THE mass residential market is heading for a modest recovery, both in prices and rents, but the luxury sector may decline further before stabilising, according to Chesterton Petty. In its quarterly report, the agent said investor confidence returned to the market in response to an improved trading and economic environment, fuelled by steadier interest rates, optimistic forecasts of economic growth, and better political climate. Relaxed mortgage lending policies for flats valued at more than $5 million, and discounted prices at sales of new projects, stimulated activity in the residential property market. The agent said the mass residential market had completed its correction and was likely to recover modestly in prices and rental levels in the next two quarters. 'Prices in the secondary market probably have dropped a further five to 10 per cent during the first quarter of 1995, but are now off their lows,' it said. But mass residential prices still were about 20 to 25 per cent below their peak levels of early last year. While the mass market had bottomed, Chesterton Petty said luxury home prices, which were less tied to affordability but sensitive to investor presence, might fall a further five per cent. The leasing market in the luxury sector was stable in the first quarter as demand continued to rise. Leasing of serviced flats showed the best performance because of the increasing number of expatriates coming to Hong Kong on short-term contracts, it said. 'The vacancy rate in this field has fallen considerably and landlords have been forced to draw up waiting lists,' it said. However, Chesterton Petty said there was a trend recently for companies, particularly multinationals, to trim costs by reducing housing allowances. Subsequently, expatriate personnel had been compelled to relocate to smaller flats in the rental bracket of $30,000 to $60,000 a month, it said. The agent said rents in all office categories had seen substantial falls over the past six to nine months. Monthly rents in Citibank Plaza fell to $81 per square foot from $95 a year ago, and rental in Exchange Square dipped to $100 per square foot from $120. On Hong Kong Island, the rental market was most active in non-core areas such as Quarry Bay, North Point and Chai Wan. In Kowloon, rents continued to drop in the first quarter of this year, by five to 10 per cent. Chesterton Petty said prime office rents on Hong Kong Island should move within a five per cent range in the short to medium-term range, while rental for secondary and tertiary space, particularly in Kowloon, would fall further. 'Rents in all categories are likely to further weaken through 1996 as increased supply hits the market,' it said. New supply of offices expected to come on to the market in the next two years included developments at 20 Queen's Road Central and 5 Queen's Road Central, and the Land Development Corp's massive Central redevelopments. The agent also said the office sales market had remained subdued in the first quarter and prices fell further because buyers were reluctant to make investment decisions. Prices of Grade A office space should hold up in the next 12 months as yields tracked general interest rates downwards. 'Secondary and industrial office space price levels may, however, be left to sink in the absence of support from buyers, who tend to be speculators rather than investors in this market,' it said.