 / $997,032,000) in this instance is relatively high and many owners in old buildings may not be willing to make such contribution. Without the agreement by majority of the owners, spending on the repair costs as estimated will not be possible. I am of the view that owners of the units in old buildings with lower EUV in higher density area, whom could not generally be regarded as wealthy, would usually be more cautions in spending. This may explain why in the past there were piecemeal and minor repairs only, and no comprehensive and preventive repairs, in the Building.

75.By reason of the matters set out above, I am satisfied the redevelopment is justified in terms of both “age” and “state of repair” of the Building.

Whether the applicants have taken reasonable steps

76.In assessing the reasonableness of the offers, I have considered the case of Capital Well Ltd v Bond Star Development Ltd (2005) 8 HKCFAR 578. In particular, I have considered paragraphs 33 and 36 of the judgment in which Ribeiro PJ stated: -

“33. In making that assessment the Tribunal is not conducting a valuation exercise. It does not need to adjudicate upon any disputes about the correct valuation principles to be applied. It does not itself arrive at any conclusion as to what figure represents the correct valuation. It merely needs to be satisfied that, on the evidence available, the offer falls within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. It is obviously necessary to recognise that there will often be differences of opinion on that matter……”

“36. ...... We are of course not suggesting that it is necessary for the offer to “beat” the valuation as if it were a payment into court. What the Tribunal must do is to consider whether, in the circumstances of each case, the offer falls within a band of what represents a fair and reasonable assessment of the value of the minority owner’s interest reflecting a proportionate share of the redevelopment value of the whole site……”

77.The applicants have made 4 offers to R4 and R9 respectively as follows: -

Date	R4	R9
6-Mar-19	$14,570,000	$12,455,000
24-Mar-20	$12,800,000	$10,900,000
29-Dec-20	$14,570,000	$12,455,000
27-Jul-22	$16,600,000	$14,800,000

78.Mr Mok submits that all these offers fall within the range of fair and reasonable compensation for the respective interests owned by the respondents. The offer prices have made reference to the independent valuation of Knight Frank and have also reflected the then pro-rata share of the RDV.

79.On the evidence available, I accept that the offer prices have reflected the respective proportionate share of the RDV of the Lot and do fall within the range of what may broadly be regarded as fair and reasonable compensation for the interest in question. I am satisfied that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot.

RESERVE PRICE FOR THE AUCTION

80.By reason of being satisfied that redevelopment of the Lot is justified and that the applicants have taken reasonable steps to acquire all the undivided shares in the Lot, I am satisfied an order for sale should be granted in favour of the applicants.

81.In the assessment of RDV, the 2 valuation experts agree to adopt mainly residual method and then cross check the result with a nearby site transaction (i.e. Nos 31 – 37 Hankow Road) and tribunal’s determinations in other compulsory sale cases. Although they agree to update their respective RDV assessments close to the trial, they cannot agree on the exact valuation date. I am of the view the transaction of Nos 31 – 37 Hankow Road, which did not comprise all the units in the building, has little reference value and determinations of the tribunal, which are not market transactions, have little reference value too. I am also of the view the valuation date in the judgment can be fixed at say 4 July 2022, the midway between 8 July 2022 and 30 June 2022 as adopted by the 2 valuation experts respectively and this minor change would not affect the analyses in the assessment.

82.On the 1^st day of trial, the applicants without admitting to feasibility and marketability instructed Mr Alnwick Chan to accept the hypothetical model suggested by Mr Patrick Lai, but the 2 valuation experts still argue over the effective saleable areas of some upper floors. In the assessment of gross development value (“GDV”), they agree on the value of signboards (i.e. total value of $101,819,764) only, but disagree on the adjustments to the comparables of all other properties and the assessment method of upper floors particularly the office floors.

83.In the residual valuation, they agree on demolition cost at $14,009,632, demolition period of 6 months, professional fees at 6% and developer’s profit (i.e. without allowance for stamp duty and legal cost on residual land value) at 20%, but they disagree on marketing cost, interest (deferment) rate, construction cost and construction period.

