Aforward looking piece of analysis from Kim Eng Securities poses an interesting question. Just how many cranes do you see swinging over office projects in Hong Kong these days? There is an obvious answer. As research head Stephen Brown puts it, what you see is what you get. A record supply is being finished and there is minimal new supply coming on stream, particularly in core locations. In Central, Cheung Kong Center is nearing completion while Cosco Tower and The Center are finished and approximately 50 per cent spoken for. Looking further into the future there is only 1.8 million square feet up for completion on Hong Kong Island between 2000 and 2004. In fact it is fringe Kowloon locations such as Kwun Tong which will provide the principal source of supply over this period. There is also not much chance of fresh unannounced projects swelling the figures any time soon. Office construction does not make commercial sense at present rents and capital values. These will need to rise if projects are to start. Kim Eng's figures have new supply of office space dropping from a peak of slightly less than eight million sq ft this year to just 1.2 million sq ft in 2001 and staying low. The figures assume that take-up will amount to about 3.5 per cent of total stock annually. Rents have fallen at least 40 per cent from the pre-crisis highs and falling rents have historically stimulated demand which has rarely fallen below 3 per cent of stock annually in the past. It was as high as 10 per cent in 1984 at the bottom of a property slowdown. The take-up figures mean office vacancy would reach 16.4 per cent at the end of next year and fall to 7.1 per cent by 2003. This would constitute tight supply, particularly in more desirable locations where the vacancy rate would be lower, and would produce substantial upward pressure on rents. Mr Brown expects that real growth in rents (more than inflation) will materialise from late 2000 onwards and produce rising net asset values which will lead the sector to outperform the Hang Seng Index that year. He also points out that any given level of rents for a building is likely to produce higher capital values for that building than has traditionally been the case. This is because yields have dropped with lower inflation. He expects that yields will stabilise at about 7 per cent, roughly in line with 10-year swap rates for instruments denominated in Hong Kong dollars. Yields have been lower than this in recent years but the longer-term trend of yields in Hong Kong has been in the 9-10 per cent range. Kim Eng's work is an interesting perspective on the office market because much of the public discussion on it still centres on the larger number of projects to be completed this year and on worries that rents may not have fallen enough. However, a multi-year view into the future is an absolute requirement in this sector. Lead times for getting a prime new office building out of the ground are very long and it is a reasonable assumption that the market will discount the shorter-term scenarios.