Fitch expects that the leasing environment in mainland China and Hong Kong will still face challenges next year

Fitch Ratings expects that the leasing environment for commercial real estate investment companies in mainland China and Hong Kong will continue to face challenges in 2026. Given the sluggish net absorption in most markets and ongoing new supply, the office vacancy rate may remain high, which will put pressure on the rental rates of Grade A office buildings in major first-tier cities in mainland China and Hong Kong.

Fitch predicts that, influenced by the weak office market, the rental income of rated issuers will remain flat or experience a low single-digit decline in 2026. Supported by tenants' demand for high-quality properties as a safe haven, the occupancy rates of investment-grade issuers are expected to outperform the overall office market.

Fitch stated that, underpinned by resilient base rents for assets in prime locations, the retail rental income of rated issuers in mainland China and Hong Kong should remain generally stable. However, due to the uneven recovery in sales and ongoing adjustments in tenant structures by landlords, rental income from revenue-sharing arrangements may experience fluctuations.

Fitch also indicated that the interest coverage ratio should remain at a level commensurate with the current ratings. If Fitch's baseline scenario of a 75 basis point rate cut in the U.S. in 2026 materializes, the potential decline in the Hong Kong Interbank Offered Rate (HIBOR) will provide support for this. Additionally, Fitch expects rated issuers to maintain smooth financing channels through their large unencumbered investment property portfolios and prudent leverage strategies.

Fitch noted that the market environment has been challenging over the past two years, but the operational and financial metrics of investment-grade landlords in Hong Kong rated by Fitch have remained stable; these companies are expected to maintain robust performance supported by their high-quality assets. Among them, HYSAN DEV (00014.HK) (BBB/stable) and SHK PPT (00016.HK) (A/stable) will see gradual increases in office rental income as their under-construction office projects come into operation in 2026.

Wharf Holdings (00004.HK) (A-/stable) and YUEXIU REIT (00405.HK) (BBB-/stable), which focus on mainland properties and have no new projects under construction, may continue to face rental pressure from new supply. However, their conservative financial positions and asset quality provide support for their ratings