HONG KONG (Reuters) ? Property group Hongkong Land Holdings yesterday posted a slightly bigger than expected fall in underlying net profit on lower rental income and said a budding recovery in Hong Kong?s property market would take time to feed through to earnings.

The Singapore listed group, the dominant landlord in Hong Kong?s Central business district, acknowledged the office rental market had picked up in the fourth quarter of 2003 and sees activity increasing in the year ahead.

But with large amounts of office space available and stiff competition for tenants, the group was cautious about forecasting a dramatic rise in rents in the coming year.

?You would expect a moderate rate of increase in office rents but nothing startling,? said Hongkong Land Chief Executive Nick Sallnow-Smith in a results briefing.

Sallnow Smith said it would be a big challenge to achieve a vacancy rate below five percent despite the upswing in the market. Hongkong Land currently has a vacancy rate of seven percent, down from 16 percent in early 2003.

The remarks contrast slightly with local reports of a dramatic turnaround in Hong Kong?s long suffering property market. Some analysts have said office rents could rise by up to 40 percent this year thanks to a surging local stock market and increased economic cooperation with China.

Hongkong Land said underlying net profit fell ten percent to US$174 million in 2003 from US$192 million in the same period a year earlier.

Analysts had forecast a three percent drop in underlying net earnings, according to Reuters Estimates.

Taking the property and asset revaluation into account, Hongkong Land posted a net loss of US$569 million for the year versus a restated net loss of of US$679 million in 2002.

The group proposed a final dividend of 4.0 US cents per share, matching last year.

?We said once we can see the revenue line improving we would hold the dividend,? said Sallnow-Smith.

Shares in Hongkong Land have risen 11 percent so far this year just shy of a 16 percent rise in the Hang Seng Properties sub index. They closed steady at US$1.89 yesterday ahead of the results announcement.

In the year ahead Sallnow Smith said the group would focus on the redevelopment of its Landmark shopping and office complex, which includes the addition of a 114 room luxury hotel to be managed by sister company Mandarin Oriental International Ltd.

The scheme remains on target for completion between 2005 and 2007.

Sallnow-Smith also said the group would start to look for further opportunities in China, with an eye on Beijing and other major cities.

Overall, analysts are bullish on the propsepcts for the company.

?The outlook for Hongkong Land is certainly improving amidst a recovering office market,? said Winnie Chiu, property analyst at DBS Vickers Securities.

Chiu said her ?hold? rating on Hongkong Land is currently under review with chances for an upgrade following the results.

Hongkong Land is a member of Hong Kong focused conglomerate Jardine Matheson Holdings Ltd, which reports annual results today.