Sustained high cost of funds leads to more property investors putting assets up for sale at discounted prices, according to Savills in its Market in Minutes – Hong Kong Investment report of August 2024.
- Banks' reluctance to lend to the commercial real estate market restricts investment demand.
- Cash-rich buyers and end-users dominating the market.
- Significant decline in major property transactions in the first half of 2024, representing a 47% decrease compared to the first half of 2023.
- Savills forecasts 5-10% decrease in Grade A office and prime street shop prices in the rest of 2024.
Tightening Lending Conditions Favour Cash-Rich Investors
Sustained high cost of funds has led to more property investors putting their assets up for sale at discounted prices. This is due to the Federal Reserve's decision to not lower interest rates as the market had anticipated, causing the HIBOR rate to remain elevated. As a result, banks have adopted a more conservative lending approach, leading to a substantial increase in the ratio of classified loans from 1.56% to 1.79% and higher funding costs for borrowers.
Banks' tightened risk appetites have led to a noticeable reduction in commercial lending, further restricting investment demand in the market. Banks have been reassessing their loan portfolios and reclaiming some property collaterals, resulting in a more favourable investment landscape for cash-rich investors and end-users as they have been able to negotiate better prices from sellers in distressed financial situations.
Decline in Major Property Transactions but Selective Acquisitions by Cash-Rich End Users
The investment landscape has seen a significant decline in the total value of major non-residential property transactions, which stood at HK$9.9 billion in the first half of 2024, representing a 47% decrease compared to the first half of 2023. Despite that, a notable en-bloc transaction took place in Q2 2024, where a brand-new hotel in Hung Hom was sold for HK$1 billion to the Hong Kong Metropolitan University. The transaction of this 255-room hotel was aimed at providing comfortable, conveniently located accommodation for its students. This highlights the demand from cash-rich end users driving the market.
Distressed Sales Dominate Hong Kong's Office and Retail Sectors
The Hong Kong property market has seen a significant shift, with distressed sales becoming a dominant trend in both the office and retail sectors. In the office sector, the newly developed 88WL commercial property in Sheung Wan, originally acquired and developed by Kai Long / Goldman Sachs for HK$1.6 billion, was subsequently sold to a local investor for only HK$700 million, incurring substantial losses for the vendors. Additionally, two entire floors of the Bank of America Tower were sold at almost a 60% discount from their peak prices, while the 29th floor of the No. 9 Queen's Road Central (QRC) commercial building was acquired for more than a 60% discount to the then peak prices. In the retail sector, a notable transaction involved the retail podium and public car park at Alto Residences in Tseung Kwan O, which was acquired by CR Longdation, a subsidiary of China Resources Group, for HK$540 million. The retail podium is expected to offer an attractive 6% return, making it an appealing investment even in the current high-interest rate environment. These distressed sales underscore the impact of the sustained high cost of funds, leading property investors to offload their assets at discounted prices.
Savills Price Forecast for 2024
With banks' loan quality likely to further deteriorate over the next few months, they would be equally if not more cautious in terms of lending attitude. Coupled with high refinancing costs, this could push more large property portfolio owners to liquidate some of their fringe assets, possibly at discounts. As a result, we may see more discounted/distressed sales in the commercial real estate market in the second half of 2024, with genuine cash-rich buyers being the major beneficiaries to continue bargain hunting. Savills predicts a 5 - 10% decrease in Grade A office prices and prime street shop prices for 2024.
Mr. Jack Tong, Director, Research & Consultancy of Savills commented, “Sustained high cost of fund has led to more property investors put their assets up for sales at discounted prices, but bank’s reluctance to lend into the commercial real estate market restricts investment demand, with cash rich buyers and end users dominating the market.”
Mr. Peter Yuen, Managing Director, Investment & Sales of Savills said, “The Hong Kong property market has faced significant challenges in recent years. The Hong Kong dollar's appreciation and high interest rates have impacted the local economy, leading to decreases in tourist spending and disposable income. The rise of new shopping malls in Shenzhen has also diverted local spending to China, contributing to a 50% decrease in prime street shop rental rates since 2019.
In the 2024 investment market, active buyers appear to be cash-rich private investors and institutions, who have been targeting property deals that offer significant discounts and can generate a 5 - 6% rental yield. Many of these deals were concluded in suburban areas, and more high-yielding assets may become available in the second half of 2024.”