Hypothetical Development Scheme

84.The parties agree to value the Lot as a site of 1,074.46 square meters, and after set back the Lot would be developed into a 24-storey commercial building over a 3-level basement at the plot ratio (i.e. including bonus plot ratio) of 12.1968 and gross floor area of 13,104.9614 square meters. The hypothetical development would have (i) car parking spaces at the 3-level basement, including 25 conventional private car parking spaces, 66 double-deck private car parking spaces, 5 light-good vehicle parking spaces, 3 heavy-good vehicle parking spaces and 9 motorcycle parking spaces; (ii) 6 shops, entrance lobby, shuttle lift to 1^st floor, vehicle ramp / driveway and plant room on ground floor; (iii) a shop(s) for special purpose, plant room and transformer room on 1^st floor; (iv) mechanical and electrical facilities on 2^nd floor; (v) 2 office units from 3^rd to 14^th floors; (vi) 1 office unit from 15^th to 22^nd floors; (vi) a restaurant on 23^rd floor; and (vii) 4 signboards. They also agree that there will have flat roofs attached to 3^rd floor, 20^th floor, 21^st floor, 22^nd floor and 23^rd floor and a notional corridor for staircase interchange from 15^th to 23^rd floors. Vertical circulation between ground floor and 23^rd floor is served by 3 passenger lifts and 2 staircases. Vertical circulation between the 3 basement levels and ground floor is served by vehicle ramps, 1 passenger lift and 4 staircases. Shop(s) on 1^st floor is also served by a shuttle lift from ground floor.

85.In the assessment of saleable areas, I agree with Mr Patrick Lai to convert the flat roofs at 1/3 of the main unit rate instead of 1/4 as proposed by Mr Alnwick Chan, but I agree with Mr Alnwick Chan to convert the notional corridors from 15^th to 23^rd floors, being part of the escape route in whole floor occupation for fire safety purposes, at 1/2 of the main unit rate instead of nil adjustment as suggested by Mr Patrick Lai. I consider that the flat roofs in such new commercial building are relatively useful and valuable, and the notional corridors would have less effective value because they cannot be used and enclosed all the time. The effective saleable areas from 3^rd to 23^rd floors are listed in Appendix X of the judgment.

GDV – Ground Floor and 1^st Floor

86.There are 8 common comparables for valuation of the shop reference unit on ground floor. The 2 valuation experts agree on the adjustment for time with reference to private retail price indices only, but disagree on most of the adjustments for location, age, size, frontage, return frontage, headroom and layout.

87.The 2 valuation experts agree that nil adjustment for location should be made to Comparables R7 and R8, which are facing Hankow Road opposite to the Lot. I agree with the 2 valuation experts that Comparables R1, R3 and R6 facing Ichang Street are inferior than the reference unit, but their adjustment rates should be 25% only instead of 20% as proposed by Mr Alnwick Chan and 30% as suggested by Mr Patrick Lai. I consider that Comparable R2 located in a relatively busy section of Carnarvon Road is similar to the reference unit and nil adjustment should be made instead of 10% adjustment proposed by Mr Alnwick Chan and -5% adjustment suggested by Mr Patrick Lai. While, Comparable R4 along Middle Road is inferior than the reference unit and an adjustment rate at 5% is appropriate instead of -10% and 10% as adopted by the 2 valuation experts. Comparable R5 along Cameron Road should also be adjusted at -5% as suggested by Mr Patrick Lai instead of -10% as proposed by Mr Alnwick Chan.

88.I agree with Mr Patrick Lai that a more sensitive rate should be applied to the adjustment for age, but the adjustment rate should be 1% for every 5-year difference only instead of 1% for every 3-year difference. There should have greater differences between a new hypothetical shop in a modern commercial building and comparable shops built in about 1960s.

89.Regarding the adjustment for size, although the 2 valuation experts agree on the adjustment rate at 3% for every 10-square meter difference, I prefer the linear approach and rounding to 1 decimal place as suggested by Mr Patrick Lai. Nevertheless, I agree with Mr Alnwick Chan to adopt a less sensitive rate at 2% per 1-meter difference in the adjustment for frontage instead of 4% per 1-meter difference as suggested by Mr Patrick Lai, and a less sensitive rate at 2% per 1-meter difference in the adjustment for headroom instead of a very sensitive rate at 6% as suggested by Mr Patrick Lai.

