THE sharp appreciation of office capital values has pushed the investment yield to an unreasonably low level, says Lee Hon-chiu, chairman of Hysan Development. ''There is a very large gap between office capital values and office rents. It is not reasonable,'' he said after the company's annual general meeting yesterday. He said a reasonable yield for office property should be around six per cent, but some properties now commanded a yield as low as three per cent. He said the gap between office prices and rents should be narrowed, because rents were bound to rise further. The office market would continue to be in limited supply during the next two years. Mr Lee said the average rental value of Hysan's investments properties was lower than market value. He said the company's properties would see a continuous growth in rental returns because many leases were due for renewal. Hysan's investment properties include offices, retail premises and luxury residential units. Mr Lee said the group's luxury residential properties enjoyed a yield of five to six per cent, which was reasonable for the state of the market. He said demand for luxury residential units remained strong because supply was limited. Commenting on the Sino-British Land Commission's release of more residential land, Mr Lee said it was a good move but it would not have any immediate effect on the market. ''It will take at least two years to see the increased office supply's effect. But it demonstrates that both Chinese and British sides are concerned about the Hong Kong property market,'' he said. It was difficult to say whether the home market would fall, but added that any decline would be a mild one. ''If there is any fall in prices, it will be around 10 per cent at most,'' he said. But housing demand was strong, boosted by rising per capita income in Hong Kong and the large number of new couples looking to buy houses, he said. Turning to the group's development projects, Mr Lee said the consideration paid for the driveway area in front of the Lee Gardens Hotel redevelopment site was about $380 million. The driveway would be retained but its developable floor area would be added on to the commercial property redevelopment of Lee Gardens Hotel, he said. The group acquired the hotel for redevelopment at a consideration of $2.45 billion last year. Hysan director Pauline Wong Yu Wah-ling said the company was not required to pay any compensation premium to the Government for the additional floor area derived from the driveway area. The Lee Gardens Hotel project would be turned into a 50-storey commercial building, giving a total of 900,000 sq feet and involving a total investment of $4.5 billion, she said. About 80 per cent of the building would be office space, with the remainder for retail premises, she said. Ms Wong said future tenants had committed themselves to about 70 per cent of space at the Lee Theatre Plaza. Hysan would turn 10 floors of the plaza into a furniture sales complex, of which two floors were already leased, she said. Average rents secured by the plaza were more than $60 per sq foot a month. Hysan was still negotiating on the rental rates with Sincere Department Store, which planned to lease five floors at the lower level, she said. Assuming an average monthly rental of $60 per sq foot, the Lee Theatre Plaza, with a total floor area of 315,500 sq ft, could generate an annual rental income of about $227 million. Construction of the building is expected to be completed in October. Mr Lee said in the company's annual report that China's MFN (most favoured nation) status would remain a cause of concern to Hong Kong. He said the proposed Chinese land appreciation tax created uncertainty about property developments on the mainland. Hysan is engaged in three property joint venture developments in China, including the Peace Garden and the Grand Gateway in Shanghai, and the Orient Plaza in Beijing. The company has a 30 per cent interest in the development of Peace Garden, 15 per cent in Grand Gateway and 24 per cent in Orient Plaza.