Demand for luxury homes is likely to remain buoyant this year, although rent returns on them have fallen from a 10.7 per cent peak in 1990 to around 4.3 per cent today, according to property specialists Marlin Land. The drop in yield is a result of a 'shopping spree' by speculators that sent prices of luxury residences surging by 20 per cent in the past six months, executive director Ruyee How said. 'This drop is due to a strong appreciation in capital values amidst confidence in the investment market and somewhat slower rental escalation,' she said. But investors were not over-concerned by falling yields when they were more than compensated by spiralling prices, she said. The value of luxury apartments increased by an average of 29 per cent annually from 1990 to 1996. 'They are currently bought and sold at levels higher than those reached in 1994,' Ms How said. Some estates like Dynasty Court increased in value by more than 50 per cent last year alone, she said. Prices rose from $9,507 per square foot to $14,617. The prevailing average price for luxury apartments on Hong Kong island was around $9,909 a sq ft. Prices are predicted to appreciate between 10 and 15 per cent this year despite Monetary Authority attempts to squeeze the market by pressuring banks to tighten mortgages on property worth more than $12 million. The loan reductions, down from 70 per cent to either 60 per cent or $8.4 million, 'may have some effect' on the sector, Ms How said. 'This is essentially a 16.7 per cent increase for the equity, which may deter some buyers,' she said. 'But the luxury sector is different and is more or less self-monitored. The underlying factor is supply and demand.' The luxury market was not affected by the same factors driving the mass residential sector, she said. Fifty-five per cent of the market was owned by investors rather than owner-occupiers and this investment area was driven mainly by market expectation, scarcity of supply and an increase in the number of high-income families. 'Investors are likely to bid aggressively to even more than the current market price if they believe the property will appreciate.' Five factors indicated that luxury homes would, indeed, continue to increase in value, she said. Hong Kong's anticipated smooth transition would greatly reduce risk. China's relaxation of austerity measures would bring mainland buyers back into the market. The presence of China's government and business elite, who preferred prestigious homes, would grow after the handover. Hong Kong continued to represent a mature, liquid and open property investment market in Asia. Developers were 'increasingly keen to hold on to part of their luxury developments to enhance their proportion of stable, recurrent income'. In addition, more families were moving into a higher income bracket. With about 170,000 families earning more than $50,000 a month, 'there will be a strong demand to acquire larger living space'. Although developers were likely to build more units to satisfy demand, supply would continue to be 'constrained by the shortage of available land for luxury residential use', Ms How said. 'Unless a sustainable and adequate supply of such property is available in the future, prices are likely to continue on the upward trend.'