Redhill Properties Ltd v. Director of Engineering Development

LDMT000005/1983

Property law - Mass Transit resumption - value of resumed property on basis of hypothetical refurbishing - contractual and statutory restrictions - comparative and residual methods - market value gross receipts - allowance for profit and risk - Internal Rate of Return and Return on Equity alternative methods - Held: 1. In exceptional circumstances of this particular resumption residual method of valuation best alternative; 2. Compensation assessed at $16 million - Section 18 Mass Transit Railway (Land Resumption and Related Provisions) Ordinance, Cap. 276; Sections 4, 11, 12 Crown Lands Resumption Ordinance, Cap. 124.

IN THE LANDS TRIBUNAL OF HONG KONG

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Coram: TRIBUNAL: His Honour judge Cruden, Presiding Officer.

Date: 22nd day of December, 1983

ADVISER: F.Y. Kan, Esq., Chartered Surveyor, appointed under Section 9(4) of the Lands Tribunal Ordinance, Cap. 17.

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JUDGMENT

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1. The applicant, pursuant to Section 18 of the Mass Transit Railway (Land RESUMPTION and Related Provisions) Ordinance, Cap. 276 (hereinafter called "the Ordinance") has applied for compensation under Item 1 of Part I of the First Schedule thereto consequent upon the Crown resuming the applicant's residential property known as Kornhill East, being Quarry Bay Inland Lot 5, Hong Kong. Notice under the Ordinance of the resumption for the purposes of and incidental to the Mass Transit Railway was published on the 10th dar of July 1981 in No. 28 Volume CXXIII 'The Hong Kong Government Gazette' as Government Notice 2005. Under that Notice the subject property was resumed and reverted to the Crown on the 10th day of August 1981.

2. The applicant in its notice of application claimed $36,300,000 as compensation for the land resumed. Both parties before the hearing, under Rule 18, filed their respective valuers reports. These reports disclosed that the applicant had by then reduced its claim to $20,100,000 While the respondent was prepared to offer $14,250,000 in full compensation. At the hearing this difference between the parties was further narrowed as the applicant's valuer reduced his valuation down to $19,060,000 while the respondent's valuer amended his valuation up to $15, 200, 000. In the result $3,860,000 separates the parties.

3. The subject property is a rectangular lot comprising 1,734.89 square metres (18,669 square feet). The lot, which was level, formed part of a platform about 92.6 metres above the principal datum level on a hill which rises steeply from the south side of King's Road, Quarry Bay, Hong Kong Island. Erected on the lot was a large three-storey brick residential structure comprising two semi-detached houses. There buildings together with the nearby Kornhill West were built in the early years of this century to house the senior managers of Taikoo Dockyard. Both properties were connected to King's Road below by a 300 metre private access road.

4. By the time of the hearing the buildings had been demolished and the ground level had been substantially lowered as part of the works for which the property had been resumed. However, detailed plans of the buildings were produeed, supported by a series of 11 large photographs. These included 2 aerial photographs showing the position of Kornhill East in relation to Quarry Bay, Taikoo Shing and neighbouring properties; 5 photographs shoring the exterior aspects of the building; and 4 inside photographs showing some of the principal rooms.

5. From these exhibits it was clear that Kornhill East had been a large, attractively designed building, situated in spacious surroundings enjoying the amenities of a tennis court and swimming pool as well as magnificent harbour views. Because of the elevated site it was relatively isolated from the residential and other buildings in Quarry Bay. This privacy was also further protected as the rear of the property shared a common boundary with the Tai Tam Country Park. From this evidence Counsel for the applicant's description of the property as an Edwardian mansion was not entirely inappropriate. Before leaving this helpful photographic evidence it should be emphasised that, as the plans of the property showed, the tennis court, the major part of the swimming pool and the large areas of lawn visible in the photographs, were not part of the resumed subject property but were built on Crown land. This fact was common ground between the parties.

