Joy Take Development Ltd and Others v. Director of Lands
Read the full judgment text of LDLR 8/2006 on BabelCite. This Lands Tribunal judgment was delivered on 14 July 2008.
1. Joy Take Development Ltd. (the “1 st Applicant”) was the registered owner of Nos. 1, 3, 5 and the 1 st and 2 nd floors of No. 7 Chun Wing Street in Tai Kok Tsui, Kowloon. Golden Square Investment Limited (the “2 nd Applicant”) was the registered owner of Nos. 9, 11, 13 Chun Wing Street, the 2 nd and 3 rd floors of No. 15 Chun Wing Street, and Nos. 17 and 19 Chun Wing Street. The 1 st and 2 nd Applicants have referred to themselves as the Group A Owners. They are represented by Mr. Liu Wah T
Cites 2 cases
|
LDLR 8 OF 2006 IN THE LANDS TRIBUNAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION LANDS RESUMPTION APPLICATION NO. 8 OF 2006 ----------------------
----------------------
Dates of Hearing: 25 - 27 & 30 July 2007, 7 - 11 April 2008 and 12 June 2008 Date of Handing Down of Judgment: 14 July 2008 ---------------------- J U D G M E N T ---------------------- Background 1.Joy Take Development Ltd. (the “1st Applicant”) was the registered owner of Nos. 1, 3, 5 and the 1st and 2nd floors of No. 7 Chun Wing Street in Tai Kok Tsui, Kowloon. Golden Square Investment Limited (the “2nd Applicant”) was the registered owner of Nos. 9, 11, 13 Chun Wing Street, the 2nd and 3rd floors of No. 15 Chun Wing Street, and Nos. 17 and 19 Chun Wing Street. The 1st and 2nd Applicants have referred to themselves as the Group A Owners. They are represented by Mr. Liu Wah Tak Walter (“Mr Liu”). Mr Liu was a practicing solicitor who established his own firm, Walter Liu & Co. Mr Liu owns and controls the 1st and 2nd Applicants. 2.Honor Fidelity Limited (the “3rd Applicant”) was the registered owner of the Ground Floor of No. 7 Chun Wing Street. Charter Win Enterprises Limited (the “4th Applicant”) was the registered owner of the Ground Floor and the 1st Floor of No. 15 Chun Wing Street. Capital Start Limited (the “5th Applicant”) was the registered owner of the 3rd Floor and Roof of No. 7 Chun Wing Street. The 3rd to 5th Applicants are members of the Peterson Group. The 3rd, 4th and 5th Applicants have referred to themselves as the Group B Owners. They are represented by Mr. Yip Wing Biu, Stephen (“Mr Yip”), the General Manager of Peterson Properties Holding Co. Ltd. of the Peterson Group. 3.The details of the ownership and address of the above said 19 property interests (“the Property”) owned by the 1st to 5th Applicants (collectively referred to as “the Applicants”) were set out by Mr. Patrick Lai, the expert surveyor for the Respondent in Enclosure 1 of his report dated 18th December 2006 (Bundle page 257). In summary, at the relevant reversion date of 7th June 2003 of the subject resumption, all the property interests of the land at Nos. 1 to 19 Chun Wing Street (“the Site”), consisting of 10 buildings of 4-storeys in height and having a total of 40 units (10 shops and 40 domestic units) were owned by the Group A Owners, with the exception of the following 4 property interests which were owned by the Group B Owners: -
4.The Property was resumed under the Lands Resumption Ordinance (“the Ordinance”) for the implementation of the Development Proposal K3 by the Urban Renewal Authority (“URA”) at Cherry Street vide Government Notification No. 1487 dated 26th February 20003. The Property accordingly reverted to the Government on 7th June 2003 (i.e. the date of reversion). 5.Under the Notice of Application filed on 29th June 2006, the Applicants jointly claimed a sum of $82 million on the basis of the market value of the whole of the Site (of which the Group A Owners claimed for the total sum of $69,227,592 and the Group B Owners claimed for the balance in the total sum of $12,772,408) plus interests and professional costs. The claims were based on the valuation shown in the valuation report prepared by Mr. C M Mo, the expert surveyor instructed and called by the Applicant. Alternatively, without prejudice to the primary claims, Mr. Mo also assessed the compensation claims for the resumption of the various property interests owned by the Applicants on the fall back basis of assessing individually the market values of the sites or units owned by the Applicants, which totalled $61,040,000 (see details in Bundle page 135). 6.The Respondent filed a Notice of Opposition opposing the application on the grounds that: - (A) the Applicants were not entitled, jointly or severally, to the compensation for the resumption and (B) the Applicants’ claims were excessive. In the valuation report dated 18th December 2006 filed by Mr. Lai, the expert surveyor called by the Respondent, the compensation for the resumption of the Property were assessed on the individual site or unit basis (see details in Bundle page 252), in the total sum of $26.422 million. Alternatively, Mr. Lai estimated that in the event the Tribunal were to decide that the Group A Owners and the Group B Owners were entitled to the compensation on the basis of the redevelopment market value of the Site as a single site, the total compensation shared between them would be $30,269,000 (Bundle page 256). 