Hong Kong's property sector gains as buyers seize discounted offices

Transaction value soared 65% year on year to HK$9.1b in the first half.

End-user demand is fuelling Hong Kong’s property sector, as falling prices and fresh government measures spur activity across office, hotel, residential, and retail assets.

Investors acquiring properties for their own use—whether as offices, student housing, or luxury residences—are driving activity that analysts say will accelerate once interest rates ease.

“Commercial activity continues to be primarily driven by end-user demand, as recent price corrections have renewed interest among buyers seeking to secure long-term office and retail premises,” Thomas Chak, head of capital markets and investment services at Colliers Hong Kong, told Hong Kong Business.

As of 25 August, commercial real-estate transaction volume had reached HK$27b, or about 60% of last year’s total, he said in an emailed reply to questions.

Grade A office prices have slumped 51% from their peak, with some mortgagee sales plunging nearly 60%. Retail and industrial prices have dropped 39% and 32%.

“Among these sectors, office properties have experienced the most significant adjustment and are now trading at deep discounts,” Chak said. “Once interest rates begin to ease, leasing and investment demand are expected to improve substantially.”

The office sector has emerged as the biggest beneficiary of renewed end-user interest. Transaction value soared 65% year on year to HK$9.1b in the first half, according to Colliers. 

Cushman & Wakefield, Inc. said offices accounted for 76% of all real-estate investments in the second quarter, with total investment sales climbing 92% quarter-on-quarter to HK$9.7b.

Driving that increase was the Hong Kong Exchanges and Clearing’s HK$6.3b acquisition of floors at One Exchange Square in Central for its permanent headquarters.

CBRE Group, Inc. highlighted other major transactions, including entrepreneur Mike Cai Wensheng’s HK$650m en bloc purchase at Park Aura and Hongxingyang Ltd.’s HK$230m acquisition at 9 Queen’s Road Central.

Tom Ko, executive director and head of capital markets at Cushman & Wakefield Hong Kong, said anticipated US rate cuts would unlock further office demand. Lower US interest rates could generate demand especially among end-users, he added.

Beyond traditional leasing, Hong Kong’s office sector is being reshaped by the “Hostels in the City” scheme, introduced in July by the Development Bureau and Education Bureau, which allows offices to be converted into student housing.

Chak said well-located Grade B offices are now priced attractively enough to yield stable returns after conversion. Ko added that Kowloon, Tsim Sha Tsui, Jordan, and Mong Kok are prime areas because they are near universities, whilst Sheung Wan could serve Hong Kong University students.

Hannah Jeong, executive director and head of valuation and advisory services for Hong Kong at CBRE, said conversion projects need not be adjacent to schools. Proximity to rail stations is sufficient since students are willing to travel “a little bit more.”

Student accommodation often generates steady rental income, usually 5% or higher compared with what the property cost to buy, said Oscar Chan, JLL Hong Kong’s head of capital markets. 

Compared with offices, Jeong said converting hotels into student housing is faster and far less costly than converting office buildings.

Hotel-to-student housing conversions usually take four to six months and cost about 5% to 10% of the hotel’s original value, according to Cushman & Wakefield. Ko said hotel unit prices are down 50% to 60% from their peak.

Jeong said buyers usually target distressed hotels or those with low rents and high vacancies. Converting such properties could generate rental yields of 4% to 6%. Buyers are often universities or other education institutions, she added, noting that they account for a significant share of end-user demand in Hong Kong.

Chak said the education sector accounted for 10% of property deals in the first half. Government-related sectors, which include bodies such as the stock exchange, airport authority, and several educational institutions, accounted for 42%.

He said the growing demand for student accommodation is driven by Hong Kong’s rising appeal to mainland Chinese and international students.

Chak noted that the government recently raised the nonlocal student quota to 40% from 20%, a move that is intensifying housing needs. Hotel transaction values advanced 83% year on year to HK$2.8b in the first half, he added.

Cushman & Wakefield reported two big hotel deals during the period. HKIA Accommodation Ltd. snapped up the Winland 800 Hotel in Tsing Yi for HK$765m, while Nanyang Commercial Bank acquired Hotel COZi Harbour View in Kwun Tong for HK$1.87b.

Mainland Chinese investors are emerging as key drivers of demand in Hong Kong, not only for student accommodation but also for luxury homes, Chan said. “We saw strong demand from mainland Chinese buyers, driven by Hong Kong’s stable market and high-end lifestyle appeal,” he said in an emailed reply to questions.

He added that cheaper financing since April and the Federal Reserve’s likely September rate cut could further lift sentiment in the luxury residential market.

Mortgage interest rates are holding at 2.5% to 2.7%, a range Jeong described as a healthy buffer, particularly as residential property is considered a less risky asset type.

Jeong said mainland buyers favor Hong Kong luxury homes since low developer risk guarantees reliable delivery of purchased units.

“In Mainland China, during the residential market crunch, a number of developers either defaulted or were unable to deliver their projects during the construction period,” she told Hong Kong Business via Zoom. “From the perspective of mainland investor-buyers, Hong Kong developers are very prudent and committed to delivering what they promise.”

Jeong added that since the Hong Kong dollar is pegged to the US dollar, buying property in Hong Kong is, in effect, like investing in US dollars rather than in renminbi. If prices climb and the US dollar strengthens, buyers gain twice, making Hong Kong apartments especially attractive to Chinese investors, she said.

About 50% of luxury residential buyers in Hong Kong are mainland Chinese, Jeong said. Location-wise, Kai Tak and Wong Chuk Hang are emerging as the preferred districts for luxury residential developments. She added that buyers prefer apartments over houses because these are typically overseen by experienced property operators.

As a result, even units exceeding HK$100m have attracted strong interest from mainland buyers, boosting apartment sales, Jeong said. Their preference for new units has translated into higher first-hand sales across the residential market, now representing roughly a third of transactions.

Retail revival

In the commercial space, hotels and retail assets continue to drive transaction volumes. The retail vacancy rate fell to 7.1% in the first half, pushing rents up 0.9% quarter on quarter, according to CBRE data. Food and Beverage groups leased 134,000 sq. ft., their strongest take-up since 2009.

In the second half, three retail deals took place—one was Perfect Smart Ltd.’s HK$119m acquisition of Unit C1 at King Fai Building, while the other two were purchases made by churches.

Retail remains undervalued, Chan said, citing prime-location shops with fixed leases of as long as 10 years that can provide yields above 5%. “Prime retail with stable tenancies can offer a good return.”

Jeong noted that retail yields typically range from 5% to 7%, depending on tenant quality and stability.

Street shops are particularly attractive, offering good rent and the potential for high yields. “Investors were keen to look at these because they were among the most heavily adjusted asset types in 2024,” she added.

She expects stronger transaction volumes in the second half, supported by an improving stock market. “The IPO market has been very active, thanks to government support. And normally, when the stock market recovers, the property market follows a similar pattern,” she added.

Chak said stronger IPO and fundraising activities in Hong Kong would create a “wealth effect” that is likely to drive robust investment in the property market. He added that a government program to let applicants invest a portion of their funds in property would also support the market.

He said 911 applicants had been approved under the scheme as of April, translating into estimated inflows of more than HK$37b.

Jeong said Hong Kong’s revised re-domiciliation rules, which allow overseas companies to shift their legal base to the city, are expected to boost business activity and investor confidence in the property sector.

She added that the Northern Metropolis project is likely to create more opportunities in residential real estate, especially with strong government backing. The large-scale development along Hong Kong’s border with Shenzhen aims to deliver about 350,000 new housing units.