6. The original Crown lessee of the property was the Taikoo Dock Yard and Engineering Company of Hong Kong Ltd. which has changed its name to Swine Pacific Ltd. However, the applicant is the beneficial owner of the property as purchaser under an agreement for sale and purchase from Swire Pacific Ltd. registered in the Land Office on the 16th day of February 1979 as Memorial No. 1660275. The Tribunal was informed that all these companies form part of the Swine Group. The Crown lease was granted on the 28th day of April 1910 for a period of 75 years from the 30th day of July 1900 renewable for a further term of 75 yours. On expiration of the first 75 Years the lease was renewed for a further 75 years. The Crown lease, as was common for leases of that period, imposes few restrictions on the lessee. There is the usual rate and range clause and a prohibition on use for offensive trades.

7. Turning to any statutory restrictions, the property under the Town Planning Ordinance, Cap. 131 is designated Residential (B) on the Quarry Bay Outline Zoning Plan LH 219 dated the 29th day of October 1976. Under the Hong Kong Airport (Control of Obstructions) Ordinance, Cap. 301 the property is affected by the Hong Kong Airport (Control of Obstructions) Order dated the 21st day of September 1982 being within the area delineated and described in the plan numbered LM/152 deposited in the Land Office. That Order imposes a  height limit on buildings erected on the property of 91.44 metres (300 feet). Any buildings on the property would, of course, also be subject generally to the provisions of the Buildings Ordinance, Cap. 123.

8. In approaching their valuations, Mr. A. G. Doran, called by the applicant and Mr. H.F.G. Beeson for the respondent were both agreed that the correct basis of valuation was that the property, as at the 10th day of August 1981, was suitable and available for refurbishment. The hypothetical refurbishment of Kornhill East contemplated by the applicant, was the conversion of the 2 semi-detached houses into 6 self-contained flats. The applicant obtained reports setting out the necessary steps to complete this conversion from Wong, Tung & Partners, Architects, Ove Arup & Partners, Structural Engineers and Levett & Bailey, Chartered Quantity Surveyors. By consent these reports were produced by Mr. Doran and formed a basis for his valuation.

9. I recognise, as a matter of fact, that refurbishment is not an alternative commonly adopted by developers in Hong Kong Generally they prefer to demolish an existing building and rebuild, rather than exploiting an existing site by altering and renovating an old building. However, as a matter of law, this is an alternative open to developers and I accept the agreement of the parties, to determine the compensation payable, on this basis. Certainly there are no contractual restrictions on the applicant under the Crown lease for such a redevelopment. Any refurbishment would, however, have to conform to the height restrictions under the Hong Kong Airport (Control of Obstructions) Ordinance and comply with the relevant provisions of the Buildings Ordinance.

10. Because of the relatively few number of residential properties remaining in Hong Kong of the age and character of the subject property together with the unusual nature of the hypothetical redevelopment by refurbishing, the project, if not unique, would certainly have been a rarity. The subject property itself provides some evidence of the first factor for by the time of the hearing, the Kornhill East building had been demolished and the ground level lowered. In the circumstances both parties were agreed that the preferable method of valuation by comparison was, on the facts, not possible. There simply were no truly comparable properties to enable any direct comparison to be made. The valuers were therefore obliged to fall back on the residual method of valuation. Both valuers recognised the potential inherent weaknesses of the residual method. A useful definition of the residual method is to be found in 'Modern Methods of Valuation' D.M. Lawrence & Ors. (6th Edn. ) page 152:

"Where the residual method is employed the market value of the property when developed to the best advantage is ascertained and allowance made for the period of deferment; the cost of the necessary works and an allowance for profit and risk is then deducted; on this basis the result should represent the present value of the property in its existing condition."

11. In similar circumstances the Lands Tribunal has in the past accepted valuations employing the residual method - Director of Lands & Survey v. Wong Chung-don & Ors. (1977) H.K.L.T.L.R. 43; Hofei Estates Ltd. v. Secretary for City and New Territories Administration C.L.R. No. 1/1982. I accept that in the present circumstances the residual method of valuation is the best of the alternative methods of valuation available.