7.Before the hearing, the only remaining issue was that the Applicants’ claims were excessive. There was no longer any dispute on the Applicants’ entitlement. However, the main opposition of the Respondent is that in assessing the total compensation for various interests owned by the Applicants, they should not be taken as the market value of the Site as a whole on the basis of redevelopment value. Other than this, there were also disputes in the details of the residual valuation prepared by the 2 experts giving evidence for the Applicants and the Respondent. Evidence from the Applicants’ witnesses 8.Mr. Liu gave evidence that the Group A Owners started to stock up the units at the Site as early as in 1990, and always had the intention of redeveloping the Site. In addition, he said that the Group A Owners were an experienced developer in the redevelopment of old buildings in the urban area. Similarly, Mr. Yip gave evidence for the Group B Owners in that they also had extensive experience in property development in Hong Kong, having co-operated with other major developers in joint redevelopments in the past. 9.Having considered the evidence adduced in this case, we are satisfied with the following: -
Factual Issue before the Tribunal 10.Given the above uncontroversial facts and findings of the Tribunal, it is necessary for the Tribunal to find, on the balance of probabilities, in a “no-scheme” world where in the absence of the subject resumption affecting the Site, the Group A and Group B Owners would have co-operated in jointly redeveloping the Site. If the answer is yes, it is not disputed by the Respondent that the compensation payable to the Group A and Group B Owners should be calculated on the market value of the Site, on a joint-site redevelopment basis. Both experts have prepared and given evidence on that basis even though Mr. Mo took that basis as his primary approach whilst Mr. Lai only put that as his fall back approach. Alternatively, if the answer to the above question is no, it is not disputed by the Applicants that the compensation payable to the different Applicants should be computed on the individual sites or units basis, as set out in the fall back approach of Mr. Mo and the primary approach of Mr. Lai. The Joint Venture Agreement signed by the parties, the Group A and Group B Owners 11.The Applicants submitted that the Joint Venture Agreement (“the JV Agreement”) signed by the parties on 22nd May 2003 must be genuine and the parties were and are willing to adhere to the terms of that agreement if the whole of the Site could be excluded from the resumption. The Applicants also submitted the following in the final submission: -
12.More importantly, on the issue as to whether the Group A and the Group B Owners would have co-operated to jointly redevelop the Site as a single site, the Applicants submitted that “the Tribunal will have to resolve that question of fact in the context of a no-scheme, no-resumption world, and does not predicate upon whether the JV Agreement was genuine or not, binding or not. But the JV Agreement signed by the parties proves that a joint venture was still possible despite the resumption.” This is because, argued the Applicants, “but for the threat of resumption, the 2 Groups could have entered into a joint venture soon after July 2002, when the last unit was bought by Group B. This fact has never been challenged during cross-examination. Now, it is not open to the Respondent to argue otherwise”. 13.We agree with the above submission of the Applicants that the finding of facts as to whether the Group A and Group B Owners would have co-operated jointly to redevelop the Site as a single site does not predicate upon whether the JV Agreement was genuine or not, binding or not. The Tribunal should determine this factual issue without relying on the details of the JV Agreement because, judging from the date of the agreement, it should have been ignored in accordance with the Point Gourde principles. It is apparent that the parties could have entered into such an agreement if they considered that the existence of such a joint venture agreement could have assisted them in getting a higher total compensation from the Respondent should it be necessary to show that there was an agreement by the parties for a joint redevelopment before the date of reversion. The evidence in support of or against the likelihood of co-operation between the Group A and the Group B Owners 14.The Applicants summed up in the written submission their evidence in support of the contention that there was a likelihood of co-operation between the Group A and the Group B Owners. They are summarized below: -
15.The Respondents submitted that the following facts were against the Applicants’ case that without the resumption, it was more likely than not that the Group A and Group B Owners would have co-operated: -
