First Pacific Davis: Predicts that prices of Grade A office buildings and core street shops in Hong Kong will fall by 5-10% this year
First Pacific Davies predicts that the rental prices of Grade A office buildings and core street shops in Hong Kong will fall by 5-10% in 2024. Due to the potential deterioration of loan quality in Hong Kong banks in the future, high refinancing costs, and the failure of the Federal Reserve to cut interest rates, banks are becoming more cautious in lending, leading to more distressed asset sales in the commercial real estate market. More property investors are adopting a discount sales strategy due to high funding costs, and buyers with ample cash on hand will dominate the market
According to the latest August 2024 investment market report released by FIRST PACIFIC Davis, it is anticipated that the quality of Hong Kong bank loans may deteriorate further in the coming months, leading to a more cautious lending attitude. Coupled with high refinancing costs, this may force more large property portfolio holders to sell some non-core assets at discounted prices. Therefore, the bank expects to see more distressed asset sales in the Hong Kong commercial real estate market in the second half of 2024, with cash-rich buyers being the main beneficiaries, continuing to seek high-value transactions. FIRST PACIFIC Davis predicts a 5-10% decline in prices for Grade A office buildings and core street shop rents in Hong Kong in 2024.
The report indicates that the continued high cost of funds has led more property investors to sell assets at discounted prices. This is due to the Federal Reserve not cutting interest rates as expected by the market, keeping the Hong Kong Interbank Offered Rate (HIBOR) at a high level. As a result, banks are adopting more conservative lending practices, with the specific classified loan ratio rising from 1.56% to 1.79%, and borrowers' financing costs also increasing.
The tightening of bank risks has led to a significant reduction in commercial loans, further limiting investment demand in the market. Banks are reassessing their loan portfolios, reclaiming some mortgaged properties. This investment environment favors cash-rich investors and users who can negotiate more favorable prices with financially distressed sellers.
Tang Zhuoxuan, Director of Research and Consulting at FIRST PACIFIC Davis, stated that the continued high cost of funds has led more real estate investors to sell assets at discounted prices, but banks are unwilling to provide loans to the commercial real estate market, limiting investment demand. Cash-rich buyers and end-users have taken a dominant position in the market.
Yuan Zhiguang, Managing Director of the Investment Department at FIRST PACIFIC Davis, pointed out that the Hong Kong real estate market has faced significant challenges in recent years. The appreciation of the Hong Kong dollar and high interest rates have affected the local economy, leading to a decline in tourist spending and disposable income. The rise of new shopping malls in Shenzhen has also diverted some local consumption from Hong Kong to China, resulting in a 50% decline in core street shop rents since 2019.
In the 2024 investment market, active buyers are mainly cash-rich private investors and institutions, targeting properties with significant discounts and rental yields of 5-6%. These transactions are expected to mostly occur in suburban areas near the border, with more such high-yield assets expected to appear in the second half of 2024