He said office leasing activity had picked up momentum after a short period of consolidation because tenants were eager to secure space even at higher than market rates.

'Tenants are spending less time to negotiate now with big users fighting for space,' he said.

Mr Smith said tenants negotiating to renew leases would pay a rental above market rates in anticipation of further increases in leasing costs.

According to CB Richard Ellis, office rents increased 26.5 per cent in the first nine months of this year. It forecast further increases later this year and next, but the growth will be more moderate compared with the previous nine months.

'With the availability of grade-A stock in Central diminishing rapidly we can expect further increases in asking rents for the limited remaining available space,' Mr Smith said.

He said office rents should increase by 30 per cent to 35 per cent for the full year.

'The negotiating power of landlords is expected to strengthen in the near future as the supply of quality office space continues to tighten and the persistence of positive economic sentiment acts to stabilise demand,' he said.

Because Two International Finance Centre is nearly fully committed and there will be tight office supply in the near future, companies have pushed ahead with expansion and relocation plans over the past few months, despite the rise in rents.

Demand for additional office space continued during the third quarter as corporations looked to increase headcount in anticipation of a higher level of business activity. Jones Lang LaSalle head of agency for Asia Anthony Couse said absorption in the third quarter was 550,000 square feet on net area basis, including 277,000 sqft of space taken up in Central.

There were notable increases in take-up in decentralised areas, where new, quality space was available. Leasing activity continued to be generated primarily by relocation or upgrading.

Mr Couse expected office take-up to exceed two million sqft for the whole of this year because there was clear evidence of strong demand for space.

The market has witnessed a material turnaround compared with the negative take-up of office space in 2001 and 2002.

With stronger sentiment and brighter economic growth prospects, Mr Couse said the upward momentum for the office sector would be sustained.

He expected a further rental increase of up to 30 per cent next year.

Financial and trading sector tenants are accounting for a large slice of demand, especially as companies and banks are benefiting from growing business in the mainland market.

Rents of grade-A offices are increasing across all sub-markets because of dwindling available space and demand for prime buildings.

Overall grade-A office rents rose 14.9 per cent during the third quarter, the highest pace since the first quarter of 2000, according to Jones Lang LaSalle.

This resulted from an improving outlook by office owners who further cut rental incentives and raised face rents.

In the first nine months, office rents in Central grew 34 per cent with a further 5 to 10 per cent upside in the fourth quarter, Mr Couse said.

Rents in Tsim Sha Tsui rose a total of 33 per cent in the first three quarters while those in Wan Chai and Causeway Bay surged 28 per cent. In Hong Kong East, rents picked up 20 per cent during the period.

As a result of stronger take-up, vacancy rates continued to fall this year.

Mr Couse said the overall vacancy rate for prime offices had decreased to 9 per cent by October.

In Central, the vacancy rate fell to 8.6 per cent while unoccupied space in Wan Chai and Causeway Bay was 7.8 per cent, he said.

The vacancy rate in Hong Kong East stood at 12.7 per cent and that in Tsim Sha Tsui was 5.1 per cent. In Kowloon's decentralised areas, the rate stayed at 9.5 per cent.

Mr Smith said: 'One of the new stimuli driving the office market is the recent promulgation of the relaxation of restrictions on mainland companies seeking to invest in Hong Kong.'

'This new investment facilitation policy is expected to lead to an increase in mainland companies looking for office space in Hong Kong.'