The Knight Frank Hong Kong Residential report for June 2009, has the following to say.

Over the past month, investment sentiment in Hong Kong's residential market was further lifted by a rally in global stock markets, near-zero interest rates on local deposits and improving risk appetite' of investors. According to Land Registry, there were 11,788 residential sales transactions in May, an increase of 19.6% from the previous month and a return to the above - 10,000 level last seen in June 2008. Momentum in the high-end residential market was particularly strong, with transactions of luxury homes worth HK$10 million and above climbing 40.2% month on month to 586.

Speculative activity was on the rise. In May, residential transactions involving 'confirmors' increased 36% month on month to a ten-month high of 136. Foreign interest in the local residential market continued. One overseas investor bought four units in The Sail at Victoria in Sai Wan for about HK$36 million, while a Mainland investor acquired four units in Shining Heights in Tai Kok Tsui for about HK$23 million.

New projects were well received by the market. Primary sales in May surged 59.1% to 2,525 from the previous month. Sino Land sold more than 1,700 units in Lake Silver in Ma On Shan within ten days of launching them. Given the satisfactory sales performance in the primary market, some developers announced plans to raise prices by 2-10% for the remaining units of their projects. Examples included Seasons Monarch and Emerald Green in Yuen Long. Meanwhile, a number of residential projects are lining up for sale, including Lime Habitat in North Point, K11 in Tsim Sha Tsui and Green Lodge in Yuen Long.

By the end of May, mass residential prices had risen nearly 16% from the most recent trough in December last year. The average price of some major estates, including Taikoo Shing and City One Shatin, returned to levels last recorded before the onset of the global financial crisis in September last year. Luxury home prices edged up another 4.1% in May, extending gains for the fifth consecutive month. All traditional luxury districts saw price growth of about 3-5% in May, with Happy Valley / Jardine's Lookout recording the biggest month-on-month increase of 5.4%.

The luxury residential leasing market showed signs of stabilising. Many companies appeared to have completed downsizing and the unemployment rate remained at 5.3% in the three months to May, the first time since August that the rate did not rise. Some multinational corporations began relocating staff to Hong Kong again, to capitalise on opportunities arising from the resilient Mainland economy. One foreign financial institution shifted more than 40 employees from Japan to Hong Kong. Instead of returning to their homelands, many unemployed expatriates chose to stay in Hong Kong to seek jobs, while relocating to less costly accommodation. Also, with property prices rising, some landlords decided to sell their properties and withdraw from the leasing market. All these factors lent support to residential rentals.

A better-than-expected take-up of residential leases led to a decline in the overall vacancy rate and a rebound in residential rents. The average rent of luxury residential property grew 1.8% in May, the first monthly increase since falling by 32.9% in the previous nine months. Happy Valley / Jardine's Lookout and Pokfulam led the market in May, with rent growth of 2.8% and 2.7% respectively, followed by 1.7% on the Peak and 1.6% in Island South.

Yield compression has been notable in recent months. Luxury residential yields have recently dropped to 2.5-2.8%, the lowest level since 1990 when the government first started to compile such statistics. Though we believe residential rents are near the bottom, we do not expect a strong recovery in rents until further evidence of an economic recovery is revealed. Given that rental yields are already at historically low levels and rents may not stage a strong rebound, luxury residential prices are more likely to plateau rather than continue to surge in the third quarter.