16.The Respondent alleged that the parties did not actually enter into any joint venture agreement in writing until 22 May 2003, many months after the time (July 2002) that the Group B Owners had acquired the last unit of the buildings standing on the Site, which was also the latest time that Mr. Yip claimed that they would have entered into an agreement if there were no resumption. In this regard, we agree with the Applicants that when they were then already living under the threat of resumption, they obviously would have done things differently. For example, since there was the resumption, the Applicants might have indulged in trying to negotiate with the Lands Department and the URA as to whether they could have excluded their properties from the resumption, and whether they could have joined hands with the URA in the redevelopment of the much bigger site of which the Site formed part. We are satisfied that by paying attention to these proposals, which, if accepted by the Lands Department and the URA, could bring more benefits to the Group A and the Group B Owners, they might have postponed to proceed with the joint venture agreement for some months pending the outcome of these proposals. We therefore agree with the Applicants that although the Group A Owners did write a without prejudice letter to the URA alone, it could not represent its intention to go alone in redeveloping the Site on its own. 17.We are also satisfied that without the resumption, it would be inconceivable that these 2 groups of owners would be prepared to sell to the URA voluntarily, to the other purchasers or other developers for any value other than these 2 groups’ fair share of the market value of the Site on a joint site redevelopment basis. In reaching this conclusion, we have taken into account the time that these 2 groups of owners have been acquiring the properties owned by all the Applicants in this case. Being experienced property developers, it is inconceivable to believe that these 2 groups of owners would not jointly ask for the market value of the Site as a joint redevelopment site. 18.The Respondent submitted that “a credible and possible reason why the Applicants would not have jointly develop the Site even if they came to some commercial agreement to co-operate at that time is SARS.” We agree with the Applicants that the Respondent might have focused on the actual timing of when the JV Agreement was signed (i.e. May 2003). Further, we agree with the Applicants that without the resumption, the parties would have concluded the joint venture agreement much earlier, at a time before the SARS had that significant impact on the property market. 19.The Respondent emphasized in the submission that it would be better off for the Group B Owners, the group who had a lesser interest and who together owned 4 out of a total of 20 units in the existing buildings in the Site, to play a waiting game and to hold the Group A Owners to ransom. However, we agree with the Applicants that on the balance of probabilities, it is reasonable to conclude that but for the resumption, it is more likely than not that the Group B Owners would have co-operated with the Group A Owners to jointly redevelop the Site as a single site. We reach this conclusion because, as submitted by the Applicants, there was undeniable evidence that the Group B Owners was a reputable developer who “has frequently co-operated with other major developers and on its own developed some landmark developments like the Lan Kwai Fong Tower and Hotel Panorama in Tsimshatsui.” Also, there was no evidence that the Group B Owners were “some straw companies or some ordinary citizens with no proven track records or the means to participate in a joint redevelopment”. 20.The Respondent also submitted that it would be likely that the Group A Owners would have decided to develop the whole of the Site alone (after acquiring the properties owned by the Group B Owners including the last unit bought by the latter), to choose to sell out to other developers or to sell to the URA. The Respondent suggested that the Group A Owners could have decided to stick to its original plan for personal ambition in redeveloping the whole site by itself even the commercial reality show that the other group of owners (i.e. the Group B Owners) bought up the other 4 key units of the existing buildings thus thwarting the possibility of purchasing all the units by itself. However, we have heard evidence from Mr. Liu that he would prefer to co-operate with the Group B Owners rather than allowing the sites to sit idle. We agree with the Applicants that it makes every commercial sense particularly when Mr. Liu realized that the other remaining units were wholly owned by the Group B Owners, another experienced property developer. Therefore, there would not be any chance for Mr. Liu to realize the best and highest values of the properties owned by the Group A Owners except to enter into a joint venture agreement with the Group B Owners and to share the market value of the whole of the Site with the latter. Also, even if they could not enter into a joint venture with the Group B Owners, why would the Group A Owners think that some other developers would pay anything higher to them than if they themselves enter into a joint venture agreement with the Group B owners thus sharing the market value of the whole Site as a joint development site? For these reasons, the various suggestions put forward by the Respondent are all inconceivable in the circumstance. 21.Summing up, we agree with the Applicants that based on the evidence adduced in this case, it is more likely than not that the Group A and the Group B Owners would have co-operated without the resumption. Similar cases decided by the Lands Tribunal in the past 22.The Applicants and the Respondent each cited a past case of the Tribunal in support of their submissions. The Applicants submitted that this case is “virtually indistinguishable to the facts of Mayloy Development Limited v The Director of Lands (unreported Lands Tribunal case No. LDLR 4 of 1998) and Julia Tam Kan Executrix of the estate of Kan Sik Kau v The Director of Lands (unreported Lands Tribunal case No. LDLR 5 of 1998) (hereinafter referred to as Mayloy case). In particular, the Applicants said that the following facts of the present case bear striking resemblances to those in the Mayloy case: -
