What was the most notable retail investment deal in Hong Kong?

It was the acquisition of five suburban retail podiums in To Kwa Wan and Cheung Sha Wan.

According to a recent Savills report, in the fourth quarter of 2024, the U.S. Federal Reserve enacted two additional interest rate cuts, resulting in a cumulative reduction of one percentage point for the year. This adjustment has effectively reduced the local cost of funds for commercial real estate (CRE) financing from approximately 7% at the beginning of 2024 to around 6% currently.

“Nevertheless, banks remain highly cautious in their lending practices within the distressed CRE market, which has seen prices decline by over 50% in the office and retail sectors over the past five years. Consequently, cash-rich end users have become the primary purchasers in the market, with total major commercial investment volume amounting to HK$20.1 billion in 2024, reflecting a 46% year-over-year decrease,” the report said.

Here’s more from Savills:

After being on the market for over a year, the Cheung Kei Centre in Hung Hom, previously under receivership, was sold to Metropolitan University (MU) for HK$2.65 billion, translating to just under HK$9,500 per sq ft. This acquisition represents MU's second major purchase, following its acquisition of a hotel for HK$1 billion in mid-2024, intended for conversion into student accommodation. Reports suggest that MU plans to retain a portion of the 279,000-square-foot office space for its own use.

The retail sector experienced notable end-user activity, highlighted by the sale of Marble 33, a 40,000 sq ft retail podium in North Point focused on the educational sector. This property was acquired for HK$245 million by a religious organization for their own operational purposes.

Similarly, City University has moved to acquire the retail podium of Inter-Continental Plaza for HK$880 million, slightly below HK$10,000 per sq ft. The university aims to utilize the 90,000-square-foot space as an urban campus. With many property investors encountering financial difficulties, universities—having amassed billions in reserves over recent years—are likely to emerge as prominent buyers in the commercial market, especially given the increasing availability of distressed and discounted assets.

On the investment front, the most notable transaction was the acquisition of five suburban retail podiums in To Kwa Wan and Cheung Sha Wan (totaling 160,000 square feet) from the Hong Kong Housing Society by CR Longdation for HK$1.035 billion. This acquisition represents an average price of approximately HK$6,500 per square foot and a yield of around 5%, with occupancy exceeding 95%. This transaction marks CR Longdation's third investment in Hong Kong's retail sector, totaling HK$1.9 billion spent on suburban retail assets.

Looking ahead, as loan quality among banks continues to deteriorate—evidenced by an increase in the bad debt ratio from 0.8% in 2022 to 1.6% in 2024—and with banks, such as Hang Seng Bank, heavily exposed to the local CRE market experiencing a surge in this ratio to over 6%, we expect banks to adopt a more conservative approach to further lending in the CRE market. Concurrently, they may become more proactive in calling loans from property investors facing financial distress, prompting these investors to consider divesting underperforming commercial assets at discounted prices.

However, with both the office and retail sectors likely facing uncertain prospects and oversupply in 2025, commercial rents are projected to decline by an additional 5% to 10%. This trend may reduce the attractiveness of such commercial portfolios for generating stable income. Given that most property investors are expected to be eager to deleverage, we may see deeper price discounts on available commercial assets, primarily attracting end users and a select few cash-rich investors looking to capitalize on potential bottoming out of commercial pricing.

Consequently, although we anticipate commercial prices to decline by an additional 5% to 10% in 2025 overall (with the exception of hotels, which are experiencing significantly stronger demand), transaction volume may rebound as motivated sellers in the market become more receptive to aggressive offers.