Leasing activity forecast to consolidate during the low season but high-end rents and demand will flourish next year THE RESIDENTIAL leasing market has recorded a steady, solid recovery on increased demand, but the rate of rental growth is expected to soften in the coming months. The upcoming winter season should see a slowdown in leasing activity with the market consolidating in the short term for a continuous recovery next year. Joseph Tsang, international director and head of residential department at Jones Lang LaSalle, said the luxury leasing market had been boosted by the expansion of multinational companies and an influx of more companies setting up offices in Hong Kong. This trend brought in more expatriate staff to the market looking for quality accommodation, he said. In the third quarter, luxury residential rents gained by a further 6 per cent, making a total increase of 16 per cent since the start of this year. While the leasing activity would slow during the traditional low season in December with many expatriates going on holiday, Mr Tsang said prospects looked positive and he expected luxury rents to increase by at least 10 per cent next year. The supply was strained further by some landlords offering their properties for sale rather than lease, which effectively reduced the stock of flats available on the leasing market, he said. Following the high level of leasing activity in the second quarter, July and August registered a significant volume of transactions, being the traditional peak season for expatriate arrivals. CB Richard Ellis director of residential services Jane Garnett said compounding this seasonal demand, relocation activity was also boosted by tenants upgrading or downsizing their accommodation. 'In addition to the industries in which foreign professionals are traditionally employed, including banking and finance, insurance, and the legal and retail sectors, there have been an increasing number of expatriates coming from the manufacturing sector in recent months following the implementation of Cepa at the beginning of the year,' she said. Luxury residential rents continued to register a rise across the board in the third quarter, on the back of an improved local economy and because landlords took advantage of the traditional peak leasing season to raise rents. 'Instead of company leases, whereby all rental payments are billed to the company account, corporates prefer to offer 'lump-sum' compensation packages nowadays,' she said. 'This provided incentives for staff to rent less expensive accommodation as they could pocket the saving on rental costs.' Overall demand has remained firm and with limited new supply coming on line, this has led to a rental increase. According to CB Richard Ellis' estimates, residential rents increased by 9.8 per cent in the first nine months, or 11.8 per cent since the bottom in September last year. 'We expect to see further increases in the fourth quarter and also 2005, but the growth will be smaller,' Ms Garnett said. Due to downsized housing packages of cost-conscious multinational companies and the marked tendency for these companies to relocate single expatriates or appoint them to work on one-off assignments, much of the demand was shifting away from conventional luxury accommodation to serviced apartments, she said. 'Due to a shortage of enrolment spaces available in Hong Kong's international schools, many expatriate families deferred their decision to relocate to Hong Kong due to their inability to make schooling arrangements for their children. 'This situation prompted many multinational companies to bring in singles and couples instead of married employees with children. As a result, they opted to stay in serviced apartments rather than conventional luxury residential accommodation.' She forecast rents to remain reasonably stable for the rest of the year as the traditional peak season for new arrivals had passed. 'In 2005, we expect luxury residential rents to rise moderately by 5 to 8 per cent.' In the mass residential market, as more investors acquire properties for investment following the commencement of the Landlords and Tenant Amendment Ordinance in early July, the consequent increase in leasing stock is expected to put rents under pressure in the medium term. As the property market bottoms out, more tenants will shift from leasing to buying properties, which will further dampen leasing demand for mass residential units.