The government's auction season continued on May 12. This time it was a little different as the three sites were all suitable for developing luxury properties. Despite concerns that mortgage rates might be on the rise, bidding was fierce, with almost all major developers taking part, pushing winning prices well beyond present levels. The biggest and most high-profile plot was the 158,229 sqft former Lingnan College site in Stubbs Road, Mid-Levels East, a traditional luxury area. After an intensive contest with New World Development, Sun Hung Kai Properties (SHKP) took the site for HK$4.49 billion, 45 per cent above the market value. The developer has indicated that total investment will run up to HK$8 billion for the project, which is expected to comprise apartments and town houses, with a maximum floor area of 180,834 sqft that can be developed. Given an average land price of HK$24,829 per square foot, the third highest on record, and factoring in an estimated 20 per cent developer's margin, construction and financing costs, the project can be sold for more than HK$35,000 per square foot, according to Colliers International. The town houses are predicted to sell for some HK$50,000 per square foot. Agents expect SHKP's new project to set a new benchmark for the market. 'Location is the most important factor in the property market. Traditional luxury districts will always command a premium price because of their rarity value. There is simply very little supply of real estate in areas such as The Peak and Mid-Levels,' says Lilian Lue, associate director of Sotheby's International Realty Hong Kong. 'With inflation on the rise and the interest rate remaining low, investors want to buy property to hedge against inflation. This supports the rise of property prices.' The other two sites auctioned were at 62 Begonia Road in Kowloon Tong, which was bought by China Overseas, and Ngau Tam Mei in Yuen Long, which was sold to Cheung Kong Holdings. Although the auction was intended as a government initiative to increase land supply to cool down the red-hot market, some experts argue that the positive auction results are giving more momentum to the market rally. Some developers have raised their asking prices sharply in anticipation of appreciation in asset values. 'The bullish atmosphere has never been so strong in the market as virtually all big developers participated in bidding at the government auction. Developers are very optimistic about the outlook. The high prices they paid for the sites mean there has to be price growth of at least 30 per cent in three years for them to make a reasonable profit,' says Alnwick Chan, executive director of Knight Frank. Kelvin Cheong, sales director of Midland Realty, says secondary home sellers raised asking prices by 5 to 10 per cent after the auction. Some property owners have withdrawn their houses from the market to rethink their sales strategy. Government statistics show that average home prices grew by 9 per cent in the first quarter. Property analysts believe that luxury home prices saw a stronger rally. According to CB Richard Ellis, luxury prices on Hong Kong Island increased by 15.8 per cent in the first quarter to average HK$25,600 per square foot. Prices on The Peak rose 22.3 per cent to HK$40,824.