Hong Kong’s commercial real estate market is enduring one of its most severe downturns, with falling property prices and rising loan defaults casting a shadow over the city’s banking sector. According to a report from IndexBox, the city’s property values have plummeted by over 40% from their 2018 peak, leaving property developers and owners grappling with financial instability. The downturn has placed significant pressure on banks as collateral values erode and loan defaults rise.
In 2024, nearly 40% of the HK$34 billion in commercial real estate transactions were distressed sales, a substantial jump from the prior year. One of the most prominent examples was the HK$2.6 billion sale of Cheung Kei Centre, resulting in a HK$2 billion cumulative loss for seven involved lenders. Such incidents highlight the broader challenges for financial institutions in Hong Kong as they navigate a struggling property sector.
Despite these headwinds, local banks are expected to withstand the impact due to their traditionally conservative lending practices. A Bloomberg Intelligence report estimates that $80 billion worth of commercial real estate loans are at risk due to softening rents and climbing office vacancies. However, major financial institutions like HSBC Holdings and the Bank of East Asia have maintained robust risk management frameworks, mitigating the threat of systemic repercussions.
Hang Seng Bank exemplifies the challenges, reporting a dramatic rise in credit-impaired loans from HK$1.1 billion in 2023 to HK$13.5 billion by mid-2024. Nevertheless, the bank reassures that its collateral remains solid, indicating some level of resilience against further market deterioration.
While the crisis has increased risks for smaller and mid-sized developers, the banking sector’s substantial capital buffers and conservative loan-to-value ratios are expected to prevent widespread financial disruption. Analysts at Goldman Sachs and S&P have echoed confidence in Hong Kong’s financial institutions, citing their strong balance sheets and prudent lending practices as critical factors in weathering this economic storm.