12. Both valuers in adopting the residual method followed the same procedure. As to the factors relevant in the application of the residual method both parties were agreed that:

13. The two important remaining factors in a residual valuation were the gross receipts that the applicant could expect to receive on a sale of the 6 new flats after the refurbishment was completed and the allowance to be deducted for profit and risk. These were the two major issues which were strongly contested by the parties. It was their differences on these two issues which is reflected in the applicant's final claim of $19,060,000 and the respondent's final offer of $15,200,000. I will now consider these two major issues in turn. #Gross receipts

14. The gross receipts represent the value of the property after refurbish-ment less an allowance for deferment. The statutory basis on which that value is to be assessed is the amount which the 6 flats, if sold in the open market, might be expected to realise. Both valuers while accepting that .there were no true comparables which could be used by way of direct comparison nevertheless were obliged to consider a wide range of other properties in their attempt to assess the open market value of the 6 flats. None of these other properties were similar to the subject property but they did provide useful evidence of open market sales and rental values during 1981 and in particular for the period immediately before and after the 10th day of August 1981.

15. Mr. Doran considered asking prices for low density residential properties in Shouson Hill and North Point; house sales in Shek O, Stanley and The Peak; the rent of a flat at Tytam; and second-hand flat sales in Causeway Bay and North Point. Mr. Beeson considered a similar wide ranging number of sales of flats in North Point, Causeway Bay, Mid-levels , Repulse Bay and Stanley. Both valuers also were aware of the details of two adjoining properties which had been owned by the Swire Group, namely Kornhill West and Finnie Ridge, whose ownership has now passed to the Crown, for the same Mass Transit Railway purposes, as the subject property.

16. With the assistance of those indicators of open market values for residential properties during the relevant period, Mr. Doran and Mr. Beeson then assessed the open market sale value of the 6 flats. In the event they arrived at the undermentioned valuations:

17. These open market values for the 6 flats show not only a difference between the two valuers in their valuations for each flat and their total valuations but also in their relative values. To understand these differences it is necessary to turn and consider the nature of the 6 flats which would be created after the alterations were completed.

18. The consolidated reports of Wong, Tung & Partners, Ove Arup & Partners and Levett and Bailey, together with the other relevant exhibits Produced, indicate that:-

19. In evidence it was contended on behalf of the applicant, that the plans were only sketch plans and could be altered to improve the general layout and also to provide, if necessary, a third bedroom. As to any remaining layout inadequacies, the applicant's valuer observed that inconvenience is the price an owner customarily has to pay for character. On this issue I accept the respondent's submission that the consolidated report contained the optimum plans for refurbishment and were agreed to by the parties as the basis for valuation of the new 6 flats.

20. I therefore propose to assess the value of the 6 flats on the basis of those plans subject only to the qualification that, in minor respects, they might be susceptible of variation within the agreed costs. Quite apart from cost, I recognise that, as well as access, major difficulties would have to be overcome to provide natural light for a third bedroom created from any of the proposed two bedrooms. I do not accept that the arches within the common living / dining room space could be removed without structural consequences. All the evidence, including the fact that they are weight-bearing, is to the contrary.

21. A major physical difference to the building would be that the ground floor would be lowered below the existing ground level. One of the consequences would be that persons in the ground floor flats, when seated, would have no view except into the nearby adjoining sloped bank. If they stood, they would have a better, but still limited view. Certainly it would only be occupants of the 1st and 2nd floor flats who would enjoy the fine panoramic views available to occupants of the building before conversion who in fact only used the 1st and 2nd floors for residential purposes. I also note that even on those upper floors the existing large open galleries would be closed in and would not be replaced by any balconies.

22. Normally a ground floor flat will command a higher value than the floors immediately above the ground floor. This tendency is reflected in Mr. Doran's valuation where both the ground floor flats are valued, adopting a higher unit rate, at over $5 million each while the 1st and second floor flats are valued, at lower unit rates, in the $4 million range. Mr. Beeson disagreed with this approach. In his view the lowered  ground floor flats would have a sunken, unusual appearance which would affect view, privacy and increase the risk of the premises being affected by flash flooding. For this reason he valued the ground floor on the basis of the same lower unit rate as he employed for the 2nd floor flat which has the disadvantage of no lift. I am satisfied that the disadvantages relating to these particular ground floor flats will, in relative terms, be even greater. I find that on the open market they would command a lower unit rate than either the 1st or 2nd floor flats. I further find that the 1st floor flats would command the highest unit rate and that the unit rates for the 2nd floor flats would be somewhere between these two extremes.

