Bank bailouts by governments in the United States and Europe may be trickling down to the streets of Hong Kong and through the doors of serviced apartments, where finance industry executives are again taking up residence. There are now signs of a pick-up in the sector since the collapse of Lehman Brothers in the fourth quarter of last year saw markets tumble, with cost-cutting by multinationals hitting leasing demand. According to property consultants, companies appear to be keener than earlier this year to hire staff and bring in expatriate employees amid an improved global economic outlook. Serviced apartment operators have reacted to this spur in demand with firmer asking rents, although they are still offering flexible lease terms to attract tenants. Rental cuts were the name of the game in the first half of this year. Simon Lo Wing-fai, director of research and advisory at Colliers International, says serviced apartment rentals fell in the first six months - with a decrease of 3.4per cent in the first quarter and 7.8 per cent in the second. The situation improved in the third quarter with a 0.2 per cent rebound in rentals, but overall the serviced apartment market recorded a 9 per cent decline in rentals in the first nine months. Lo says the average company budget for leasing accommodation had dropped but serviced apartments were more resilient than standard residential properties and their rent had been edging up since July. 'The positive sign is that market activities are attributed to the arrival of corporate newcomers through the third quarter, which is not a traditionally busy period,' he says. 'Serviced units in non-core districts saw an outstanding rental growth in the order of 6 per cent in the third quarter from the second quarter. Landlords are more flexible on the lease terms but getting firm on their asking rentals. Individual landlords offer free fitness membership as a lease incentive if the length of lease is longer than three months.' Anne-Marie Sage, regional director of residential services at Jones Lang LaSalle, says occupancy levels range from 50 to 95 per cent, depending on location and quality. Better-quality properties continue to maintain an occupancy rate of 80 to 85 per cent. She says larger serviced apartments have been affected more by the contraction of the financial industry, but those in the HK$20,000 to HK$40,000 bracket continue to perform well. 'Quality and design is the key for serviced apartments to attract tenants. Demand is quite high and tenants are willing to pay for quality properties,' Sage says. 'I think the market sentiment is picking up and a few more people are coming to Hong Kong, though not in big numbers. Landlords' terms are not as negotiable as three or four months ago.' Many companies favour serviced apartments for their flexible lease terms, particularly when the business and economic environment is uncertain. There is also a growing need for short- to medium-term accommodation for project-based staff travelling around the world. Ageing or poor-quality properties that fail to upgrade facilities will likely suffer from growing competition, including the boutique serviced apartment sector, as tenants demand more sophisticated building specifications and services. One upcoming competitor in the larger serviced apartment sector is The Residences of Repulse Bay, which is expected to meet demand for larger serviced apartments. The Chinachem Group project at 129 Repulse Bay Road was originally built as a luxury residential project for sale. Lo says the banking and finance industry forms the leasing bedrock for top-notch serviced apartments and the prospect of more medium-sized non-finance companies coming to Hong Kong is good news. With landlords regaining their bargaining power, the rate of rental discounts they are offering has fallen. Lo says a previously quoted 10 per cent discount was cut to 5 per cent for one-bedroom units. Lo predicts serviced apartment asking rents will rise by 6 per cent in the next 12 months, driven by the recovery in the financial services sector, the performance of the economy and business confidence beyond 2010. 'Most corporate tenants are more concerned about their business outlook,' he says. 'Individual tenants who are not 100 per cent sure of the prospective recovery in 2010 will prefer to stay in serviced apartments on short leases before committing to standard leases at standard units.' Sage of Jones Lang LaSalle says the decision by some owners to sell their rental properties had resulted in a decrease in overall property stock for rent, which should also lend support to the leasing of serviced apartments. But companies were still cautious as the economy was not completely out of the woods. She expects the leasing of serviced apartments to be stable and slightly quieter toward the end of this year, and the performance to vary from building to building, depending on location and quality. According to Jones Lang LaSalle, there are about 14,400 serviced apartments in Hong Kong and nearly 70 per cent came on the market after 2000. About 48 per cent are on Hong Kong Island, 40 per cent in Kowloon and 12 per cent in the New Territories. By category, 80 per cent of serviced apartments fall under the standard type, mainly serving low-management-grade tenants and interns from overseas and young middle-class couples without children. Prestige serviced apartments, targeting senior management expatriates, account for about 11 per cent of the total. Major projects include Four Seasons Place, Gateway Apartments and Pacific Place Apartments. Examples of new serviced apartment projects include The Yin in Central and Han Residence in Tsim Sha Tsui, both of which were previously office buildings for lease. GardenEast, offering 216 serviced units in Wan Chai, The Mood in Central and Fraser Hong Kong Suites in Wan Chai also came on the market recently. In terms of tenant profile, about 90 per cent of tenants in prestigious and boutique serviced apartments in core locations are expatriates, while locals account for 10 per cent. As for standard serviced apartments, especially those in the fringe areas and smaller schemes, the ratio of expatriates to local tenants is about 75:25.