The residential market is finally getting back on its feet, while tight supply in the high-end office sector is pushing up rents THE RESIDENTIAL market is set to pick up momentum after a slow first half on sustained demand from homebuyers amid signs of an end to the interest rate uptrend. Property consultants forecast a revival of homebuying activity in the next few months, as developers race to release new projects and cash in on the improved market sentiment. But new developments will probably be pitched at less aggressive prices to lure homeseekers back to the market. Tony Tse Wai-chuen, general manager of the sales department at Henderson Land Development, says the residential sales market has slowed in the first six months. About 4,500 new flats in the primary sales market have been sold during the period. 'The interest rate rises dampened market sentiment, and developers in general put fewer projects on sale. Market transactions effectively shrank in the first half,' he says. 'However, confidence is returning on signs of peaking interest rates, continued economic growth, improvements in the employment rate and salary rises. We should see more projects for sale and improved sales in the remaining months of this year.' Henderson Land focused on selling its remaining flats in previously launched projects such as Grand Promenade and Metro Harbour View in the first half. The group will release more new developments in the second half, including Grand Waterfront in To Kwa Wan, which has nearly 1,800 units, and The Sherwood in Tuen Mun, which has about 1,600 units. Mr Tse says homebuyers would be more forthcoming in making purchase decisions while developers continued to offer preferential payment terms. 'With a revival of buying interest it is likely that primary market transactions will rise to about 10,000. I see no reason why the market cannot absorb the supply,' he says. 'Strong liquidity in the banking system means banks will extend mortgages at attractive terms to compete for home loan business. This will benefit people wishing to purchase homes.' The residential market slowdown in the first half meant that sales of units at some new mass-sector projects were at prices lower than previous launches. The luxury sector, however, outperformed the market. Eric Chow Kwok-yin, executive director of Sun Hung Kai Real Estate Agency, says the luxury home market has continued to rally on strong demand and tight supply this year. 'Luxury flats have emerged as the engine of the market, supported by positive economic performance, and the growth momentum will continue. In the mass market, developers will probably be selling flats at less aggressive prices to increase the sales volume, so transactions should rise in the coming months,' he says. Improved job security, household incomes and retail consumption mean that people are more willing to buy homes or upgrade to better accommodation. Mr Chow says that while the impact of high oil prices on the worldwide economy and terrorist attacks pose threats to market sentiment in the short term, the long-term prospects for buying flats remain positive because of strong underlying demand. The recent macroeconomic measures implemented by China to rein in its overheated economy will pave the way for the country's prosperity in the long run, which will boost Hong Kong's economic growth, he says. Sun Hung Kai recently put its Park Island's Oceancrest development in Ma Wan on sale. Other upcoming projects include the 1,100-unit Manhattan Hill in Lai Chi Kok and the 2,400-unit Harbour Place, formerly known as Hunghom Peninsula, in Hunghom Bay. Despite the weaker sales market, residential leasing has gained pace on increased demand since the start of the year, particularly with the continued arrival of more expatriates. Simon Lo Wing-fai, director of research and consultancy at Colliers International, says the leasing market has recorded a rental increase of more than 10 per cent this year. But residential sales prices have retreated by 5 per cent or more in the second quarter on fewer transactions. 'With sustained tenant demand, residential rents will rise a further 16 per cent by the middle of next year. Sales activity will also increase in coming months with more new projects to be launched by developers,' he says. CB Richard Ellis associate director Simon Wong says luxury rents have registered a 6.2 per cent year-on-year increase on Hong Kong Island in the first half of the year. Premier flats on The Peak and the south side of Hong Kong Island remain the long-term favourites for tenants, while those in West Kowloon attract people looking for luxury style at a lower cost. Newly arrived expatriates are keen to secure accommodation earlier, as many companies aggressively expand their operations in Hong Kong, which is driving up rents in the limited supply of leasing units. Mr Wong says: 'The level of quality leasing stock has been further squeezed in the past few years and this trend is likely to continue as some corporate landlords have disposed of, and will continue to offload, on a strata-title basis, their single-owner developments. This has put further pressure on supply during a period of upswing in demand.' Inflation has edged up moderately this year, partly driven by the rise in private housing rents, which show the bullishness of the residential leasing market. Landlords want to translate the strength of leasing demand into higher rents. 'Rentals are expected to rise as companies continue to bring in more employees from overseas and demand outstrips supply. We anticipate rental increases in the region of 12 per cent to 15 per cent over 2006,' Mr Wong says. 'We expect to see a similar rental growth of 10 per cent to 15 per cent over the course of next year. While demand will likely continue to outstrip new supply in the traditional expatriate areas, we are already seeing some companies sending expatriates to Singapore instead of Hong Kong due to the increasing costs here. In addition, secondary areas such as Cyberport, West Kowloon and Tung Chung are becoming increasingly attractive to expatriates as these areas are generally less expensive and have a reasonable amount of leasing stock available.' The office leasing market has continued its rally this year, with further increases in rents. Cathie Chung, associate director of Knight Frank Petty's research department, says the improved economy and business expansion, especially in the finance, insurance, banking and legal sectors, has stimulated relocation demand for bigger and premium office premises. Landlords are being firmer on rental negotiations and rent-free periods due to the limited availability of quality space. Major transactions during the year include UBS's commitment to more than 80,000 sqft of space on multiple floors in Exchange Square and The Landmark in Central. AIA has taken up about 80,000 sqft of space in Devon House in Quarry Bay. Maersk leased about 100,000 sqft of space in One Kowloon, in Kowloon Bay. Grade-A offices experienced a low vacancy rate of 4.2 per cent in July so rents increased 23.9 per cent to an average of HK$53.50 per sqft a month in the first seven months, Ms Chung says. Overall, Central, Admiralty and Quarry Bay led the market with a rental growth of 27 per cent to 29 per cent over the period. She says the grade-A office supply of about 1.64 million sqft this year will not cope with robust demand, considering that there was an average annual take-up of about 2.6 million sqft between 2001 and 2005. The redevelopment of the 500,000 sqft Hennessy Centre in Causeway Bay will contribute to even tighter availability of quality offices in the district. The lack of available space near Causeway Bay will probably push companies to relocate to Quarry Bay and other non-prime office districts. Major office supply in secondary areas includes Swire Properties' One Island East in Quarry Bay and Sun Hung Kai's International Commerce Centre at Kowloon Station. Ms Chung says: 'The office vacancy rate will fall further to 4 per cent by the end of the year. We expect that overall grade-A office rents will rise another 10 per cent to 15 per cent in the second half of this year. However, we expect a slower growth rate during 2007, at about 5 per cent to 8 per cent.'