Will Hong Kong Weather the Commercial Property Storm?
There are rising concerns about commercial real estate risks in Hong Kong’s banking sector. Will the city be able to ride out the challenges or could a crisis be brewing?
The state of Hong Kong’s banking system has been increasingly under scrutiny as observers closely monitor rising risks in the city’s commercial real estate (CRE) market. HSBC was most notably spotlighted by media reports for flagging 73 percent of its CRE loan book as risky, increasing almost threefold to $18.1 billion since the start of the year.
What is the outlook for the CRE sector and are there serious threats to Hong Kong banks?
Office Oversupply, Retail Decline
In terms of the outlook, most analysts highlight risks from the oversupply of offices which is being offset by tailwinds elsewhere.
«The recovery of IPO activity should help support market sentiment and downstream office demand, chiefly from banking & finance and professional services firms,» said a report by Cushman & Wakefield. «We forecast the overall office rental level to drop in a range of 7 percent to 9 percent in 2025, amid a heavy new supply pipeline while occupiers are still cost-cautious.»
On retail sales, a note by Fitch Ratings expects retail sales to continue its decline, albeit at a narrower rate through 2025 due to support by Hong Kong initiatives to boost tourist visitation and, potentially, retail consumption.
Default Risks
Despite mild improvements in the outlook, there are worries that this will not be sufficient to prevent defaults among local developers. Earlier this month, small-sized local developer Road King Infrastructure became the first to fall after failing to make payments totalling $11.3 million.
According to S&P Global Ratings analyst Edward Chan, the possibility of more defaults by small-sized developers in the next 12 to 24 months cannot be ruled out with local property developers seeing bond maturities rising to $7.1 billion in 2026, up from $4.2 billion this year.
In a research report by UBS, the Swiss financial institution expressed its cautious stance, noting that the rebound in the Hong Kong Inter-bank Offered Rate (HIBOR) may exacerbate the risk of non-performing loans at local lenders to the sector and further increase provisioning pressure.
Lending to Small Developers
While much attention has been placed on global banks like HSBC, which typically finance large developers, analysts have been noting that risks are higher amongst local lenders to small developers.
Hang Seng, HSBC’s Hong Kong subsidiary, is a notable example as it has the highest exposure to retail real estate among the city’s systemically important banks, with 36.3 percent of its total loans allocated to this market. According to data compiled by Goldman Sachs, Hang Seng’s non-performing loan ratio reached a record 6.7 percent at the end of June, which is even higher than levels seen during the Asian financial crisis.
Regulator’s Reassurance
The local banking regulator has been providing reassurances with Hong Kong Monetary Authority chief Eddie Yue calling CRE risks «manageable» in a recent commentary.
He said that most loans are to large developers with «relatively good financial health» while banks have already taken credit risk mitigating measures earlier on for small and medium-sized local property developers, adding that most of such loans are secured with «no concentration risk at individual borrower level».
«Hong Kong’s banking sector has safely sailed through the 1998 Asian Financial Crisis, the 2008 Great Financial Crisis, the few years following the Covid-19 pandemic as well as the 2023 banking turmoil in the US and Europe, demonstrating its strength and resilience,» Yue added.
