Corporate growth a fillip for luxury market
Property consultants expect rents to continue to rise as expansion by multinationals drives demand for high-quality accommodation
BUOYANT DEMAND HAS renewed leasing activity in the residential market despite signs of a slowdown in rental growth in the first three months of the year.
As companies continue to expand their businesses and more expatriate staff arrive, property consultants expect the rental uptrend to continue, particularly as the supply of luxury flats remains tight.
Jane Garnett, director of residential services with CB Richard Ellis, said the first quarter of each year was traditionally a quiet time for residential leasing, but this year had seen a higher than usual level of activity.
'This is mainly due to multinational companies continuing their expansion plans and bringing in more foreign nationals. As many of these expatriates are on relatively short-term assignments and requiring flexible lease terms, the demand for serviced apartments continues to be especially strong,' she said.
'Overall, rentals increased by about 8 per cent over the course of 2005 and we have only seen moderate increases over the first quarter of this year. However, as demand continues to be strong and the limited supply is taken up, we expect to see greater increases in rentals throughout the remainder of 2006.'
Cathie Chung, associate director of research consultancy with Chesterton Petty, said overall luxury rents were steady in the first quarter of this year, with a 0.9 per cent rise over the previous quarter.
Luxury rents on The Peak were now at $39 per square foot, while at Island South they were $29 per sq ft, in Mid-Levels they were $32 and in Happy Valley $29.
Ms Chung said the slowdown in rental growth was justified because of the rally in the past year but rentals should continue to move up on sustained demand.
Among the larger leasing deals, a 4,325 sqft house at 2 Barker Road on The Peak was recently leased at a monthly rental of $265,000, according to Chesterton Petty. A 3,216 sqft apartment at 127 Repulse Bay Road was leased for $155,000; a 2,560 sqft apartment at Bel-Air on the Peak for $100,000 and a 2,266 sqft apartment in Dynasty Court for $85,000.
Ms Garnett said leasing demand was outstripping supply as more foreign executives were being transferred to Hong Kong by their companies and more Asian executives returned due to the favourable economic factors.
'There has been very little new supply in the luxury residential leasing market. However, many of the buyers at some of the larger new developments such as Residence Bel-Air at Cyberport are likely to place their units on the rental market, which should help ease the supply situation,' she said.
Serviced apartments would continue to outperform the general luxury market as more people arrived on shorter-term assignments, she said.
Ms Garnett said rents would rise this year but the growth was likely to be moderate due to limited increases in housing allowances and the effect of the transitional termination notice (TTN).
TTN is an interim measure implemented as part of the new landlord and tenant ordinance, which took effect in July 2004. The measure allows tenants the right to stay in their existing properties for a further 12 months at the same rental.
Ms Garnett, who anticipated an overall luxury rental increase of 8 per cent to 10 per cent this year, said TTN was still having an effect as tenants who had signed their leases before July 2004 could apply for the notice.
Benedict Ma, research manager of Knight Frank Hong Kong, said luxury residential leasing demand remained firm, supported by new expatriates arriving in Hong Kong as well as tenants negotiating renewals or looking for new premises.
'However, as rentals continue to rise and housing budgets remain static, some tenants are finding better value for money in properties further afield from the traditional areas favoured by expatriates on Hong Kong Island,' he said.
Tenants are required to pay premium rents for properties in prime locations, he said. Renovated flats in old buildings in popular areas such as Central and Sheung Wan near the SoHo neighbourhood were being leased at high rents and were especially sought after by expatriates.
'We expect rents for the luxury residential sector to continue rising on firm demand. This is essentially being driven by the economic growth in Hong Kong and China as well as the growing headcount in the banking, finance and legal sectors, which have helped contribute to rising occupancy rates,' he said.
Kenneth Tsang, head of research for greater China (South) at Jones Lang LaSalle, said as buying had become more expensive than renting in the mass residential sector, some people had chosen to rent rather than to buy.
Average mortgage rates increased by about 300 basis points last year, widening the 'buy-rent' gap, which would slow the growth of owner-occupier demand. The buy-rent gap is the ratio of mortgage repayment over rental payment for the same flat.
Mr Tsang said the leasing market would stay active due to the anticipated drop in owner-occupier demand.
He said rental growth would probably outpace capital value growth in the mass housing sector this year.
For the high income earners, the buy-rent gap was less of a concern and rising incomes would actually trigger their desire to upgrade. The upgrading trend would leave the market with more lower-end units for sale, limiting the price growth.