Director of research and consultancy Simon Lo said the minimum rental increase would be 10 percent while capital values will rise 20percent this year.

``There will be very little new supply in the coming three or four years,'' he said.

The shortage of luxury apartments drove up prices by 50 percent last year, DTZ Debenham Tie Leung consultants said earlier, outpacing the average 30 percent increase in the general market.

Rents at The Peak and South Side edged up 13 percent and 14.2 percent respectively last year when compared with 2003. Current sale prices per square foot are about HK$9,000, while rents are HK$25 psf a month.

Lo said that although overall residential stock had been rising steadily over the years, growth in stock for luxury units flattened out from about 1990 onwards.

The low plot ratios, which limit developable floor space, in luxury areas and the scarce supply of new sites contributed to fewer upper-end properties being supplied, he said.

New supply is set to continue to fall, bottoming out at only about 40 units in 2007, compared with more than 300 in 2003 and the previous high of over 1,200 in 1989, Colliers said.

``Not 100 percent of this new stock is going to be for lease. According to our experience, only one fifth or even less will be for lease,'' Lo said.

Another factor in the increase in rents is that rents tended to mirror economic growth and inflation, he added.

The enactment of a new tenancy law in July, which abolished security of tenure for tenants, has also encouraged investment demand that in turn is propelled by inexpensive financing due to low interest rates, he said.

Although investment yields had fallen to 3.4 percent from over 5 percent in 2001, it was still higher than borrowing rates of less than 1 percent.

danny.chung@singtaonewscorp.com