Commercial real estate downturn spreads to banks

Post-pandemic recoveries in HK and the mainland were weaker than expected. 

Hong Kong's commercial real estate (CRE) sector is seeing its worst downturn since the Asian financial crisis, spreading to small banks and lower-tier or financially aggressive property firms, according to S&P Global Ratings. 

S&P Global Ratings credit analyst Ricky Tsang said that post-pandemic recoveries in Hong Kong and Mainland China have been weaker than initially expected, resulting in leasing demand falling short. 

During the first half of the year, two major banks—Hong Kong and Shanghai Banking Corp reclassified 8% to 10% of their loans in the sector as credit-impaired. 

"The banks viewed the loans as problem loans even though a significant portion of the borrowers were still current on payments of interest and principal," said S&P Global Ratings credit analyst Emily Yi, adding that this reflected cash flow strains amidst high interest rates and low rental yields. 

"Despite this reclassification, the banks did not incur any material loan-loss provisions related to these exposures," Yi said.

Tsang said individuals and small, financially aggressive property firms will likely be unable to service debt costs at current rental yield rates, potentially triggering asset sales at steep discounts. 

Furthermore, recent data speak to the scale of this downturn with Hong Kong's grade-A office property values dropping 40% from their 2018 peak. Regional headquarters of multinational firms are also down to 132,000 as of end-2023 whilst retail rents slipped 13% from the pre-pandemic era.