Growing demand is boosting the value of serviced flats as more tenants opt for their greater flexibility and convenience Growing demand has bolstered the value of serviced apartments, making the sector a star performer in the residential leasing market. Rental rates are picking up at a modest pace as serviced accommodation continues to attract local and foreign tenants looking for flexibility and convenience. Jane Garnett, director of residential services at CB Richard Ellis, said serviced apartments outperformed the conventional luxury residential leasing market, which saw rent drop 0.7 per cent in the first quarter of the year. During the period, the luxury serviced apartment sector recorded a 1.6 per cent rise in rents, while the non-luxury sector saw a 7.6 per cent increase. 'This is due to the fact that the non-luxury serviced apartment market has been gradually improving standards and can therefore command higher rentals,' Ms Garnett said. 'Serviced apartments outperformed the conventional luxury residential market due to continuing high demand for serviced flats. Corporations are increasingly looking for flexible lease terms, minimum deposits and all-inclusive rentals with no additional charges.' She said many serviced apartment operators were widening the services available to residents. Many include breakfast and a daily newspaper, and a few are linking with local service providers to introduce 'incentive' cards for their tenants to enjoy discounts at nearby shops or priority reservations at local restaurants. Ms Garnett said demand was coming from many business sectors, including manufacturing, technology, banking, finance, legal and insurance. 'We anticipate that demand for serviced apartments will remain strong throughout 2004 and into 2005. However, with rentals remaining soft across the luxury residential market and increasing supply of serviced apartments, we do not anticipate much greater increases in rental within the sector,' she said. Simon Lo, director of research and consultancy at Colliers International, said the serviced apartment market had been steady, and demand was attributed to short leases of three to six months. 'The trend of rental performance is up for 2004. Overall growth for luxury residential rental will be 5 per cent to 8 per cent this year, while serviced apartments can perform better,' he said. The attractive features of having flexible lease terms and quality services enable serviced apartments to command a rental premium compared with standard non-serviced apartments. Edina Wong, senior director of the residential leasing department at FPDSavills, said demand for serviced apartments had been very stable and most developments achieved good occupancy rates. Expatriates continued to arrive in Hong Kong for short-term assignments, including as training and research staff for financial companies and those setting up new operations here. Market players said that, in addition to business travellers, demand for serviced apartments came from families taking long holidays away from home and local residents looking for interim accommodation during home relocation. Considering the amount of potential cost savings, living in serviced apartments is more attractive than traditional hotels and conventional apartments. Victor Yuen, manager of the residential department at Knight Frank, said rental performance for serviced apartments had been better than the conventional luxury residential sector. After Sars was contained last year, serviced apartments started to pick up and reached 90 per cent occupancy before the end of last year, he said. In March and April this year, some serviced apartment developments recorded a 100 per cent occupancy rate, he said. Average rental rates ranged from HK$22 to $40 per square foot a month, up about 20 per cent from last year. Mr Yuen said the influx of new expatriates was less than expected, while about 40 per cent of new demand came from locals and mainlanders. After Sars, some middle class families that had refurbished their homes had temporarily moved to serviced apartments for one or two months, he said. 'In addition, with the rebound of the residential market, some vendors and purchasers need a temporary home.' An increasing number of individual travellers from the mainland filled many of the three-star hotels, and this forced expatriates to consider serviced apartments, Mr Yuen said. 'Serviced apartments will still record a good performance. Rental will rise another 10 per cent by the end of this year. The growth will slow by the fourth quarter of this year as more serviced apartments will be coming up,' he said. As serviced apartments enjoy better yields, more landlords or investors are entering the market by converting their residential, commercial or even hotel properties into serviced flats. Most serviced apartments are on Hong Kong Island, with Kowloon as the secondary market. Mr Yuen said most expatriates favoured serviced apartments in commercial districts. However, demand from mainlanders was increasing, especially for projects in Kowloon. Major serviced apartment projects in Kowloon include The Gateway Bay and New World Apartments in Tsim Sha Tsui, Lanson Place at Kowloon Station and Harbour Plaza Metropolis in Hunghom. Mr Yuen said location was the biggest consideration for tenants, followed by services and facilities. Tenants also preferred a whole rental package as rentals were usually paid by their companies. New supply of serviced apartments would mainly come from the New Territories, including Tsing Yi, Kwai Chung and Tsuen Wan. Mr Yuen said that with supply increasing, landlords would be more flexible in negotiating terms and be willing to offer more discounts to long-term tenants.