90.In terms of return frontage, the 2 valuation experts agree that -5% should be applied to Comparable R2. I am of the view that Comparables R3 and R8 should be adjusted at -3% instead of -5% as proposed by Mr Alnwick Chan and -2% as suggested by Mr Patrick Lai. The lanes next to Comparables R3 and R8 are relatively less prominent to attract pedestrian flow.

91.In terms of layout, I agree with Mr Alnwick Chan that much more adjustment should be made to the comparables, but the adjustment rate for Comparables R1 – R6 should be -15% only and the adjustment rate for Comparables R7 & R8 should be -10% only. The Lot has a width of about 28.194 meters facing Hankow Road and a depth of about 38.102 meters from Hankow Road. After consideration of set-back in the front and backfilled at the back, the hypothetical development would still have a relatively long depth. The hypothetical shops as shown in the layout plan prepared by Mr Patrick Lai are elongated and would have average depth much longer than the comparables. Even if the layout can be redesigned, I envisage that there will not be much improvement as there would still have some hypothetical shops occupying the large area at the back. In any event, there is no alternative layout plan as agreed by the parties for tribunal’s consideration.

92.The valuation of the shop reference unit is listed in Appendix VII of the judgment. The average unit rate of the 8 shop comparables is about $1,087,714. The average excluding the highest (i.e. Comparable R4) and the lowest (i.e. Comparable R1) adjusted unit rates is $1,086,811. I am of the view that the shop reference unit should be assessed at $1,087,000 per square meter, and this unit rate should also be applied to the area occupied by the shuttle lift to 1^st floor. The building of shuttle lift is optional, but its existence at the expense of the valuable ground floor space would bring benefit to the 1^st floor.

93.In assessing the 1^st floor shop unit rate, Mr Alnwick Chan adopts the comparable in Luna Court, which consists of a ground floor shop connecting to 1^st floor premises, whilst Mr Patrick Lai assumes the conversion rate to be 60% of the ground floor unit rate. I agree with Mr Patrick Lai that the analyses of the comparable in Luna Court, which involves substantial adjustments, is complicated, indirect, arbitrary and unreliable. Nevertheless, I am of the view that, in addition to the full rate for the shuttle lift on ground floor, the 1^st floor conversion rate should be 1/3 of the ground floor unit rate only. Although the subject 1^st floor is connected by a shuttle lift from ground floor and would have a high headroom, its value should not be much higher than the office unit rate. Further, 1^st floor conversion rate in prime area is usually lower than that in secondary area.

GDV – Upper Floor Office and Restaurant

94.For the assessment of upper floor office, the main difference between the 2 valuation experts is the proper valuation method to be adopted. Mr Alnwick Chan proposes to use direct comparison method, whilst Mr Patrick Lai opines that income capitalization (investment) method should be used instead. Generally, direct comparison method is more reliable and preferred in the valuation so long if there are relevant comparables in the market. Whilst, in the adoption of income capitalization method, there is not much reliable and direct data on capitalization rate in the market; the valuation is very sensitive to the capitalization rate to be adopted; and there is sometimes greater variance in rental unit rate because some unknown factors such as internal condition of the premises, landlord’s provisions in the tenancy and different bargaining positon of the landlord and tenant in short term can substantially affect the rental value of a 2 to 4-year tenancy.

95.I agree with Mr Patrick Lai that the sales comparables identified by Mr Alnwick Chan in Silvercord and Concordia Plaza, which were built in 1983 and 1994 respectively, about 40 years and 30 years ago, are not so relevant in the subject valuation. These 2 commercial buildings are reasonably maintained but they are not similar to the modern commercial building to be built on the Lot. Nevertheless, I agree with Mr Alnwick Chan that the adoption of income capitalization method in this instance would have many shortcomings. Hence, I consider that these 2 valuation methods should also be adopted, and the results should then be overall reviewed.

96.In the adoption of direct comparison method, I agree with Mr Alnwick Chan to adjust for time with reference to office price indices, adjust for age at 1% for every 3-year difference, adjust for floor at 1% for every 2-level difference, adjust for view at 5% to 10%, and adjust for size at 1% for every 50-square meters difference, but I would prefer to adopt the linear approach and rounding to 1 decimal place in the adjustment for size instead of the threshold approach.

