What’s to blame for Hong Kong’s lacklustre property investments in Q2?

Investments declined by 37.5% to HK$7.5b during the quarter.

According to a Savills report, due to persistently high interest rates, non-residential (office, retail, hotel, industrial) investment transaction value in Hong Kong declined sharply from HK$12.0 billion in Q1 to HK$7.5 billion in Q2, a 37.5% decrease.

If we only take major transactions into account (en-bloc or transactions involving over 30% ownership), Q2 volume of HK$0.6 billion was less than 10% of Q1 volume (HK$7.0 billion).

Here’s more from Savills:

While high holding costs have pushed more vendors to market their assets, banks’ unwillingness to lend in the commercial market, together with negative yield carry in most sectors, deterred many potential investors.

Therefore, both the hotel and retail investment markets were muted in Q2, while the office market was dominated by end user demand in the second quarter of 2023: 22/F of Euro Trade Centre in Central was sold for HK$142 million, while 7/F of Fairmont House (8,824 sq ft) for HK$168.3 million, both to local end users.

Units on two separate floors in Convention Plaza Office Towers were also sold for HK$309.8 million and HK$255 million respectively, both again to end users. With rental yields at 2.5% to 3% and interest rates remaining high in the foreseeable future, investment demand for office premises may be kept on the sideline for at least another 12 to 18 months.

The investment market looks set to endure another difficult six months at least with interest rates almost certain to remain high (if not higher), and many experienced investors with sizeable portfolios and relatively healthy LTVs (below 40%) begin to receive calls from banks requesting them to further lower their loan amounts by cash repayment or selling down of their portfolios.

With more vendors under pressure to sell underperforming assets over the coming months, coupled with continuous declining office rents and slowing growth momentum in both the retail and hotel segments, asset prices look set to come under further pressure. While more strata office floors and small retail shops would likely be purchased by end users, investment deals may only happen with 5%-yield being the minimum requirement, with more transactions likely to be concluded at yield levels of around 7% to 8%.