Hong Kong's clampdown on speculation in residential property is fuelling fears that the hot money flowing into the region will further inflate a bubble in the city's commercial property market.

Yields on office and retail space are already at record lows and rents among the highest in the world, and investors are increasingly turning their attention to smaller office spaces and even car parking spots, prices for which have more than doubled in some districts, according to analysts.

Hong Kong is not alone, with commercial and industrial property prices in Singapore also having hit highs.



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"The government is trying to do something about residential property price inflation, but it is very difficult against the backdrop of the money that is coming into Hong Kong," said Cusson Leung, analyst at Credit Suisse. "We believe most of the investment demand will shift from the residential market to the commercial property market."

The government has intervened in the foreign exchange market five times in the past fortnight to hold down the Hong Kong dollar, which is pegged to the US dollar at HK USD 7.80 and restricted to a trading band of HKUSD7.75 to HKUSD7.85. It also has introduced a 15 percent special stamp duty on foreign and speculative buyers of residential property.

CY Leung, Hong Kong's chief executive, told reporters last week that with money also flowing into shops, commercial premises and car parks, the government's non-interventionist policy was outdated

The Hong Kong Monetary Authority had already implemented other more technical damping measures to cool residential and commercial property because of concerns about risks to the local banking system.

But these have had little effect with office yields down to 3 percent and retail yields down to almost 2.5 percent, according to data from Credit Suisse. In the five years to mid-2009 yields averaged 4.5 percent to 5 percent.

Still, Agricultural Bank of China's HK USD 4.9bn (US USD632m) purchase this summer of a new art deco-style 28-floor stone-fronted block, which also houses the Hong Kong gallery of White Cube, shows there is less pressure on yields in the larger, single-owner building segment.

Monthly rents for Hong Kong office space remain at record levels of HK USD150 per square foot, where they have been for some time, according to John Saunders, chief executive in Asia for MGPA, a specialist property investor. In Singapore, in contrast, rents that had been as high as SUSD20 per square foot per month have dropped back to SUSD10-SUSD12.

"Will some hot money switch from residential to commercial property? Maybe," he said. "But that would really just be storing up trouble for the adjustment that has to come."

Singapore could yet tighten regulations on mortgage lending for commercial property to put a lid on prices, analysts at Citigroup reckon.

Aside from the hot money issue, Hong Kong also suffers from a lack of supply, according to Ed Farrelly, head of research at CBRE in Hong Kong. He says the clampdown on foreign buying of residential property will definitely send money into commercial property, primarily the smaller single-floor office market.

But introducing a stamp duty on foreign investment in commercial property would be a colossal mistake, he warns: "It would send out entirely the wrong message to businesses and investors that they should look to set up elsewhere".