Hong Kong's residential market is facing weaker demand next year as a result of the 'China effect', where a slight deterioration in the mainland economy has translated into reduced numbers of homebuyers coming to the city, at least in the short term, according to CB Richard Ellis. 'Demand rather than supply will be more of an issue in 2012 due to the traditionally volatile nature of the market, which is often driven by sentiment,' the report says. Investment volumes have also dropped away considerably in the real estate market, resulting from global economic uncertainties, while credit has also dried up to a large extent. 'Buyer and seller price expectations differ and this has led to a level of stagnation,' the report says. 'However, an expected drop in rental levels next year should encourage investors that value has returned and upside gains are possible. This is likely to create greater interest, however the holding power of the sellers remains strong and distressed sales in the market are not envisaged.' On the office market, it expects average rents might fall by less than 10 per cent, however the correction could reach 20 per cent in Central as companies become more cost conscious. 'Vacancies in the area are on the rise and this could accelerate over the next 12 months as some companies surrender space or opt not to renew leases which are set to expire,' CBRE says. Almost 20 per cent of leases in Central will expire during the course of next year, and together with further possible job losses in the financial sector, this could lead to vacant space exceeding 800,000 square feet, and possibly reaching one million square feet by the end of next year, it says. 'Despite a downward adjustment in rents, Hong Kong will remain among the most expensive office locations in the world and the wider issue of Hong Kong's longer term competitiveness still needs to be addressed. Large corporations benchmark Hong Kong against other cities globally and struggle to comprehend why they should pay more for back office space in Hong Kong than they do for their headquarters in London or New York. Key to the future of Hong Kong is the development of alternatives for occupiers, of which East Kowloon is a good example,' Craig Shute, senior managing director for CBRE, said.