Recent transactions showed rents at the top end of the market surged about 20 per cent over the past two quarters, mainly due to the diminishing availability of top-quality houses.

FPDSavills expected the luxury leasing market to remain buoyant while average rents should increase a further 3 per cent in the second quarter and 4 per cent in the third quarter.

Given the rapid rate of economic growth and the expansion in the financial services and information technology sectors, the consultant said rents would rise more rapidly in the second half of the year.

As the recent interest rate rise and the volatile stock market hurt luxury residential prices, landlords generally chose to rent their properties to capitalise on the still-buoyant leasing market, it said.

They had also been flexible in negotiations, which helped keep the market active.

FPDSavills said luxury residential prices remained broadly stable, edging down 0.6 per cent in the first quarter.

While stronger-than-expected economic growth underpinned luxury prices, the volatility of the stock market and the rising interest rates created uncertainties.

The consultant expected average luxury prices to remain steady in the second quarter with a more rapid rise in the second half of the year when interest rates stabilised.

Prices at the top end of the market would continue to outperform due to limited stock, it said.

Meanwhile, the substantial volume of new supply and the competitive pricing strategies adopted by developers forced mass and medium-sized residential prices down 3.6 per cent in the first quarter.

This left the average price for mass housing only 5.3 per cent higher than the recent market trough in the third quarter of 1998, FPDSavills said.

Primary supply and prices would continue to affect mass residential prices over the rest of the year while the secondary mass residential market had been squeezed by primary sales.

The launch of large projects such as Ocean Shores in Tseung Kwan O and Island Resort in Siu Sai Wan had consumed a significant amount of purchasing power.

FPDSavills said potential buyers might wait for upcoming projects such as Villa Esplanada phase three in Tsing Yi and Park Avenue phase two at the Olympic Station.

In the luxury leasing market, last month was very active, dominated by tenants with budgets of HK$30,000 to HK$60,000 per month, it said.

They were mainly mid-level staff of large corporations with housing allowances, with the preferred inclusive rents covering expenses such as rates, management fees and government rents.

Overseas and local companies in the dotcom, financial services and legal fields had helped generate a strong demand for the luxury units, the property consultant said.

The emergence of tenants in the HK$30,000 to HK$60,000 band was a result of the influx of senior executives from overseas firms during the second half last year, it said.

These executives had come to Hong Kong to identify business opportunities and are now hiring more staff to expand operations.

This has resulted in steady take-up of serviced apartments. Buildings such as Gateway Apartments in Tsim Sha Tsui and The Atrium in Admiralty continued to welcome short-term stayers, FPDSavills said.

Unlike last year when leases of serviced units were generally signed for at least six months, the terms are now signed for less than three months.