23.Therefore, submitted the Applicants, “on those facts, in a no-scheme world, it would be unreasonable and inconceivable to conclude in the present case that the parties would not have co-operated. 24.On the other hand, the Respondent cited the case of Cheung Lai-wan and Others v Director of Lands and Survey [1977] HKLTR 14 in which the Tribunal held that the existence of a joint development by 4 claimants in respect of 6 separate resumed properties had to be established on the balance of probabilities and since the Tribunal was not satisfied on the evidence that redevelopment had been established, the compensation of each property was valued separately. In that case, President Power (as he then was) decided that “Having considered the matter the Tribunal feels that the redevelopment value of the sites on the evidence as it stands is so remote that it cannot be given any real weight”. Therefore, the Respondent submitted that following the decision of that case, the Tribunal will not make any assumption that a site would be redeveloped but that it has to be proved by evidence. The Respondent further added that the passage from the judgment of President Power was cited with approval in Mayloy. 25.In particular, the Respondent submitted in Mayloy, the Tribunal was satisfied that the Applicants’ witnesses were reliable and accepted their evidence as truthful. However, in the present case, the Respondent submitted that both Mr. Liu and Mr. Yip were not credible and reliable witnesses. The Respondent submitted at lengths, in the final written submission, its analysis of the evidence of these 2 witnesses to show that they are not reliable because for Mr. Liu, it consisted of untruths, inconsistencies or implausible statements, material omissions or new allegations, and inaccuracies on material matters, and for Mr. Yip, it contains material omission, reckless errors on material matter and absurdities, and it is inconsistent with Mr. Liu’s evidence on material matters. 26.However, on the whole, we find that what we have relied on in reaching our finding of facts in this case really is the few rather uncontroversial facts of this case as summarized earlier. We therefore do not intend to go through all these criticisms one by one in this Judgment. 27.Indeed, in our opinion, each case has to be decided on its own merits. The 2 cases cited by the Applicants and the Respondent do not really assist either of the 2 parties. However, we do wish to add that this case should be distinguished from Cheung Lai-wan case in that in the present case, we are dealing with only 2 groups of owners whilst in the latter case, the Tribunal was deciding a joint claim lodged by 4 different owners claiming compensation on a joint redevelopment basis. Other things being equal, it is obviously more likely than not those 2 different owners could have agreed on a joint redevelopment than 4 different owners. Valuation Issue before the Tribunal 28.Mr. Mo for the Applicants assessed the market value of the Site, on a joint-site redevelopment basis, at $82,000,000 whilst Mr. Lai for the Respondents assessed the market value of the Site on the same basis at $30,269,000. It would be necessary for the Tribunal to consider the differences between the 2 experts in arriving at the market value of the Site. Valuation Methodology 29.Both experts adopted the same methodology of residual valuation, which is commonly employed by valuation professionals in Hong Kong for the valuation of the market value of development land. This is because as both experts agreed, there are no direct sales of development sites around the relevant valuation date that could be adopted as suitable sale comparables for the Site in the present valuation exercise. We accept that this is the appropriate valuation method in this circumstance. 30.Each expert has undertaken the residual valuation, which involves, as summed up by Mr. Lai in his report (Bundle page 243): “the ascertainment of the market values of the proposed development upon completion… The total value of the proposed development upon completion is termed the gross development value. Deductions are then made to the gross development value properly deferred to arrive at the residual land value. The deductions include the cost of construction, professional fees, profits on construction costs and interest payment. In order to arrive at the final land value, a deduction for developer’s profits is then made on the residual land value.” 31.Mr. Mo filed to the Tribunal and exchanged with the other side his valuation report and supplementary report dated 27th June 2006 and 16th July 2007 respectively. On the other hand, Mr. Lai filed to the Tribunal and exchanged with the Applicants his 2 reports dated 18th December 2006 and 5th March 2007 respectively. They were also called to give evidence in support of their valuation. 