23. From the valuers assessments it will also be observed that Mr. Beeson has made no distinction between the flats on each floor while Mr. Doran increased the value of the Eastern flats by an average of about 1.5% compared with the Western flats on the same floor. In evidence Mr. Beeson considered whether flats on the higher Eastern floors might have a better view. Under cross-examination, Mr. Beeson replied that if he were to make an allowance for this difference it would reduce his total valuation as he would preserve his existing values for the Eastern floors and reduce the comparable values for the Western floors by 2% to 3%. I am satisfied that the Eastern views are superior to the Western views. However, I am further satisfied that this difference will not affect the two ground floor flats because their views, as a consequence of the lowering of the ground floor level, will be substantially similar. Adopting Mr. Doran's approach for the remaining flats I propose to allow a small percentage increase for the Eastern flats on the 1st and 2nd floors for their better view.

24. There were also other factors raised in relation to the 6 new flats, apart from their own physical characteristics detailed in the consolidated reports, which it was claimed would affect their value. These related to access, squatters, and locality.

25. So far as access is concerned, the subject property Was linked to King's Road, at a point opposite Taikoo Shing, by a 300 metre private road. This road was also shared, as a sole means of access, with the occupants of Kornhill West and Finnie Ridge. The applicant recognised the existing extreme traffic congestion in North Point particularly along the King's Road axis. However, Mr. Doran reminded the Tribunal that the revelant date to consider was when the subject property reverted to the Crown on the 10th day of August 1981. At that date, he asserted, it was known that the projected opening date of the proposed Island Eastern Corridor, including a link to Taikoo Shing, was towards the end of 1983.

26. By the date of this hearing it was known that due to various delays the now partly constructed Island Eastern Corridor will not be completed this year. During the hearing 1985 was mentioned as a possible late. This is not a case where the Tribunal is allowed the benefit of hindsight but it must evaluate the position in the light of the known position in the market on the 10th day of August 1981. Mr. Doran's bare assertion, unsupported by any documentary or other evidence, was disputed by Mr. Beeson. Accorcing to Mr. Beeson 1983 was never the completion date for the Island Eastern Corridor and no such date was known or announced by August 1981. Again this evidence, although admissible, was hearsay in nature and unsupported by any other evidence. Limiting myself to this evidence, all I can find is that by August 1981 plans had been announced for and work had commenced on an Island Eastern Corridor. There was no precise knowledge of any completion date but the very large scale of the project meant that it would take time to construct. I am satisfied that potential purchasers of one of the 6 flats in August 1981 would be aware of the problem of increasingly congested traffic; know that the Island Eastern Corridor planned to alleviate some of this congestion had started; and anticipated that traffic conditions would no doubt worsen before they would eventually improve.

27. Mr. Beeson was also of the opinion that the presence of a squatter village beyond Finnie Ridge to the east of the subject property, would detract from the property's value. This squatter area was visible on the aerial photographs of the locality which were produced. From these and the accompanying plans the squatter village appeared a considerable distance away. In addition the photographs suggested that Finnie Ridge would tend to shield the subject property from the squatter village. This apparent position was confirmed by the applicant's Mr. K.G. Kerr, who is the General Manager for Development and Management of Swire Properties Ltd. Mr. Kerr is also a chartered surveyor and was personally familiar with all three Kornhill properties owned by the Swire Group and visited them on numerous occasions before they were demolished. He stated that Finnie Ridge rose at a higher level between Kornhill East and the squatter village. The squatter village could not be observed from Kornhill East. From the Kornhill area it was only possible to see the squatter village from the higher floors of the Finnie Ridge flats. From this evidence I am satisfied that the presence of the squatter village would not materially affect the value of the 6 flats.

