Is the glass half empty or half full in today's serviced apartment sector? Analysts' forecasts offer mixed guidance, ranging from slightly negative to mildly positive. Rising demand from the manufacturing, logistics and legal services sectors is helping to offset declining demand from the finance and insurance industry, but the jury is still out on the medium-term future, according to regional residential director of Colliers International Anton Eilers. He forecasts a price softening of 10 per cent in rentals of luxury serviced apartments over the next 12 months, with a rebound in leasing activity likely to kick in by the second half of next year. 'I am quite a pessimist,' Mr Eilers says. 'I do not see things changing dramatically until the second half of next year. By that stage, I am assuming the Four Seasons will have been completed.' The Four Seasons is a combined hotel and serviced apartment complex expected to be completed by early 2005. The development, which includes 600 serviced apartment units, will be classed in the same league as four top-end serviced-apartment projects centrally located on Hong Kong Island. Analysts believe the Four Seasons will compete directly with Swire's Pacific Place properties: the Parkside and Atrium. Mr Eilers believes new supply will likely dampen landlords' hopes for improving occupancy rates, because corporate postings are expected to remain subdued for some time. 'I just can't see the turnaround in corporate spending,' Mr Eilers says. 'I think companies are still looking at costs, and the banks will look at headcount again. 'The financial services side has traditionally been a big source of clients for us, but the demand is just not there. 'We are doing probably half the volume of business we used to do in 2000.' Colliers International forecasts a modest improvement in the number of corporate postings in Hong Kong over the medium term. Much of this demand will be driven by the increase in small and medium-size businesses seeking financial, legal and consultancy services before doing business on the mainland. However, Colliers International forecasts that United States and European multinationals will bypass Hong Kong in favour of direct trade links with China. The trend will be most evident in firms involved in manufacturing and infrastructure works. The bottom line, Mr Eilers says, is that, over the long term, demand for Hong Kong executive housing will be capped by slower economic growth and the special administrative region's diminished role as a gateway to China. 'I see Hong Kong as being like any other mature developed country,' Mr Eilers says. 'We had a huge recession, which we are growing out of. Eventually we will be back in the days of 2.5 per cent growth, and if you have a good year you get 4 per cent. It will just be a normal country.' Others believe supply shortfalls and rising integration with the scorching mainland economy are bullish for the long term. Nicholas Brooke, managing director of Insignia Brooke, says demand for high-quality serviced apartments remains strong despite the downturn. He blames part of the apparent glut in serviced apartments on a flood of second-tier properties that have been converted into serviced apartments. These properties, he says, do not meet the regulatory requirements or service levels necessary to qualify as serviced apartments. 'A lot of people have jumped on this bandwagon,' says Mr Brooke, who was recently named president of the Royal Institution of Chartered Surveyors. 'They have bought traditional flats, if you like, and dressed them up a bit and called them serviced apartments. 'Where there is quality, there is interest. If you look at the supply figures, you would think there is too much, that supply exceeds demand. But, like I say, a lot of that supply is not what we would really call serviced apartments.' He says many landlords are dressing up residential buildings, but these properties do not offer amenities such as laundry services, valet parking and daily maid service. Much of the new supply is located in outlying areas and targeted at the middle range market (between HK$9,000 per month and HK$20,000 per month). These properties tend to appeal to local or regional businessmen with mainland connections, who often might be required to split their time between factories in Guangdong and offices in Hong Kong. Rentals on these properties are generally not tracked by the larger property consultancies as they fall below the HK$20,000 per month threshold, or are a significant distance from the central business district. 'To my mind, they either have to be within a business district, or in close proximity to a business district [to be considered in the luxury bracket],' Mr Brooke says. During the past year, rentals in the luxury sector have fallen about 10 per cent, while the middle-tier serviced apartments have been hit by price declines of 15 per cent to 20 per cent. Pricing weakness has been fuelled by excessive supply, much of it from converted residential buildings which are not technically designated for service apartment use, Mr Brooke says. 'As you know, the Lands and Planning departments are taking a much more stringent attitude in allowing land to be used for the development of serviced apartments in urban areas. They realised that people were playing games, if you like, so they brought in much more stringent rules, and that has had an impact on supply.' Mr Brooke admits the second half of this year will be tough, but he anticipates a pick-up within 12 months. 'We have to look at Hong Kong's position as the middleman, as the enabler,' Mr Brooke says. 'We are going to see a lot more people coming here and using Hong Kong as the stepping stone into the mainland. 'I'm bullish in terms of genuine product, but I am not bullish in terms of people just trying to jump on the bandwagon.' Mr Eilers estimates the market demand for apartments in the HK$30,000 to HK$45,000 price range will remain strong over the near term. One reason is that a growing number of business executives are pitching up in Hong Kong on their own, with their spouses and children following six months later and delaying the demand for larger flats in affluent areas. Another reason is that companies are reducing their housing budgets but giving employees more discretion over how to spend the cash.