32.The details of Mr. Mo’s residual valuation for the Site was set out in Enclosure VI of his report dated 27th June 2006 (Bundle page 146) whilst Mr. Lai’s residual valuation was set out in Enclosure 31 of his report dated 18th December 2006 (Bundle page 459). During the hearing, the parties produced Exhibit AR7, which detailed all the components adopted by the 2 experts in their valuation reports. For ease of reference, this is now attached as Appendix 1 of this Judgment. We will consider the differences in the assumed factual parameters and the valuation opinion of the 2 experts in their residual valuations under the following headings: the hypothetical development proposed for redevelopment of the Site, the Gross Development Value (“GDV”) components and the Costs components. Hypothetical development for the Site 33.The experts could not agree to use the same site area for the Site but we note that the difference is only 0.01 m2. For all practical purposes, there is negligible difference in using either of these 2 figures. We decide to adopt the area of 575.26 m2 as quoted by Mr. Lai. 34.It was not disputed that under the Conditions of Re-grant or Government Leases of various lots of the Site, it was restricted to the use of “non-industrial purposes”. As at the date of reversion, the Site was zoned “CDA” (i.e. Comprehensive Development Area). However, it was not disputed that but for the underlying resumption scheme undertaken by the URA, the zoning would have been R(A). Therefore, but for the purpose of the subject resumption and this Application, the R(A) zoning has been adopted by both experts. 35.Hence, both experts agreed that but for the resumption, the optimal hypothetical development for the Site would be the erection of a 24-storey residential building of 4 flats per storey, over a 3-storey podium deck including ground floor shops and entrance lobby, first floor for communal facilities or clubhouse, second floor for podium garden, with the whole building served by 2 lifts and 2 staircases. The differences between the 2 experts rested on such very minor issues as to whether the plant room would be located on the ground floor or the first floor, and whether there would be a mini swimming pool on the landscaping floor (i.e. 2/F). These would only have slight effects on the estimates for the construction cost of the proposed new development. More importantly, the small differences in the total GFA of the shops and the flats proposed for the Site would affect both the estimated GDV as well as the estimated cost of the development. 36.We have considered the experts’ differences in their computation of the estimated GFA of the shops, the flats as well as other ancillary accommodation. We find that Mr. Lai’s figures are generally more reasonable. However, we find the differences to be very trivial too so that we do not find it necessary to go through each figure by each in this Judgment. Instead, we decide to adopt Mr. Lai’s estimated GFA figures as a whole. The only exception is that we agree with Mr. Mo that in general, it would enhance the value of the proposed composite development by erecting a mini swimming pool in the landscaping floor. Therefore, we have adopted Mr. Mo’s proposed area and unit cost for the mini swimming pool and the consequential changes in the remaining area of the landscaping floor in the computation of construction cost for the said floor. Estimation of the Unit Rates for the Shops and the Domestic Flats in the proposed new development 37.Mr. Lai and Mr. Mo adopted the following per m2 unit rates for the different components of the proposed new development: -
Adoption and adjustments of comparables for the shops 38.Mr. Mo analysed and adopted 4 shop comparables in his analysis at Enclosure IV of his report (Bundle page 148). He analyzed his comparables in terms of the RZA (Reduced Zone A) area, in relation to the shops in the proposed new development on the Site. He adjusted the comparables for the factors of location, frontage, size, retail potential & management, layout and time. He arrived at per m2 unit rates of $68,915, $63,166, $75,454 and $87,555 for his Comparables referenced A1, A2, A3 and A4 respectively. He finally adopted the average of these unit rates, i.e. the average adjusted unit rate of $73,772 per m2 (on RZA basis) or $65,000 per m2 (on overall net area basis) for the shops in the proposed new development on the Site. 39.In addition, Mr. Mo relied on the Lands Tribunal decision on the assessment of compensation for shops nearby, along Tai Kok Tsui Road (unreported case of Yuen Shu Wing v The Director of Lands, etc., LDLR 1 to 4 of 2004 (consolidated) dated 18 April 2007), to support his assessments for the shops in the proposed new development on the Site. 40.On the other hand, Mr. Lai analyzed his 5 comparables (Comparables R1 to R5) in Enclosure 32 of his report (Bundle page 460). After adjusting for location, frontage, headroom, quantum, building age and time, Mr. Lai arrived at per m2 unit rates of $39,004, $46,413, $34,861, $29,998 and $38,713 for Comparables R1 to R5 respectively, giving an average adjusted unit rate (on overall area basis) of about $37, 800 per m2. 