Hong Kong housing rents have finally turned the corner and are picking up, a clear indication that the economy's recovery is well under way, analysts say.

Unlike property prices, which have rebounded about 30 per cent from a trough last summer helped by speculative investors looking to turn a quick profit, rents are moving up slowly. But their upturn confirms growing confidence in the economy.

"Rents are a decent economic indicator because they are a product of genuine end-user demand for space, unlike property prices which are more often a reflection of interest rates or future value expectations," said Peter Churchouse, director of Asian property fund Lim Advisors.

"With rents you can't fudge it: people are only prepared to pay more for their accommodation when their job prospects are good."

Economic recovery over the past year has raised the prospect of pay rises for the first time in three years and is bringing down unemployment.

In the first half of 2004, 127 foreign companies expanded or established operations in Hong Kong - compared to 142 companies for the whole of 2003, a record year - creating 2,110 jobs.

That has boosted demand for accommodation in expatriate enclaves like Stanley, a beach suburb on Hong Kong Island. Rents for luxury units there are up about 5 per cent or more this year, real estate agents say, ending a 30 per cent decline since the onset of the Asian financial crisis and property market crash in late 1997.

"Property rents have risen about 20 per cent year-on-year ... the mass property market has seen a bigger increase in rents than the luxury market," said Wong Leung-sing, senior research manager at Centaline Property.

In June 2004, tenants paid about HK$11.97 per square foot for a flat, compared with HK$10.16 per square foot in the same month last year, based on calculations by Centaline.

One of the results of higher rents has been the territory's speedier than expected return to inflation after nearly six years of deflation.

Housing rents account for more than 20 per cent of the composite consumer price index, used to measure inflation, which in June was flat for the first time since late 1998.

It is expected to turn positive as early as this month, lending support to a recovery in consumption that has helped put the economy on course for 6 per cent growth this year.

"When people expect prices to rise quite quickly they will go out and buy as soon as possible," said Kelvin Lau, an economist at Standard Chartered Bank. "That's the reverse of what we've seen with deflation."

Consumption has rebounded on the back of a rise in asset prices, notably equities and property, in the past year. Simon Smith, head of research, at FPD Savills, says higher rents should keep property price appreciation intact.

"Higher rents will support property values at current levels because yields will rise," Smith said.

He expects luxury rents to rise 10 per cent this year over last year, underpinned by net hiring in the financial services industry and by other companies benefiting from the mainland's boom.

(HK Edition 07/29/2004 page19)