'Investors have been hurt as their assets have depreciated and the rental yield is diminishing,' Mr Lai said. 'They are becoming more and more cautious in the lacklustre market.'

Most investors were waiting to see how the Hong Kong government would make good on its promise to stimulate the property market, he said.

This included foreign funds, which had been the most active buyers in the investment market in the wake of the Asian financial crisis.

'Foreign funds are rethinking their investment strategy as most of their acquisitions in the past have ended up with depreciation,' Mr Lai said.

'Even though they keep on looking for properties, their response is slow.'

Vigers managing director Albert Chan said foreign funds were shifting their targets or considering a wider variety of options.

'Previously, they mainly focused on the luxury residential properties and grade-A offices on Hong Kong Island. But now their preference is for retail shopping premises in densely populated areas such as Causeway Bay, Central, Mongkok and Tsim Sha Tsui,' he said.

The reason for the shift was the relatively steady rental income generated by retail properties. 'The foreign fund buyers remain return-led,' Mr Chan said.

However, there had been few large-scale retail transactions recently because landlords were unwilling to dispose of their properties at low prices.

Since the peak of the market in 1997, overall property prices had plunged more than 60 per cent, and few owners were keen to sell at those levels, Mr Lai said. They were also reluctant to sell properties that were generating satisfactory rental income.

Mr Lai said that apart from deflation, the major cause of the sluggish market was the contraction in demand resulting from the decline in investor confidence.

'The government can stimulate demand by encouraging immigration of expatriates or granting the right of abode for Southeast Asian or mainland investors who purchase properties in Hong Kong,' he said.

'In addition, the stamp duty should be reduced to lower the entry cost in the investment market.'

Without effective measures to stimulate demand, the market would only get worse, he said.

Before deciding to suspend land sales or abolish the Home Ownership Scheme, the government should consider the possible adverse impact on the property industry, Mr Lai said.

Estate agencies and property-related professional firms were struggling to survive.

Vigers has sacked about 10 per cent of its staff in the past few months in a bid to reorganise the company to cope with the challenging business environment.

Mr Lai said: 'Investment deals have contracted substantially. The head count for estate agents dealing with property transactions can be reduced. Alternatively, we need more support work and we have to reallocate more resources to the professional services team.'

The ratio of estate agents to professional services staff had fallen from 1:1 to 3:7, he said. Total staff at Vigers now stood at about 150, compared with more than 200 in 1997.

'We are now putting more emphasis on valuation, management and building consultancy,' Mr Lai said.

Vigers executive director Kenny Suen said professional services helped facilitate property transactions.

'We are offering one-stop comprehensive services ranging from space planning, office workplace management, such as office downsizing and relocation, layout design and cost optimisation,' he said.