THE latest round of quarterly Hongkong property reports indicate there is plenty of heat left in both the commercial office market and luxury residential sector, which should keep the industry active following the summer break. The predicted tightening of available commercial space in the prime office districts will be the key influence on future rents, which are expected to be driven to new heights later in the year. The Richard Ellis quarterly report, released yesterday, forecasts that grade A office vacancies should fall from 8.5 per cent at the end of last year to around five per cent at the end of this year, and force rents up a further 20 to 25 per cent. Rentals rose 9.5 per cent in the first half of this year, according to the Richard Ellis Index, as the pressure for office space became more acute. The seriousness of the office shortage - the result of several economic factors - was underlined by the Government's land sale programme for 1993/94, which offered no prime commercial lots. According to Richard Ellis, this announcement will have a major impact in 1995-96, when office vacancies are expected to fall to a record low of two to 2.5 per cent. First Pacific Davies (FPD) executive director of research Mary Seddon said the pressure on office space was the result of Hongkong's changing dependency on manufacturing to a more service-oriented economy. Ms Seddon said this was exacerbated by finance institutions looking to increase their presence in China and Southeast Asia by setting up offices in Hongkong, as well as local companies expanding. The FPD quarterly report, released yesterday, said these recent trends would fuel further demand for office space over the next few years. There has been a corresponding rise in office prices of 10.3 per cent between March and June but, according to Richard Ellis, this will not continue as rapidly because of low investment returns. Jones Lang Wootton's Property Index last week showed that Grade A capital values rose 16.7 per cent over the quarter. This was the largest rise since 1988 with strong fundamentals of high demand and low supply underpinning the market. Analysts agreed the robust level of office sales activity during the quarter - over $8 billion of commercial properties changed hands in May alone - has fuelled a return in investor confidence. This rise in confidence followed the fresh start of talks between Britain and China and the renewal by the United States of China's Most Favoured Nation trading status. But Richard Ellis said low investment yields, caused by price rises outstripping rental growth during the quarter, would slow down price increases for the rest of the year. The report said the speculator-driven sales market was extremely sensitive to political and economic factors and could come to a standstill without notice, as demonstrated last February and March. However, Richard Ellis said that a large proportion of funds going into the sector was from local speculators anticipating a strong return of mainland investors in the future who would buy at a premium when the time came. The luxury end of the residential market will be closely watched by property analysts towards the traditionally active autumn period, to see whether recent sales activity will be sustained. All the indications point to a continued spending spree, with many liquid investors unhindered by the 60 to 70 per cent mortgage ceiling rate set by the major banks. According to the Richard Ellis Luxury Capital Index, prices territory-wide rose by 7.2 per cent over the past three months, compared with 3.6 per cent during the first quarter. Although housing continues to be in short supply, the sector increasingly attracted speculators. Richard Ellis research showed investors made up 20 per cent of all luxury residential property purchases in May, but this figure had more than doubled by June. How much momentum remains in the luxury residential market is still debatable, but most analysts believe it will pause for breath with the potential for another run of speculation in September.