31st December 2024 – (Hong Kong) The year is 2024, and Hong Kong’s commercial property market remains trapped in the doldrums of a punishing downturn. As we approach the precipice of 2025, analysts warn that the turbulence is far from over. Battered by economic headwinds and an unrelenting supply glut, the city’s once-booming real estate landscape has been reduced to a mere shadow of its former glory. Investors, take heed: the storm hasn’t passed yet, but those with nerves of steel may find opportunities in the chaos.
The data paints a grim picture, a harsh reality that even the most optimistic investors can’t ignore. From their dizzying peak in October 2018, prices of prime office space in Hong Kong’s central business districts have plunged by a staggering 46 per cent as of November 2024. A free-fall of epic proportions, one that has left landlords and investors nursing deep wounds.
Overall rents for the city’s premium office spaces are estimated to have fallen by a gut-wrenching 8.6 per cent this year, according to real estate firm JLL. And the consultancy’s grim prognosis for 2025? A further 10 per cent decline in office rents, a prospect that would leave even the most seasoned investors trembling.
“A few years ago, rental transactions would go for 50,000 square feet, but now leasing transactions are just for 18,000 square feet,” laments 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.”
The root cause of this malaise is a toxic combination of oversupply and anaemic demand. As new office towers continue to sprout across the city’s skyline, tenants are downsizing or fleeing to more affordable pastures, leaving a trail of vacant floors in their wake. This vicious cycle has left landlords scrambling to fill their empty spaces, slashing rents and offering increasingly generous incentives in a desperate bid to attract tenants.
Tom Ko, executive director and head of capital markets in Hong Kong at Cushman & Wakefield, sums it up bluntly: “Towards the end of 2024, the office market exhibited a mixed performance. Looking ahead to 2025, the outlook for the office market suggests a continuation of challenges.”
However, the pain doesn’t stop at the office sector. Hong Kong’s retail market is facing its own reckoning, as domestic consumption wanes and tourists tighten their purse strings. Rental values for prime shopping centres decreased by 2.3 per cent in 2024, while high street shops saw a paltry 1.3 per cent increase – a far cry from the heady growth of previous years.
Jeanette Chan, Senior Director of Retail at JLL in Hong Kong, paints a picture of a polarized landscape: “Leasing demand is expected to remain active in 2025. We anticipate that retailers will target prime locations at relatively lower rental rates and aim to secure favourable lease terms. Given the current bottleneck in retail sales, the foreseeable expansion in online sales, and the existing abundant availability of new prime shopping centres, the market will face increased downward pressure.”
In simpler terms, prime shopping districts are holding their ground, while secondary locations are struggling to stay afloat. And with rents for both high street shops and prime shopping centres projected to decline by up to 5 per cent in 2025, even the most resilient retailers may find themselves treading water.
Amidst this perfect storm, the capital markets have been equally rattled. Commercial property values have taken a beating across the board, with Grade A offices seeing a 9.8 perc ent decline, high street shops retreating by 1.6 per cent, and prime warehouses suffering a 7.4 per cent drop.
But the real drama lies in the distressed assets lurking beneath the surface. As Oscar Chan ominously warns, “We expect the pace of rate cuts to be slower, potentially prolonging the property downturn. A rise in distressed properties listings is probable next year, as numerous owners continue to grapple with refinancing high-interest loans.”
In other words, the real estate market’s day of reckoning may be just around the corner, as overleveraged investors find themselves unable to service their debts. And when the banks come knocking, a wave of forced sales and foreclosures could flood the market, further depressing prices.
Amidst the gloom, however, there are glimmers of hope – if you know where to look. The recent rate cuts by Hong Kong’s central bank have injected a much-needed dose of liquidity into the market, sparking a mild rebound in investment activity.
“We are seeing increased interest in big-ticket deals in the market following the start of the rate cut, coupled with deeper price discounts,” observes Reeves Yan, executive director and head of capital markets at CBRE Hong Kong. “End users and long-term investors are gaining confidence to enter into buying positions.”
For those with deep pockets and an appetite for risk, bargain-hunting opportunities may emerge as distressed sellers seek to offload their assets. But timing, as always, will be crucial. As Yan cautions, “Capital values, however, will take longer to improve as a supply overhang in some property sectors and a negative carry will prevent a sharp jump in prices.”