41.We do not agree with Mr. Mo that we should give any weight to the decision of the Lands Tribunal in LDLR 1 to 4 of 2004 (Consolidated) as each case was decided on its own merits, on the basis of the evidence heard before the Tribunal in that particular case. It was never accepted by the Lands Tribunal in the past that the expert could use the decision of the Tribunal in other previous cases, so far as the facts and/or valuation are concerned, for the use and decision of any other new case. Otherwise, it would be very unfair to the parties of the new case that is to be decided by the Tribunal. For the same reason, although Mr. Lai has spent considerable time in analysing the decision of the said case of LDLR 1 to 4 of 2004 (Consolidated) in his Supplementary Report in response to Mr. Mo’s reliance on the decision of that case, we have to ignore that part of Mr. Lai’s evidence as it was totally irrelevant in the present case. 42.We have decided to use all the comparables quoted by Mr. Lai. We have also agreed with Mr. Lai to use the overall net area (the EFA as quoted by Mr. Lai) for analysis, instead of the RZA quoted by Mr. Mo. The method used by Mr. Lai is obviously more commonly adopted by the landlords and tenants in Hong Kong, particularly bearing in mind the secondary retail location of the Site in this valuation exercise. On the whole, we find Mr. Lai’s adjustments to be more reasonable and appropriate than Mr. Mo’s. In addition, we agree with Mr. Lai that there would not be any need to adjust for the layout or the retail and potential management factors so far as the differences between the comparables and the shops of the proposed new development in the Site are concerned. We adopt all his adjustments with the exception of the adjustments for locations for which we have adopted much lesser adjustments than Mr. Lai. On this basis, we have set out our adjustments to the comparables in Appendix II. We find that the average after adjusted unit rate of the comparables to be about $47,700 per m2. We shall use this unit rate for the calculation of the GDV of the shops in the residual valuation for the Site, which will be set out in Appendix IV. Adoption and adjustments of comparables for the domestic flats 43.Similarly, we have considered the adoption and the adjustments of the residential flat comparables made by Mr. Mo and Mr. Lai. Mr. Mo opined that the appropriate unit rate for the domestic units of the proposed development on the Site should be about $42,000 per m2 whilst Mr. Lai’s corresponding figure was about $35,000 per m2. 44.We agree with Mr. Mo that Mr. Lai’s sole comparable development, Metro Harbourview was too far away from the Site. It also had other drawbacks, including being too close to the Funeral Parlour on the opposite side of Tai Kok Tsui Road. On the other hand, Mr. Mo relied on comparables from 3 different projects (Park Avenue, Island Harbourview and Central Park), which are all in close proximity to the Site. We therefore decide to adopt the comparables identified and analyzed by Mr. Mo. We further find that Mr. Mo’s adjustments for his comparables to be reasonable and appropriate with the exception of the adjustment for facility and management. We therefore adopt his adjustments in total except that we allow a much higher adjustment of -15% for the facility and management factor. This is because judging from the type and the scale of the proposed development, and the size of the Site when compared with the comparable development projects (for which the domestic comparable are located) we think that our adjustments are more appropriate than Mr. Mo’s. On this basis, we set out in Appendix III our analysis and adjustments to the domestic comparables for the proposed development on the Site. We arrived at an average adjusted unit rate of about $39,100 per m2. We shall use this unit rate in the residual valuation for the Site, as set out in Appendix IV. In addition, we agree with Mr. Lai that no additional adjustments have to be made for the flats’ utility platforms and the balconies. Their values are deemed to be included in the values of the flats as assessed. Should marketing cost be deducted from the estimated GDV 45.Mr. Mo did not allow for any marketing cost in his residual valuation model. Mr. Liu said in his evidence that his own staff could carry out the marketing of the proposed redevelopment project, which after all was considered to be not a big scale project. The Applicants submitted that the Group A Owners would have more than sufficient experience and manpower to carry out the necessary marketing. 46.On the other hand, Mr. Lai opined that the usual commission of 1% of the residential portion of the GDV payable to the estate agents should be allowed for as the marketing cost deduction in the residual valuation. 47.We agree with the opinion of Mr. Lai. We have witnessed much change in the marketing of new development projects in Hong Kong in the last decade. Nowadays, we noticed that even for the biggest property developers in Hong Kong, they have preferred to have exclusive or multiple agency arrangements with the estate agency firms in Hong Kong when marketing new projects particularly for the residential units. A good example of this is the Henderson Land’s project Metro Harbour View at No. 8 Fuk Lee Street, which was adopted by Mr. Lai as the only comparable project for the purpose of estimating the appropriate residential unit rate for the proposed development on the Site. There are obviously advantages in employing (but thereby paying for these estate agency firms) when marketing a new development project because for instance, these firms could mobilise a very number of their agents from various offices