97.In terms of location, I agree with Mr Alnwick Chan that nil adjustment should be made to the comparables in Concordia Plaza, but I am of the view that the comparables in Silvercord, which is located in the business hub of the district, should be adjusted at -10% instead of -5% only. In terms of headroom, I am of the view that a more sensitive rate at 4% for every 1-meter difference should be adopted instead of 2% for every 1-meter only. Higher headroom is valuable in a modern office.

98.While I disagree to adjust for scale and facilities at -2% to -6% in this instance, I consider that an additional adjustment should be made for quality and standard of finishes on top of the adjustment for age. I agree with Mr Patrick Lai that modern lift would have better efficiency. On the other hand, it is expected that the hypothetical development as a new commercial building would have much better quality and standard of finishes.

99.The valuation of the office reference unit by direct comparison method is listed in Appendix VIII of the judgment. The average unit rate of the 7 comparables is about $270,065, and I consider that the office reference unit with distant sea view on 14^th floor should be assessed at $270,000 per square meter.

100.In the adoption of income capitalization method, I agree with Mr Alnwick Chan that the reference office unit on 14^th floor would have distant sea view only instead of sea view. The Lot is not located at or close to the seafront, and there are a number of buildings between the seafront and the Lot. Nevertheless, I agree with Mr Patrick Lai to calculate the rent free period in terms of month instead of day and the way how he derives the effective monthly rent.

101.The 2 valuation experts agree on the adjustment for age at 1% for every 3-year difference, adjustment for floor at 1% for every 2-level difference and adjustment for size at 1% for every 50-square meter difference. In the adjustment for size, I would prefer the linear approach and rounding to 1 decimal place as suggested by Mr Patrick Lai instead of the threshold approach as proposed by Mr Alnwick Chan.

102.Regarding the adjustment for time, I prefer the territory wide indices as suggested by Mr Patrick Lai instead of the Tsimshatsui indices as proposed by Mr Alnwick Chan. The 2 valuation experts have argued over this extensively, but the adoption of the territory wide indices in fact allows greater negative adjustment to 5 of the 8 comparables, which would lower the average adjusted unit rate.

103.In terms of location, the 2 valuation experts agree that nil adjustment should be made to the comparables in HK Pacific Centre (i.e. Comparables OR6 and OR7). I agree with Mr Alnwick Chan that the other comparables in One Peking (i.e. Comparables OR1, OR2 and OR3), 26 Nathan Road (i.e. Comparable OR4) and Mira Place (i.e. Comparables OR5 and OR8) are better than the hypothetical development but the adjustment rate for One Peking and 26 Nathan Road, in the business hub of the district, should be -10% and the adjustment rate for Mira Place, in the fringe of the business hub, should be -7.5%.

104.Regarding the adjustment for headroom, similar to the valuation by direct comparison method above, I prefer the adjustment rate at 4% for every 1-meter difference as suggested by Mr Patrick Lai instead of 2% for every 1-meter difference as proposed by Mr Alnwick Chan. Regarding the adjustment for sea view to the comparables in One Peking, which is close to the seafront, I agree with Mr Alnwick Chan to adopt the adjustment rate at -5%.

105.In terms of scale and facilities, I consider that Mira Place should be similar to the hypothetical development, but -2.5% adjustment should be applied to the comparables in One Peking, which is one of the top commercial buildings in the district, and 2.5% adjustment should be made to the comparables in 26 Nathan Road and HK Pacific Centre, which do not have car parking facilities.

106.In terms of quality and standard of finishes, I am of the view that the hypothetical development would be similar to One Peking and better than 26 Nathan Road, HK Pacific Centre and Mira Place. The adjustment rate for 26 Nathan Road and HK Pacific Centre, which are well maintained, should be 2% only on top of the adjustment for age, and the adjustment rate for Mira Place should be 4%.

107.The rental valuation of the office reference unit is listed in Appendix IX of the judgment. The average unit rate of the 8 comparables is about $919, and the average excluding the highest (i.e. Comparable OR6) and the lowest (i.e. Comparable OR3) adjusted unit rates is about $915. I consider that the monthly rental of the office reference unit with distant sea view on 14^th floor should be assessed at $915 per square meter.