28. Mr. Doran stated that the subject property's environment was unusual for a location so close to the main urban area. In his opinion it formed part of an enclave of high class residential development elevated above the middle class housing of Taikoo Shing. He went on to say that it stood on a spacious platform, surrounded by a green belt, bounded to the rear by Tai Tam Country Park, which created almost a rural ambience. There were also panoramic views over the harbour. Mr. Beeson, while accepting that the subject property may have had some of these characteristics, was emphatic that the remoteness of this relatively small area from established middle to upper market residential locations, would make it less attractive to purchasers.

29. I am satisfied that the isolation of Kornhill East from established upper market residential localities; its close proximity to dissimilar residential and non-residential areas in Quarry Bay; and the traffic problems as they appeared in 1981; would all combine to make the 6 flats less attractive than the applicant urged.

30. Leaving aside Kornhill West and Finnie Ridge, the other properties referred to by both valuers as providing some guidance to value may now be considered against that background. Mr. Doran's properties included at one extreme the sale of houses for much higher prices, namely No. 2 Shek 0 Road on 25.9.81 for $20,000,000 with a unit rate of $35,295 per square metre; No. 32 Lugard Road, The Peak, on 12.10.81 for $13,880,000 with a unit rate of $27,168; No. 27 Tung Tau Wan Road, Stanley for $10,000,000 on 28.12.81 with a unit rate of $27,600. Flats at Braemar Hill, which are of a higher quality than the applicant claimed, were sold in 1981 for prices including $2,400,000, $2,400,000, $2,180,000, and $2,153,000. Braemar Hill flats were very much smaller than the subject flats varying from 99.59 square metres to 137.31 square metres which severely limits their relevance. However, they had excellent amenities such as a swimming pool; were relatively new; far better designed than the subject 6 flats; and had 3 or 4 bedrooms. Mr. Doran's most helpful Property was the sale of No. 3 Fontana Gardens, 3rd Floor, Tai Hang Road, on 21.5.81 for $4,130,000. This was a large flat of 254.08 square metres with a unit rate of $16,255 square metres. Fontana Gardens are a modern, well planned if big scale, development.

31. Mr. Beeson's nine Comparables included a Braemar Hill flat at $2,600,000; Dragon Court $1,730,000 and $1,550,000; and Taikoo Shing $1,379,000 and $1,044,000. These flats while being geographically closer to the subject property than others, represented smaller flats ranging from 80.9 square metres to 121.7 square metres. Larger properties such as the sale of No. 28 Shouson Hill Road on 22.6.81 for $5,300,000 and Villa Veneto, 3 Kotewall Road on. 26.2.81 for $4,400,400 comprising 254.5 square metres and 204.2 square metres respectively, while interesting, were too far distant from the subject property to be of substantial assistance. Any analysis of these latter sales was also complicated by the fact that each flat included a rooftop as large or even larger than the flat itself. Perhaps the most helpful of Mr. Beeson's comparables was the sale of a duplex apartment being Flat A, 25th Floor, Block A, Provident Centre, Wharf Road, Causeway Bay on 3.7.81 for $4,789,100. This flat comprised 216 square metres together with a roof area of 23.1 metres. The flat's unit rate was $21,879 per square metre. This is a new development on the waterfront with an uninterrupted view towards Kowloon.

32. I will now consider details of the transactions whereby the Crown has also recently become the owner of Kornhill West and Finnie Ridge. Kornhill West was resumed by the Crown under the same Notice of Resumption as Kornhill East. The date of reversion was likewise the 10th day of August 1981. Kornhill West was resumed at the agreed price of $11, 690, 000. The property included a residential building similar in age and design to Kornhill East. However, because of its slightly lower location it was not affected by any height restrictions under the Hong Kong Airport (Control of Obstructions) Ordinance. Mr. Doran stated that he also acted as valuer for the Crown lessee on that resumption and that the agreed price was negotiated on the, basis of redevelopment. The respondent declined to disclose the details of any internal residual valuation it may have carried out before it agreed with the Crown lessee on the resumed price of $ 11 , 690, 000. However, Mr. Doran made an analysis of that resumed price on a residual basis. This was a highly speculative exercise. Starting with the finally agreed resumption price it was in fact a notional residual valuation done in reverse. These calculations produced a unit rate of $17,875 per square metre as the assumed selling price of the new flats within kornhill East on the basis of the agreed resumption price for Kornhill West.