to the Site at a short notice of time. This is nothing a property developing company, even for the big ones but not to mention the smaller ones such as the Group A Owners, could compete. Since we are adopting the actual prices from comparable sales in the market, we should assume that the marketing arrangement for the residential flats for the Site are similar to those of the comparables flats in other similar developments for which the experts identified in their valuation. For this reason, we agree with Mr. Lai that the usual 1% commission cost of the sale price of the flats for the Site is allowed for as deduction in the residual valuation. Deferment Rate for the GDV 48.Both experts agreed to adopt 7% p.a. as the deferment rate, which was calculated as 2% over the then prevailing best lending rate of 5%. We agree to use this figure. Estimation of the cost of constructing the proposed development 49.There is a substantial difference between the 2 experts on the total cost of constructing the proposed development on the Site. Mr. Mo estimated a total cost of about $44.43 million whilst Mr. Lai’s corresponding estimate was about $62.56 million, which is about 40% higher than the estimate of Mr. Mo. In our experience, this is quite unusual when different experts gave evidence on residual valuation basis. The difference arose because the 2 experts used entirely different approaches in arriving at the adopted unit rate for the cost of construction. 50.Mr. Mo opined that the building cost for the proposed development should be about $8,000 per m2, based on the information provided by Davis Langdon & Seah International, a leading firm of quantity surveyors. In applying this unit rate to the GFA of the proposed development for the Site, he multiplied by a factor of 1.05 so that the GFA was converted to the Construction Floor Area so as to include all stairwells, lift shafts voids, plant room, balconies, bay windows, water tanks and the like. For the GFA of the clubhouse and the mini swimming pool on the podium floors, he adopted unit rates of $8,000 per m2 and $7,000 per m2 respectively. 51.On the other hand, Mr. Lai compiled a table of construction costs of a number of new buildings completed in 2003 and 2004, based on the information obtained from the Monthly Digests published by the Buildings Department. Mr. Lai opined that in compiling the table, he has identified those newly completed buildings similar in type and scale to the proposed development on the Site. He has worked out the average unit cost of construction of those new buildings at the rate of about $11,700 per m2. He considered it appropriate to adopt this figure as the average cost for the G/F and the upper floors (with the exception of the podium floors) of the proposed development on the Site. However, he considered that the proposed cost of constructing the 1st floor and the 2nd floor would be lower than the above said average unit cost. He actually adopted unit rates of $7,000 per m2 for the GFA of the 1st floor, $1,000 per m2 for the GFA of the 2nd floor and $5,500 per m2 for the GFA of the balconies. 52.Mr. Mo commented in his Supplementary Report that Mr. Lai’s method of using the Building Department’s Monthly Digests had a number of drawbacks. This included firstly, the criticism that there was no standard as to which information was included by the projects’ Authorized Persons in filing the data to the Buildings Department and secondly, the costs computed on a project to project basis could relate to historic costs incurred at different times notwithstanding that those buildings were reported to have been completed in 2003 and 2004. Therefore, comparing the figures worked out by Mr. Lai based on his chosen data from the Monthly Digests with the average building cost quoted by Davis Langdon & Seah International, Mr. Mo urged the Tribunal to adopt the figure from the latter source. 53.After consideration of the 2 approaches advocated by the 2 experts, we prefer to adopt the method used by Mr. Mo. This is in any event the usual and traditional source of building cost data obtained and used by most valuation professionals and the Lands Department in Hong Kong. As there are some parts of the proposed development, which would cost less than the average unit cost of the standard buildings of similar type and scale, we have adopted the following unit rates in the residual valuation when computing the costs of construction of different parts of the proposed development: -
54.As shown in the working at Appendix IV, we estimated the cost of constructing the proposed development to be $45,420,678. Estimation of the allowance for the professional fees 55.In estimating the amount of professional fees, both experts applied the same 6% on the costs of construction. As this is the generally accepted and reasonable percentage for estimating the professional fees, we accept to use this percentage. Estimation of the profits on cost of construction and the profits on value of land 56.Likewise, both experts adopted the same 20% as the profits on the cost of construction and the profits on the value of land. As this is also the generally accepted and reasonable percentage for allowing for the profits on both of these two items, we accept this percentage being used in the residual valuation. Estimation of the period of development for discounting the GDV 57.Mr. Mo opined that since the total GFA of the proposed development was only about 5,000 m2, the maximum time allowed for the construction of the new development should only be 2 years. Therefore, he commented that the 3 years’ period as suggested by Mr. Lai was excessive. Mr. Mo quoted an example of a previous redevelopment by one of the Applicants for the site at Nos. 121 to 127 Wuhu Street. Mr. Mo produced documents at Enclosure S3 of his report in which it was shown that it took less than 2 years to complete the new building. On the other hand, Mr. Lai gave an opinion that the optimum development period allowed for the proposed new development should be 3 years. 