108.The 2 valuation experts have argued extensively over capitalization rate. Mr Patrick Lai adopts the capitalization rate of 2.9% per annum. He firstly makes reference to the market yield of Grade A office premises published by Rating and Valuation Department at 2.4% and then further considers the location and scale of the hypothetical development, the nature of office rental comparables and the demand for office premises in coming years. He adds 0.5% to the published market yield to allow for the risk envisaged in the investment of the hypothetical office premises.

109.Whilst, Mr Alnwick Chan in his fallback valuation suggests an additional risk premium of 1.1% and adopts the yield of 3.5%, because there are high vacancy rate in Tsimshatsui (i.e. 0.3%), massive Grade-A office supply in coming 2 years (i.e. 0.3%) and fierce competition from nearby buildings (0.5%). He considers that long time is required to establish the hypothetical development as medical-centric building, and there is also high risk associated with beauty care services tenants that should command an additional risk premium of 0.5% on top of 3.5%. In addition, he has carried out a yield analysis of 14 transactions subject to tenancies, which gives an average yield of 3.21%.

110.I consider that the proposed adjustments to the market yield at 2.4% is subjective. The yield analysis, which is not based on sales transactions in modern commercial building and tenancies in the trade of medical and/or beauty centre similar to the comparables, are not so representative. There is also a great range from 2.42% to 4.09% (i.e. if the transactions in Silvercord are excluded in the analysis, the highest yield would then be 3.33%) in the yields as derived.

111.Nevertheless, in this instance, I prefer the capitalization rate of 3.5% as proposed by Mr Alnwick Chan to 2.9% as suggested by Mr Patrick Lai. While there will have substantive supply of Grade A office in Kowloon including Tsimshatsui, due to the change in business operation since the coronavirus pandemic, office demand is not so promising in coming years even if the pandemic will soon be over. Further, in the difficult market as at the valuation date, hypothetical purchaser in new building would expect a higher expected yield because interest rate is increasing, long time is required to establish a medical/beauty-centric building, and there will also have an additional risk for buying a vacant unit / floor in new building for investment purpose.

112.If a capitalization rate of 3.5% is applied, the office reference unit is assessed at $313,714. If 3.25% or 3.75% is applied, the result will be changed to $337,846 or $292,800. Having considered the analyses by both the direct comparison method and the income capitalization method, I am of the view that it is fair and reasonable to adopt the unit rate at $300,000 per square meter in this instance.

113.The valuation of all upper floor offices and restaurant is listed in Appendix X of the judgment. The adjustments for floor, size and headroom are the same as those in the valuation of the office reference unit. In terms of view, I agree with Mr Patrick Lai that the higher floors in the hypothetical development would enjoy better view, but there should have 3% adjustment to 20^th – 23^rd floors only instead of 5% from 16^th floor as suggested by Mr Patrick Lai. I also agree with Mr Patrick Lai to apply a usage adjustment to the 23^rd floor as restaurant but the adjustment rate should be 5% only instead of 10%. I consider that the transaction in H8 at Hau Fook Street as proposed by Mr Alnwick Chan for valuation of the 23^rd floor is not a relevant comparable. The character and location of H8 are substantially different from the hypothetical development.

GDV – Parking Spaces

114.The 2 valuation experts agree to assess firstly the value of a conventional private car parking space, and then apply conversion rates to assess the value of other parking spaces. Mr Alnwick Chan adopts 7 comparables (i.e. 2 in Kowloon Centre, 4 in Concordia Plaza and 1 in East Ocean Centre) and after adjustment for time with reference to private office indices he derives a unit rate at $2,900,000. Whilst, Mr Patrick Lai considers 3 comparables only (i.e. 2 in Kowloon Centre and 1 in Silvercord) and assesses the unit rate at $3,900,000. I consider that the 2 comparables in Kowloon Centre close to the Lot and at the price of $3,141,840 and 3,194,100 are more relevant than the other comparables in Tsimshatsui East or close to the business hub along Canton Road. Having further considered the greater demand for car parking spaces in new modern commercial building, I am of the view a conventional private car parking space in this instance should be assessed at $3,500,000.

