The Current Slump in Hong Kong's Property Market
Hong Kong’s property market is experiencing a significant downturn that analysts say is unlike previous economic slumps. This current crisis is marked by a "negative spiral" that makes recovery unlikely within the next decade, according to experts.
The commercial real estate (CRE) market in Hong Kong is facing challenges from both structural and cyclical factors. These include an oversupply of properties, changes in work patterns post-pandemic, geopolitical tensions, and a slowdown in the Chinese economy. As a result, both office and retail segments are struggling, making it difficult for analysts to foresee a quick recovery.
Historically, Hong Kong’s real estate market has shown resilience, with past crises like the 1997-1998 financial crisis, the 2008 global financial crisis, and the SARS outbreak in 2003 having only temporary impacts. However, the current situation is different, as it presents more complex and prolonged challenges.
Factors Contributing to the Crisis
One of the key factors contributing to the current slump is the high borrowing costs. Before the recent rate-cut cycle, Hong Kong followed the US lead in increasing interest rates, which raised the cost of money to its highest level since December 2007. Although the Hong Kong Monetary Authority has since cut its base rate, the prime rate at major banks remains relatively high, with some institutions charging up to 5.5%.
Prime offices in Hong Kong have lost more than half their value from their peak in the fourth quarter of 2018, while rents have dropped by around 23%. The overall office vacancy rate was 13.6% in the second quarter, just below a record high of 13.7% in the first quarter. Additionally, new supply is expected to increase significantly between 2025 and 2028, further pressuring the market.
Analysts note that while the repricing of properties has been more gradual compared to previous downturns, the lack of demand means the decline will be prolonged. Values and rents are expected to settle at lower levels than before the pandemic, with no strong catalysts to reignite demand.
Historical Comparisons and Recovery Efforts
In the past, the office market recovered quickly after downturns. For example, after the 2003 SARS outbreak, falling interest rates, the Closer Economic Partnership Arrangement with mainland China, and the end of the epidemic spurred leasing demand. From 2003 to 2008, office values surged 3.7 times, and the vacancy rate fell to less than 8% in 2006.
Similarly, the market rebounded swiftly from the 2008 financial crisis due to monetary easing and close ties with the mainland economy. However, the current situation is more challenging, as the government sees it as a market adjustment rather than a crisis affecting people's livelihoods.
To address high vacancies and the upcoming surge in supply, the government has halted commercial land sales for 12 months and is exploring alternative uses for commercial sites. Additionally, a scheme to convert hotels and commercial buildings into student housing aims to ease a supply shortage amid an influx of overseas students.
Retail Sector Challenges
The retail sector is also struggling, with vacancies in prime shopping centers reaching a record high of 10.5% in the second quarter. High-street rents have returned to 2003 levels, and the types of tenants have changed, with many unable to afford previous rent levels.
Local spending remains weak as northbound travel becomes more convenient, and mainland tourists are focusing on experiential travel rather than luxury purchases. This shift has led to a drop in rents, with some properties now being leased at significantly lower rates.
Future Outlook
Analysts believe that while leasing activity may pick up as falling rents make space more affordable, overleveraged investors will suffer as their capital value declines. Distressed owners are selling properties at fire-sale prices, and banks are becoming more cautious about lending for CRE investments due to rising non-performing loans.
Despite these challenges, there is hope that the market will eventually recover. However, the path to recovery is likely to be long and complex, with asset values and rents settling at lower levels than before the pandemic. The situation highlights the need for continued support and innovative solutions to navigate the current economic landscape.