33. The Finnie Ridge property was a post-war 5-storey block of 10 residential flats. The flats were of an average size of 277 square metres. Unlike Kornhill East and Kornhill West, the Crown did not become the owner of Finnie Ridge under any of its statutory resumption powers. Instead the property was purchased under an agreement for sale and purchase dated the 29th day of October 1982 for the sum of $50,000,000. Mr. Beeson pointed out that Mr. Doran' s analysis of Finnie Ridge and Kornhill East would have required the flats at Finnie Ridge to have sold on the open market at an average of $6,500,000. In Mr. Beeson's opinion that price for Finnie Ridge flats during August 1981 would have been ridiculously high.

34. The applicant invited the Tribunal to accept that both the Kornhill West and Finnie ridge transactions were negotiated at arms length. Further they were the only other residential buildings in the same locality as Kornhill East and were negotiated at a similar time. In those circumstances, Counsel for the applicant submitted that they were not only the best starting point but were also the best comparables and it that event the Tribunal might feel it need not look beyond those two transactions to determine the value of Kornhill East.

35. That submission has at least a superficial attraction. I accept they were both arms length transactions. However, I find that the analysis of the Kornhill West resumption, being at most a residual valuation in reverse, while interesting, is of lesser weight. All that was really established on the evidence was the property's accommodation value. Turning to Finnie Ridge, I have Mr. Beeson's opinion that the property was sold at a figure above the open market value. I find there was no positive evidence explaining why such an apparently high price was paid. I accept Mr. Kerr's evidence that negotiations were commenced on the 17th day of July 1982 and agreement reached on the 14th day of October 1982. I have also considered his opinion that the agreed price reflected current market values. In the light of the whole of the evidence of other transactions which were placed before me I find that Finnie Ridge was sold for a price higher than its open market value. I also observe that with the Crown as the effective purchaser - although it was negotiated and completed in the name of the Mass Transit Railway Corporation - that for a transaction of this size, agreement was quickly reached. The transaction probably was completed more quickly than had the Crown resorted to any of its formal resumption powers. The sale price alone leads me to infer that the transaction may have been affected by other considerations which, as a consequence, makes reliance on this sale price by, itself, as an indication of true open market value, less satisfactory.

36. I therefore find that it would be unsafe to rely on the Kornhill West and Finnie Ridge transactions as the best indicators of the open market value of Kornhill East. This is the very situation where it is not only desirable but necessary to go outside the Kornhill area and consider relevant transactions elsewhere. Both Mr. Doran and Mr. Beeson as experienced valuers and on their own initiative followed that same course. So far as the transactions beyond Kornhill are concerned I repeat that none of the properties concerned are true comparables but are only, at most, indicators of open market prices for residential properties during 1981. I confirm that the best indicators from these transactions would be the sale of the Fontana Gardens flat at $4,130,000 and the Provident Centre flat at $4,789,100.

37. Nevertheless all these transactions, together with the expert opinion of the two valuers and the invaluable advice tendered with his customary skill, clarity and expedition by my Adviser, Mr. F.Y. Kan, enable me, in what would otherwise have been a difficult application, to arrive at the following valuations:

38. These valuations also accord with my earlier findings relating to the differentials between floors and also between the Eastern and Western flats on the upper floors. I would observe that the apparent similarity between the gross values of the ground floor flats and the 1st floor flats, conceals the substantial difference in value between these flats. This is because the inferior ground floor flats are very much larger than the superior 1st floor flats. However, the different unit rates accurately reflect this factual distinction. The ground floor flats have the lowest unit rate of $15,100 per square metre while the 1st floor flats have the highest unit rates of $17,400 and $17,600 respectively per square metre.

