An upswing in Hong Kong's property market gathered momentum in the first three months of 2005, with a buoyant economy numbing the threat of interest rate rises, according to consultants Jones Lang LaSalle.

A report from the property services firm showing prime office rents jumping as much as 25 per cent since the end of 2004 makes particularly cheerful reading for major landlords such as Singapore-listed HongKong Land.

Capital values in the mass residential market have also climbed, rising 13.3 per cent on the previous quarter. That is good news for leading developers Sun Hung Kai and Cheung Kong, which are launching new projects.

Rents at high street shops jumped 8.5 per cent.

Kenneth Tsang, Jones Lang LaSalle's head of research for Greater China, said growing confidence in the economy, was helping all sectors, including housing.

"There has been a broad trend of pay rises and bonus payments in the first quarter and the increase in income and better job prospects have sped up home-buying decisions," Tsang said.

The only segment to see relatively slack activity was the luxury residential market, where buyers were becoming less prepared to pay what landlords wanted, the report said. Luxury home prices have shot up by a third in the past year.

Property-obsessed Hong Kong has been buzzing for the last couple of years, with hopes of closer economic ties, with the mainland helping push values up 70 per cent from a 2003 trough when an outbreak of the SARS respiratory disease ravaged the economy.

Rising interest rates will start taking the heat out of the property market by discouraging speculators, analysts say, but prices are still affordable, especially compared with the heady mid-1990s property boom.

Banks have lifted mortgages by up to 60 basis points in the last month, but the cheapest rate is still just 2.75 per cent.

If mortgage rates rose to 4.5 per cent and prices climbed 15 per cent, the cost to Hong Kong buyers would be in line with the long-term average for their typically cramped homes.

A typical mid-range two bedroom apartment on Hong Kong island, squeezed into 600 square feet, goes for about US$500,000.

Most Hong Kong developers reported big jumps in earnings last month, but analysts tend to prefer stocks in major landlords, because fast rising land prices will squeeze development margins.

Morgan Stanley analyst Kenny Tse forecasts climbing property values will boost net asset value (NAV) at property investor companies HongKong Land, Hysan Development and Great Eagle by at least an average 25 per cent this year.

In a recent research note saying office landlord HongKong Land was his top pick among the SAR's property firms, Tse said his forecast of 30 per cent rent rises looked conservative.

Office rents climbed an average 18.9 per cent in the first quarter, and were up by more than a quarter in the main business area of Central, Jones Lang LaSalle said, predicting overall rents would rise 35 per cent in 2005.

Because landlords are still tied to two- or three-year leases negotiated during the last property slump, rent rises are likely to translate into big earning jumps in the next couple of years.

Higher borrowing costs present the main risk to their bottom lines, with Hong Kong's three-month interbank rate climbing to 2.56 per cent from 0.35 per cent at the end of last year.

Property investors have an average net debt to equity ratio of 39 per cent, compared with 16 per cent for Hong Kong developers, according to JP Morgan. Because buildings coming up in the Hong Kong market are quickly snapped up by locals, stocks are the main investment avenue for foreign property investors.

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