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Rising interest costs and a surplus of vacant retail and office space boosted sales of distressed investment properties in Hong Kong during the second quarter, a trend realtors expect to continue in an already sluggish real estate market. Realtors noted that the increasing willingness of lenders and landlords to accept significant losses has increased the number of these transactions, with the market forecast to remain weak due to higher interest rates and declining rental income.
Distressed properties, which are either on the verge of foreclosure, already owned by banks, or repossessed by mortgage lenders, present attractive investment opportunities due to their relatively low prices. Data from real estate services firm Colliers indicated that half of the 22 investment properties transacted in the second quarter were foreclosure sales or sold at a loss. This is a significant increase from one quarter of the previous quarter and is 26% for all of 2023. Colliers included deals worth just over HK$100 million ($12.80 million).
Thomas Chuck, co-head of capital markets and investment services at Colliers Hong Kong, said the market expects more distressed deals and discounted stocks in the second half, which will put pressure on market prices. In response to the growing demand from lenders to recover their loans, Colliers set up a restructuring services team in Hong Kong last year, the second in the Asia-Pacific region after Australia.
Reeves Yan, head of Hong Kong capital markets at real estate consultancy CBRE, mentioned that the drop in interest rates could be a turning point, potentially stabilizing the number of distressed deals. CBRE expects office prices, which have fallen more than 50% from their peak in mid-2019, to decline by around 5-10% for the whole of 2024. Yan noted that foreign investors were the primary buyers in most large office deals. In the first half of the year, when funds and mainland Chinese companies were less active due to higher borrowing costs and their own financial challenges.
Chalk also highlighted that family offices from Singapore, Malaysia, mainland China and Hong Kong have been increasing their investment in Hong Kong real estate over the past year, with demand for retail space outperforming office space, where vacancies have hit record highs. 16% due to increase in new supply. However, not all lenders are keen to sell distressed properties in the current market. Chinese state-owned financial institutions are generally more reluctant to record losses than smaller local banks and prefer to delay sales until the real estate market recovers. For instance, state-owned China Citibank Corp. Lenders to troubled Hong Kong-headquartered developer China Evergrande Group, led by Ltd, have not yet decided whether to offer the property for sale for a third time, as its valuation has come down. Their loan value is HK$7.6 billion, sources say.
The sale of two tenders for office towers in the second half of 2022 has ended. Citibank did not immediately respond to requests for comment. Currently, a harbourfront office tower on the Kowloon peninsula is set for a second tender sale to close next month, with the expected sale price down by a third from last year. The lenders, including seven mostly local banks such as Hang Seng Bank, extended a HK$4.5 billion loan secured by the property, called One Harbor Gate East Tower, formerly owned by Chinese property tycoon Chen Hongtian. The banks now expect to sell the office tower for just HK$3 billion after an unsuccessful tender offer last year, said sources with direct knowledge, who declined to be named due to confidential information.
Hang Seng Bank did not immediately respond to requests for comment.
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Disclaimer : This information has been collected through secondary research and Yugen Realty Newspaper is not responsible for any errors in the same.
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