Distressed sales lead Hong Kong Q2 real estate transactions

Market sentiment remains cautious.

Hong Kong’s real estate investment market continues to show signs of caution in the second quarter of the year, with distressed assets taking the lead in transactions. Kathy Lee, Head of Research at Colliers Hong Kong, provides insights into the impact of distressed sales on market sentiment and the sectors most affected.

"Actually, the market sentiments in the investment markets have remained subdued. That's why we have seen more distressed property put onto the market for sales," said Lee. "In terms of the sectors, we've seen a lot more affected in the office sectors, like maybe in last year, in the second half of last year, and also at the beginning of this year," she added.

On the investment front, distressed or capital loss sales dominated 50% (11 deals) of the big-ticket deals in Q2, recording a capital loss of as high as 60% in certain deals compared to the purchase price in 2017–18. 

The trend of distressed sales is now extending to the retail market as well. "When we are entering the second quarter of this year, we actually see more distressed sales in the retail market as well. I think that may be due to a relatively slow recovery in the retail leasing market," Lee explained.

Retailers are facing additional challenges amid rising rents, declining domestic spending, and increased outbound travel. Meanwhile, high street shop rentals have seen an increment since the border reopened, attracting retailers interested in expanding in these locations. 

"In terms of the high street shop rental, we actually saw an increase since the border reopened, and retailers are still very interested in expanding in these locations," noted Lee. The return of tourists has helped businesses in these areas, allowing retailers to accept slight increases in rental levels.

Conversely, she mentioned that the neighbourhood segments have not experienced significant rental growth as those areas are particularly affected by the outbound travelling of Hong Kong residents. This has led to a polarisation in the retail market, with high street rentals seeing some growth but still remaining relatively low compared to pre-COVID levels. 

The increased duty-free allowance for mainland residents is another factor impacting the high street retail sector. "We are actually welcoming the government's increase of the allowance for mainland visitors going back to China," said Lee. However, the increase may not be substantial enough to significantly benefit the luxury market.