HONG KONG has overtaken Tokyo as the most expensive place in the world to set up an office. The Jones Lang Wootton Property (JLW) Index, released early exclusively to the South China Morning Post yesterday, showed average top grade office rentals shot up 22.8 per cent in Central over the last quarter. This translates into a hefty 75 per cent rise year-on-year. Average net office rentals in the core business district is now $75 square foot a month, although one-off deals of more than $100 a square foot have recently been achieved for smaller units in top buildings such as Nine Queen's Road Central. In central Tokyo, by comparison, it cost an average $71 a square foot to rent an office in December last year and rentals have since fallen. With record rentals being achieved almost every day in Hong Kong, it looks like the worst is still yet to come. Property guru Peter Churchouse, managing director of Morgan Stanley Asia, has been predicting average prime office rentals could rise as much as 70 to 80 per cent this year. Rental growth in Wan Chai-Causeway Bay and Tsim Sha Tsui was more moderate over the first quarter, rising 11.8 per cent and 5.8 per cent respectively. Purchase prices have also soared, by 40.5 per cent for top grade office space in Central over the last quarter to an average $13,450 a square foot, according to the JLW index. This is a staggering 94 per cent leap year-on-year and the largest quarterly rise ever recorded by the index. The pace prices have been rising is quite alarming. Office space in Lippo Centre, Admiralty, for instance, was changing hands at $9,450 a square foot in January, $13,500 in February, $15,000 last month, and now between $17,000 and $20,000 is being asked. Average office capital values in Hong Kong are still not yet quite as high as the $14,650 a square foot in the centre of Tokyo, but other costs combine to make the territory the most expensive city in the region. The cost of housing expatriate staff is proving particularly frightening. Despite moves by banks to tighten mortgage lending requirements for homes worth more than $5 million in January, the JLW index shows average large residential capital values rising 26 per cent over the quarter, or 95 per cent year-on-year. It now costs about twice as much to buy a luxury home in Hong Kong than in Tokyo. Morgan Stanley reckons the average cost of large flats and houses in Hong Kong is now about $9,000, or US$1,200, a square foot, compared with US$600 for a good quality flat in Japan. Tony Darwell, JLW research director, said new demand from the expanding financial and banking sector and new entrants to the territory, particularly US multinationals, had played an important factor in driving rental values up in a period of low supply. On Hong Kong Island, JLW said luxury flats of between five and 10 years old have recently been averaging HK$10,000 to $12,000 a square foot, while houses were averaging $12,000 to $15,000 a square foot. In Kowloon, JLW said demand for houses was strongest in Hong Lok Yuen and Silverstrand of Clearwater Bay, with values increasing 23 per cent in the first three months of the year. Rises in residential rentals had also been relentless. The JLW index showed average rentals for large flats rose 11.3 per cent in the three-month period, the highest percentage quarterly growth since April 1985. Average rentals for luxury units on Hong Kong Island are about $39 a square foot and rising. The JLW index does not monitor the mass residential market prices or rentals. Enzio von Pfeil, chief economist at S.G. Warburg (Far East), described local property prices as ridiculous and warned that they might damage the territory's role as regional headquarters for multinational corporations in Asia. He doubted that many existing companies in Hong Kong would uproot and relocate as a direct result of spiralling property prices. Singapore has to date proved the most popular alternative to Hong Kong, where average prime office rentals are just HK$35 a square foot, although many other outgoings in Singapore are higher than in Hong Kong, such as taxes.