Distressed property sales in Hong Kong are beginning to bite banks that used to be well protected against loan losses.
The city’s commercial real estate sector is going through one of its worst slumps in history, with no end in sight. Average prices of office buildings, shopping malls and other properties have fallen more than 40 per cent from their highs in 2018, eroding the value of the collateral backing many bank loans. Defaults are also rising as more property owners and developers run into cash flow difficulties.
Close to 40 per cent of the HK$34 billion in Hong Kong commercial real estate transactions in 2024 were distressed sales or capital loss deals, where owners – including banks – sold properties for less than what they originally paid, according to data from Colliers International.
In 2023, such deals for offices, retail spaces, hotels, serviced apartments and industrial assets, made up 21 per cent of the total transaction volume. The data covers deals of least HK$100 million.
Most Hong Kong lenders have sizeable exposures to the city’s real estate industry, but the deepening slump is unlikely to cause systemic issues for the banking sector, which is well capitalised.
Still, pressure on their commercial real estate portfolios is increasing, and investors are becoming more concerned about rising bad loans, said Ms Karen Wu, a credit analyst at research firm CreditSights.
Goldman Sachs credit analysts said Hong Kong’s banks have strong balance sheets and capital buffers that will help them withstand the downturn. They said in a mid-December report that even if commercial real estate prices decline another 35 per cent, losses would still be manageable for banks. The continuing asset value declines mean some commercial real estate transactions could see discounts of as much as 60 per cent from the original purchase price.
