Hong Kong’s flats might be tiny, but demand for them is huge, according to JLL.

While the secondary market for larger flats has slowed down, demand for apartments that are small yet comfortable enough for a home, especially in the primary market, is solid and is expected to surge further.

Rentals for small units in Hong Kong will outperform larger units by a mile. Rental demand for modestly-sized units is rising as the secondary sales market eases, triggered by both the Government’s decision to hike stamp duty to 16 percent and fears of an imminent series of 25 to 50 basis point interest rate increases.

And the recent sale of boutique development, 28 Aberdeen St, in the city’s central area embodies this small unit trend.

With each floor housing just two units reminiscent of hotel rooms or serviced apartments, 28 Aberdeen Street reflects developers’ confidence that demand for small units in Hong Kong will be strong as it is in other major cities worldwide.

Demand for small apartments always boils down to the location and building design. There is virtually no development comparable to 28 Aberdeen Street (located near the Grade 3 Historic PMQ) on Hong Kong island, particularly, in Central.

This makes them a prime target for investors looking to buy to let. Mini units can command rental returns of 20 percent above normal market rates. For example, in Central a 1,000 square-foot unit rents at about HKD50 (US$6.50) per-square-foot but a brand-new unit of 400 square-foot can command HKD80 (US$10.2) per-square-foot, because more people can afford that size of flat.

Prices for units at 28 Aberdeen Street range from HKD11.767 million to HKD16.555 million (US$2.1 million), after discounts, or HKD28,912 (US$3707) per saleable square foot to HKD40,676 (US$5215) per-square-foot. The landmark project is expected to be completed in the latter half of this year.

I believe 28 Aberdeen Street will generate roughly three percent annual return per annum, assuming a HKD30,000 (US$3846) per-square-foot purchase price.

28 Aberdeen Street is designed and built by privately-held local developer The Development Studio, founded by Keith Kerr, formerly CEO of Swire.

We expect the trend to build smaller units will continue for at least two more years.