Allowance for profit and risk

39. I will now turn to consider the second major dispute between the parties, in their application of the residual method of valuation, namely the size of the allowance that should. be made for the developer's profit and risk. Mr. Doran's calculations allowed the developer profit in return for the risk it would incur in undertaking the project of 10%. Mr. Beeson rejected that figure and asserted that 20% would be a more realistic allowance. He pointed out that a developer could, without incurring any real risk, have invested the same funds on a bank time deposit at 14.5% per annum. At the relevant time, he pointed out, the minimum cost of borrowing was 18%. I note that the applicant in its calculations anticipated the cost of borrowing at 19.5%.

40. Mr. Doran's response was to explain that his calculations included other inbuilt profits so the real profit to the developer was more than 10%. In an attempt to demonstrate that the 10% profit allowed in his residual valuation was a reasonable and realistic figure, he calculated the percentage return to a developer under two alternatives to the residual method. These alternatives were the:-

41. Schedules were produced by Mr. Doran setting out his analysis under these two different methods. Both methods assist in measuring the feasibility of development projects. However, as with the residual method, they have their inherent weaknesses. In particular, in considering any analysis under either method, care must be taken to limit conclusions to the information they seek to provide. The schedules do show that the internal Rate of Return on this project would have been 37.68% per annum and the Return on Equity 40.4 % per annum.

42. There was initially some confusion whether the applicant was advancing the profits produced under the Internal Rate of Return and Return on Equity methods, as alternatives to the profit allowed for under the residual method. However, the applicant in evidence and again in Counsel's closing submissions, emphasised that it continued to rely on the percentage under the residual valuation. It was explained that as the respondent had attacked the residual 10% allowance, all that the applicant sought to do was to support that allowance by reference to the much higher percentage under the alternative methods.

43. All these calculations were interesting although I suspect that in practice only the residual method and variants thereof are used on a wide scale by developers in Hong Kong. In considering these higher percentages I note, for example, that the Return on Equity calculations, by ignoring land acquisition costs - for this project at 19.5% per annum - simply provide an answer limited to that express nomenclature. They leave unanswered the question what percentage net return a developer would expect in relation to the whole of his capital outlay including the cost of land acquisition.

44. That is the question which must now be answered. In a typical development scheme for buildings of this kind 20% rather than 10% would, I am satisfied, more accurately reflect developers expectations. However, I recognise that because this is merely a refurbishing project the development period is only 13.5 months. This period is made up of 6 months to obtain vacant possession plus 7.5 months for the refurbishing contract period which is relatively shorter than for a typical redevelopment scheme. I am prepared to infer that because of this shorter period, developers would probably be prepared to accept a lower percentage return. Taking all these factors into account I find that a reasonable allowance for profit and risk would be 15%.

45. Having made these findings it is now possible, with the assistance of the residual method, to calculate the value of the resumed property. In employ-ing that method I propose to follow the same basic formula adopted by both Mr. Doran and Mr. Beeson. I have so far not commented on deferment factors. In this case they are for relatively short periods of less than 1 year. I will adopt Mr. Doran's deferment factors based on effective rates.

46. On this basis my calculations are as follows:

Deduct costs of refurbishment

47. This final figure of $15,997.044 is the value of the property ascertained under the residual method. I have already accepted the inherent weaknesses of that method but confirm that in the exceptional circumstances surrounding this resumption it is the best method available. I hold that the foregoing calcula-tion produces an accurate indication of value. I am prepared to adopt this calculation subject to rounding the final figure up to $ 16, 000, 000.

48. Accordingly I order that the respondent shall pay to the applicant compensation which I assess at $16,000,000. The applicant shall be entitled to interest on that sum from the 10th day of August 1981 until the date of payment in accordance with Section 26. Liberty to apply in respect of costs and any other consequential matters is reserved,

DATED this 22nd day of December, 1983.

Representation:

Mr. David Widdicombe, Q.C. with him Miss Maria Yuen instructed by Johnson, Stokes & Master for the applicant.

Mr. N.L. Strawbridge, Senior Crown Counsel and Mr. B. Whaley, Crown Counsel, for the respondent.