58.The Applicants submitted in the final written submission that Mr. Lai’s estimated period of development had not taken into account the possibility that the joint re-development could have been pre-sold. The Applicants cited the evidence of Mr. Liu that the Group A Owners would normally sell the flats as “pre-sale flats” as they did not need to have the consent from the Lands Department (Transcript 3H-I). The Applicants stated the following in the written closing submission: “LIU also said that the pre-sale for this redevelopment could start about 1 year prior to occupation (i.e. 6 months into the construction period) (note that LIU opined that it would take 18 months to construct the subject sites as joint site) (Transcript 3K-O). Those parts of LIU’s evidence were never challenged.” 59.The Applicants submitted that Mr. Lai’s opinion on the construction period of 3 years should not be accepted, as he was not an architect and would not be qualified to express an opinion on the length of the construction period. Moreover, the Applicant alleged that Mr. Lai had failed to take account of “pre-sale”. 60.We are of the view that the development period that should be allowed for in the residual valuation does not only cover the period of constructing the foundation and the superstructure. It should reflect the entire period of development from the time when the site was vacant and available for redevelopment up to the time the proceeds of the GDV were received by the owner/developer of the Site. As such, it should include the time taken for the appointment of consultants, the design, submission and approval of building plans, the calling for tenders by the contractors, as well as the actual construction process. 61.We have considered the Applicants’ evidence that we should take account of the possibility of pre-sale of flats in the proposed development in consideration of the entire period of development. However, we also noted that in both experts’ evidence, the domestic comparables were actual sales of similar flats, which were vacant and available for occupation, but not pre-sales. And, we understand that in pre-sales, the prices of flats would usually be quite different from the prices of flats that are available for occupation. Therefore, in the absence of any analysis showing the differences in the level of prices of pre-sale flats and flats that are available for occupation, we do not accept the view that as developers could start a pre-sale marketing strategy, we could reflect that in the estimation of the period of development in this valuation exercise. It would be most inappropriate to do so in the present case. 62.All in all, we agree to adopt a period of two and a half years as a reasonable figure as the period of redevelopment for the Site. Estimation of the period for discounting the costs of development 63.We accept with the 2 experts to use half of the adopted period of development as the period for discounting the costs of development (i.e. the costs of construction, the professional fees and the profits on costs of construction & the professional fees). Therefore, since we adopt 2.5 years as the optimal period of development, we discount the costs of development for 1.25 years in the residual valuation. Estimation of the period for obtaining vacant possession & demolition of the existing structures on the Site 64.Mr. Mo did not allow for the time for obtaining vacant possession and demolition of the existing structures on the Site. As it was not disputed that some of the units of the buildings on the Site were tenanted, we agree with Mr. Lai that a further deferment of 6 months is appropriate to allow for the time to obtain vacant possession of all the property interests in this Application and to carry out the demolition of the existing structures on the Site. Tribunal’s determination of the value of the Site 65.Applying the same methodology of the 2 experts and adopting the various GDV and Cost components as set out in various sections above, we have carried out a residual valuation of the Site, which was shown in the attached Appendix IV. The value of the Site was computed to be about $61,833,000. Orders 66.We order that the Respondent do pay the Applicants compensation for the resumed Property in the sum of $61,833,000. The matters of professional fees, interest and costs shall be adjourned to a date to be fixed by the Listing Officer, with liberty to apply for any other ancillary and consequential matters.
Mr. Patrick K.C. CHONG, instructed by Messrs. Ng, Lie, Lai & Chan, for the 1st to 5th Applicants Mr. Anthony ISMAIL, instructed by the Department of Justice, for the Respondent
|
Cases cited in this judgment