Leasing momentum, lower interest rates unlikely to rescue Hong Kong’s distressed office landlords

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The prices of prime office space in the city’s main business zones declined by more than 46 per cent since October 2018

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Overall rents across the city’s premium office space segment are estimated to have fallen 8.6 per cent this year. Photo: May Tse

Cheryl Arcibal

Published: 8:00am, 30 Dec 2024

Hong Kong’s office property market is likely to see more distressed sales in the medium term, as banks will need to call on loans amid a soft demand for office space, according to analysts.

From their peak in October 2018, prices of prime office space in the city’s main business zones of Sheung Wan/Central, Wan Chai/Causeway Bay and Tsim Sha Tsui declined by more than 46 per cent as of November, according to the latest data from the Rating and Valuation Department.

Overall rents, meanwhile, across the city’s premium office space segment are estimated to have fallen 8.6 per cent this year, according to real estate firm JLL. The property consultancy forecasts office rents to drop by as much as 10 per cent in 2025.

“A few years ago, rental transactions would go for 50,000 sq ft, but now leasing transactions are just for 18,000 sq ft, so rents could not fund the loans,” said Oscar Chan, head of capital markets at JLL in Hong Kong. “For the banks, if a borrower has defaulted for one or two years already, they have to take action no matter what. Definitely, in two to five years, there will be more cases of banks taking action.”

While Hong Kong’s six biggest lenders – HSBC, Hang Seng Bank, Bank of China (Hong Kong), Bank of East Asia, Standard Chartered Bank and ICBC Asia – this month cut borrowing costs to the lowest level in more than two years, uncertainties cloud the outlook for more rate cuts initiated by the US Federal Reserve next year because the incoming Trump administration’s economic policies are widely viewed as inflationary.

“Towards the end of 2024, the office market exhibited a mixed performance,” said Tom Ko, executive director and head of capital markets in Hong Kong at real estate brokers Cushman & Wakefield. “Looking ahead to 2025, the outlook for the office market suggests a continuation of challenges.”