Prices of select units have doubled in the past year and further increases are expected next year THE LUXURY RESIDENTIAL sales market has staged a magnificent rally, leading the property recovery with prices rising by more than half in the past year. Spurred by underlying demand from end users, some investors are betting on a continuous rebound in values at the top end of the market. The buying spree saw prices of select luxury houses or rare apartments more than double during the rally. The sales trade was particularly brisk in the first quarter of this year, as sentiment remained buoyant from the post-Sars recovery in the third quarter of last year. While activity slowed briefly in the second quarter, sales growth has been gathering steam again in recent months. Luxury residential prices have increased 58 per cent this year, or a total of 68.3 per cent since last year's market bottom, according to CB Richard Ellis. CB Richard Ellis director of residential services Jane Garnett said buying demand was strong from end-users and investors, with units in the primary market and the top-end segment being particularly sought after. 'Recent quarters have also seen an increasing number of expatriate tenants shifting from leasing to purchasing luxury properties, as a result of the present low interest rate environment and the increased affordability of property prices after the six-year slump in capital values,' she said. 'At the same time, speculators have become increasingly visible in the market, as is reflected by the rising number of confirmor sales transactions.' Prices were also affected by the recent record-breaking land auction, with some owners increasing their asking prices 10 per cent to 15 per cent, she said. At a government auction last month, Cheung Kong (Holdings) bought a luxury site in Sheung Shing Street, Ho Man Tin, for $9.42 billion while Sun Hung Kai Properties paid $4.7 billion for a site in San Po Kong. The higher than expected prices paid for the sites reflected the confidence of developers in the market's prospects. The surprisingly strong momentum and dramatic price surges led some analysts to warn that a bubble could be in the making. However, Jones Lang LaSalle international director and head of residential department Joseph Tsang said the momentum could be sustained for the luxury sector despite the dramatic price increases. He estimated luxury prices had risen 52 per cent from the beginning of the year. Compared with the market bottom last year, luxury prices had rebounded more than 65 per cent. He expected prices to rise a further 5 per cent in coming months, and for next year the values of luxury apartments could increase by 10 per cent to 15 per cent. Mr Tsang dismissed concerns that a bubble was building in the luxury residential sector. 'The market is mainly driven by end-users and the supply of luxury flats is very limited in the next few years,' he said. Jones Lang LaSalle said only 474 luxury flats of more than 2,000 square feet each were completed this year. The supply is expected to fall to 328 units next year, 184 units in 2006 and only 33 units in 2007. However, Ms Garnett said that bearing in mind the slowdown in China's economy, the uncertain global economy and increasing oil prices, the local economy was unlikely to have significant growth in the coming year. She did not believe there would be adequate buying power to support substantial rises in residential property prices. 'We are somewhat concerned that the residential property market may be forming a potential bubble, especially in the luxury sector, and we would advise people to keep a watchful eye on the movement of the market,' Ms Garnett said. On the back of buoyant investment demand and an improving economic outlook, the launch of 'market-guiding' projects such as The Victory Arch at Kowloon Station and Residence Bel-Air town houses in Pokfulam are expected to provide the impetus for an upswing before the end of the year. Taking into consideration the recent surge in oil prices, Ms Garnett said the global economy was likely to slow next year, which was expected to put pressure on capital value appreciation. 'While we remain optimistic for the coming year, we do not expect to see a sharp appreciation in luxury residential prices again in 2005,' Ms Garnett said. 'We project luxury residential prices to rise moderately by 10 per cent to 15 per cent in the next 12 months.' CB Richard Ellis forecast about 1,620 luxury units would come on stream next year on Hong Kong Island, 1,300 units from Residence Bel-Air phases two and three.