115.In terms of a double-deck private car parking space, I agree with Mr Alnwick Chan to adopt a conversion rate at 60% instead of 75% as suggested by Mr Patrick Lai. The accessibility to double deck parking space is relatively poor and it is generally not preferred by driver if there are other choices.

116.The conversion rate for a motorcycle parking space is agreed by the 2 valuation experts at 10%. I consider that a light-good vehicle parking space should be converted at 120% instead of about 114% as proposed by Mr Alnwick Chan and 130% as suggested by Mr Patrick Lai, but I agree with Patrick Lai to convert a heavy-good vehicle parking space at 140% instead of about 131% as proposed by Mr Alnwick Chan.

RDV of the Lot as at 4 July 2022

117.Although the hypothetical development comprises a 3-level basement, I agree with Mr Patrick Lai that construction period of 3.25 years should be sufficient given the relatively small scale of the hypothetical development and the proposed usage of the basement as parking spaces only, instead of 3.5 years as proposed by Mr Alnwick Chan. However, I agree with Alnwick Chan in the difficult market as at the valuation date to adopt a higher marketing cost at 2% instead of 1.75% as suggested by Mr Patrick Lai. I also agree with Mr Alnwick Chan to adopt a higher construction cost at $653,386,073 (i.e. 49,858 per square meter gross), instead of $590,326,000 (i.e. $45,046 per square meter) as suggested by Mr Patrick Lai, to reflect the high to very high quality of the hypothetical development and the relatively high headroom at basement for accommodation of double-deck parking space.

118.Based on the agreements of the 2 valuation experts and the above determinations, the residual valuation of the Lot is listed in Appendix XI of the judgment. The RDV of the Lot as at 4 July 2022 is assessed at $2,134,000,000, equivalent to an accommodation value of about $162,839 per square meter (i.e. about $15,128 per square foot), which should be the reserved price for public auction.

ORDERS

119.For reasons given in this judgment, I have set out reasons why I am satisfied an order for sale should be granted and I therefore make the following orders: -

1) All the undivided shares in the Lot, the subject of the application, be sold by way of public auction for the purposes of redevelopment of the Lot;

2) Mr Anthony WK Chow and Ms Anna SH Chow, nominated by the applicants, be appointed the trustees (“the Trustees”) to discharge the duties imposed on them as trustees by the Ordinance in relation to the sale of the Lot;

3) The Trustees be authorized to charge such remuneration for their services in accordance with the terms set out in the letter of Messrs Guantao & Chow dated 19 July 2022;

4) For the purposes of the sale of the Lot by public auction: -

a) the sale of the Lot be on the particulars and conditions of sale the same or substantially the same as those set out in the draft Particulars and Conditions of Sale to be approved and initialed by the tribunal; and

b) the reserve price be set at $2,134,000,000;

5) Subject to further extensions that the tribunal may subsequently allow upon the application of the purchaser of the Lot or its successor in title, the redevelopment of the Lot and the Building shall be completed and made fit for occupation within a period of 6 years after the date on which the purchaser of the Lot becomes the owner of the Lot;

6) For the purposes of redevelopment, the Lot shall include not only Kowloon Inland Lot No 7306, but also (in the event of a successful lease modification or in-situ land exchange application which involves Kowloon Inland Lot No 7306) the amended or new lot as may be granted or approved by the Director of Lands in such lease modification or land exchange (with or without a new lot number to be assigned by the Director of Lands); and

7) Liberty to the applicants, the respondents, the Trustees and the purchaser of the Lot or its successor in title to apply to the tribunal for further directions.

COSTS

120.Following Good Faith ^[1], I make a costs order nisi that the applicants do pay costs of these proceedings to the respondents, on High Court scale with certificate for counsel and including any reserved costs, to be taxed if not agreed.  Unless any parties apply by summons to vary, the costs order nisi shall be made absolute upon expiry of 14 days from the date of this judgment.

Mr Mok Yeuk Chi and Mr Adrian But, instructed by Howse Williams, for the applicants

Mr Desmond Leung, instructed by Foo and Li, for the 4^th and 9^th respondents