More than 11,000 pre-sale flat transactions may be cancelled this year following the drastic fall in property values since last year's peak, a brokerage said. Santander Investment said the potential massive defaults could result in a sudden extra supply of units for sale, boosting the total supply of flats sharply beyond the Government's original forecast for the next two years. In its latest report, the firm estimated about 34,054 people who bought flats in the first half of last year had not arranged mortgage loans. Of these, it was highly possible that 11,351 would forfeit deposits following the 30 to 40 per cent fall in home values since the middle of last year. That meant potential supply could reach as much as 38,735 units a year in 1998-99, property analyst Nichols Pang said in the report. The figure compares with the Government's projection of 24,790 this year and 33,560 in 1999. Potential forfeitures were expected to be seen in several key projects, which together had sold 6,191 units at last year's peak, said Mr Pang. They included Villa Esplanada in Tsing Yi, a venture by China Resources Enterprises, Sun Hung Kai Properties and Cheung Kong (Holdings); and Vista Paradiso in Ma On Shan, jointly owned by Cheung Kong and Concord Land Development. Others include Cheung Kong's Laguna Verde, in Hunghom, and Maywood Court, part of its Kingswood Villas development in Tin Shui Wai. HKR International and New World Development's Discovery Park in Tsuen Wan also is expected to see many defaults this year. Besides the unexpected new supply, other negative factors to further pressure the sagging sector include low rental yields and high funding costs. 'The prevailing rental yield of 4.7 per cent is simply too low to lure investors and the cost of funding at about 10 per cent is unlikely to drop in the short term,' said Mr Pang. Santander Investment said rental yields should return to 6 to 7 per cent because the prevailing prime rate was already higher than in 1995. 'Assuming no changes in both rental value and interest rates, property prices would have to drop by 29.8 per cent in order to push the rental yield to the 1995 level of 6.7 per cent,' said Mr Pang. He said properties had become more affordable after the fall in values. Households were paying about 42 per cent of their income to service monthly mortgage payments on small flats, compared with 57 per cent at the market's peak in the third quarter last year. However, lower purchase prices were not the only factor affecting home-buyers' decisions. Others included sentiment, expectations, income growth and job security. 'Due to the economic contraction in Hong Kong, none of these factors is strong enough to boost demand for properties.'