Rents Breach 10-year High to End-1997 Levels (13/03/08)
Residential rents have continued to rise and return to the levels at the end of 1997. According to leasing transaction records of major estates, average rents stood at about $18 per square foot a month in February, up about 3% from January – representing an increase for the 10th consecutive month and a new high for more than 10 years. Current rental rates have approached steadily the levels at the end of 1997 and are just about 13.8% lower than the peak levels. (See Graph 1) Rents have risen by nearly 7% over the past two months.

In the first two months of this year, private housing rents have increased by a total of 6.9%. (See Graph 1) The rally was led by major secondary estates such as Kornhill, Nan Fung Sun Chuen, Pokfulam Gardens, Queen’s Terrace, Whampoa Garden, Laguna Verde, The Grand Waterfront and The Pacifica. Their strong leasing led to an overall growth of about 7% for residential rents.

Record leases of over $10,000 a month
With the sustained rental growth, leasing transactions with a monthly rental of more than $10,000 have increased sharply. According to an analysis of leasing deals handled by Midland Realty, leases with rents exceeding $10,000 a month increased to 57% of total leasing transactions in the first two months of the year, which surpassed the level of 1997. Leases with a monthly rental of $5,000 to $10,000 showed a retreat but maintained at more than 40% of total transactions. Leases with a rental of less than $5,000 fell to just 2.5% of market activity. (See Graph 2) A continuous increase in rental will reduce further the number of small budget leases.

Another 0.25% interest rate cut makes “buy” a better option
With a further rental upside, continued interest rate reductions and the one-year waiver of government rates, an increasing number of people are expected to turn from the leasing market to purchase homes. This is especially true when interest rates probably will fall further this year. Given another 0.25% cut in mortgage borrowing rate, it would be better off to buy than rent for flats at 56 (compared with 49 at present) out of 100 selected major housing developments in Hong Kong – as rental expenses would be larger than the mortgage outlay for the same flat.

Rental yield exceeds 5% for 21 successive months
The strong increase of private housing rental has run head to head with the average price growth, keeping the rental yield at a high level. Latest statistics put the yield at about 5.2% in February, meaning that the rental return has maintained at 5% or more for 21 successive months. In view of the exceptionally low interest rates for bank savings, the high rental yield is poised to attract investors to enter the market and purchase properties for long term leasing and investment.

Graph 1: Monthly Rental Movements of Major Housing Estates

Feb-2008 data are provisional figures
Source: Midland Research

Graph 2: Percentage of Monthly Leases by Category

Source: Midland Research