LTV ratio relaxation boosts seller confidence in Hong Kong

It has reduced distressed opportunities.

In Hong Kong, the recent relaxation of loan-to-value (LTV) ratios for commercial real estate has significantly boosted sellers' confidence, leading to a reduction in distressed property sales, according to Reeves Yan, Head of Capital Markets at CBRE Hong Kong.

Yan stated, "The increased LTV ratio from 60% to 70% has alleviated some pressure from the banks on sellers regarding interest repayments. This change has been particularly beneficial for sellers in the commercial sector."

While the relaxed LTV ratios have provided some relief to sellers, the impact on buyers has been less pronounced. "On the buyer side, this has not significantly impacted commercial properties, despite the increased LTV ratio," Yan noted, "Banks remain cautious in commercial lending, making it difficult for new buyers to secure financing. Buyers still need to assume they need a 40 to 50% mortgage for purchasing commercial real estate."

In terms of investment growth, the office sector has seen the most significant increase. "We see a significant picture in the office sector, driven mainly by end-user buyers acquiring offices for long-term self-use," Yan explained, "The key reason is the significant price drop, around 40 to 50% from peak levels. Additionally, family offices and high-net-worth individuals are investing in offices to capture potential capital appreciation."

The living sectors and student accommodation have also become hot topics for institutional investors. "With the increasing number of tenants and overseas students coming to Hong Kong, there is a shortage of housing for newcomers," Yan observed, "This demand has led to strong rental performance and high occupancy rates in these sectors."

Looking ahead, Yan's outlook for Hong Kong's real estate investment is cautiously optimistic, contingent on macroeconomic factors. "The outlook of Hong Kong real estate investment largely depends on the US interest rate cut cycle in the second half of 2024 and 2025," Yan predicted. "We believe the transaction volume has already reached the bottom, and we expect a rebound in Q3 and Q4 of this year."

Despite the positive outlook, certain sectors may face challenges. "Office prices and rentals will remain soft due to the significant upcoming supply and the current historical peak of vacancy rates," Yan warned. "However, industrial and retail sectors will stay resilient due to low vacancy rates. The most positive sector will be the living sector, seeing increasing investment demand from various investors."