By Susan Fenton

HONG KONG - Demand for residential property is seen picking up in key Asian cities but economic recession will continue to depress the region's office markets, pushing Grade A rents in Singapore and Tokyo down nearly 40 percent in the next 18 months, a Reuters poll shows.

"The office market is driven more by headcount and employment issues," said Aaron Fischer, head of property research at CLSA. "On the residential side, liquidity in the market place is affecting property, in Hong Kong and Singapore, particularly at a time when interest rates are low."

Hong Kong looks the healthiest of three markets covered in the poll - which also includes Singapore and Tokyo - as apartment prices have rebounded 15 percent this year from a slump.

Analysts, however, warn the rally is driven mostly by liquidity and is losing steam as the economy could shrink up 6.5 percent this year based on the government's forecast. The poll showed Hong Kong home prices will be flat for the rest of this year but rise 10-15 percent in 2010.

In Singapore, demand is picking up but strong supply means apartment prices are poised to decline 6.8 percent between now and the end of the year before recovering 4 percent in 2010.

Tokyo residential prices are forecast to drop 10 percent between now and the end of the year and fall 6.3 percent in 2010.

House prices in Hong Kong, Singapore and Japan have fallen so much they are starting to look attractive given the added incentive of very low interest rates, analysts say.

In Singapore, monthly flat sales have tripled since February as apartment prices are down 20 percent since the middle of 2008.

Developers including City Developments and UOL have stopped discounting new projects and in some cases are raising prices slightly although overall prices remain weak.

Tokyo residential prices are only 10 percent off last year's peak, but have more downside than the other markets as falling wages and rising unemployment will dampen demand.

FALLING OFFICE RENTS

Economic recession will continue to depress office rents although in Hong Kong they are poised to stabilise next year amid dwindling new supply.

The city's biggest new project, International Commerce Centre - a 118-floor skyscraper in Kowloon - has lured Morgan Stanley, Credit Suisse and other multinationals across the water from Hong Kong Island, and is 80 percent leased.

The poll forecasts Hong Kong Grade A office rents will drop 10 percent by the end of this year and then be flat next year.

Singapore on the contrary faces a rush of new supply and prime rents, already 40 percent off their peak, will skid 20 percent by the end of this year and 18.8 percent in 2010.

"Next year, the new supply will hit and rents will start falling again," said David Lum, Singapore property analyst at Daiwa Institute of Research.

Tokyo Grade A rents - already down 29 percent from a peak in late 2007 - are poised to fall 10 percent between now and the end of the year and drop 15 percent in 2010, according to the poll.

New supply, however, is relatively limited and analysts expect companies to take advantage of the weak market and upgrade to better quality office space at little or no increase in rent.

(Additional reporting by Mariko Katsumura in Tokyo and Kevin Lim in Singapore)

(Editing by Kazunori Takada)