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Driven by strong demand, Hong Kong property prices are expected to increase another 10 percent in 2015 after a 13 percent surge last year, according to Bank of America Merrill Lynch (BAML).

The investment bank said that the expected US interest rate hike later this year could serve as a cooling measure to what is widely believed to be an overheating residential market.

"Rising interest rate would slow down the price increase," said Raymond Ngai, managing director of BAML and its head of Hong Kong and Chinese mainland property research.

Ngai predicted the interest rate hike would happen in September the earliest. But its impact on the Hong Kong property market would depend on the scale of the increase, he said.

Given the average rental yield in the city's private residential market is around 2.7 percent, and that the current mortgage rate is around 2 percent, any increase in interest rate should at least fill the gap before it can truly make a difference, Ngai said.

"The economic fundamentals indicate that the market outlook has remained positive," Ngai added. "It's still cheaper to buy than to rent."

The key to escalating property prices is that demand has continued to outpace supply, property market analysts said.

Latest government figures show that in 2014, a total of 15,700 private residential units were completed, and 900 were completed in the first quarter this year - down 69 percent from a year earlier period.

Yet the government has predicted that a record 78,000 new apartments will come on stream in the coming three or four years.

"But the demand accumulated in the past decade has exceeded 50,000 units," Ngai said.

In general, as property prices have been holding up better-than-expected this year because interest rates have remained low and the less-than-expected impact of increasing primary supply on the secondary market, a 10 percent or more price increase in 2015 is likely, according to BAML.

Karl Choi, director and a Hong Kong property analyst at the bank, said the retail sector has outperformed the office sector in the last two years. But the trend is showing sign of reversing because of the downturn in retail sales in recent months. He predicted there will be a 5 to 10 percent increase in Central office rental this year. But the increase would be more moderate for office rental outside the prime location, he said.

In contrast, the rental of high-end retail properties is expected to fall 5 to 10 percent in 2015 while that for retail properties in lesser commercial districts is forecast to decrease up to 5 percent.

agnes@chinadailyhk.com

Analysts predict that there will be a 5 to 10 percent surge in Central office rental this year, while the rental of high-end retail properties will head the other direction. Lam Yik-Fei / Bloomberg

(HK Edition 06/18/2015 page7)