Hong Kong’s worst office slump squeezes real estate funds
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Funds are increasingly trying to sell once-prized office towers at significant discounts as they rush to exit to avoid mounting interest payments on loans.
PHOTO: REUTERS
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HONG KONG – Real estate funds are getting caught in Hong Kong’s worst commercial property slump after making ill-timed investments when the market peaked just a few years ago.
Funds are increasingly trying to sell once-prized office towers at significant discounts as they rush to exit to avoid mounting interest payments on loans.
Those holding onto assets are having to endure record-high vacancies along with rising borrowing costs.
Domestic and overseas funds bought a combined US$16.1 billion (S$21.6 billion) worth of commercial real estate in Hong Kong from 2016 to 2019, but sold only US$1.2 billion between 2020 and 2023, data from MSCI shows.
Selling an office property in Hong Kong now is no easy feat, with rents falling and space emptying
Buyers are hard to come by even after office prices tumbled 35 per cent from their peak in 2018.
“There are few investors looking to buy offices because the yield is low while rents may drop further,” said Mr Oscar Chan, head of Hong Kong capital markets at Jones Lang LaSalle. “Owners have to cut their prices.”
Some office owners, including Chinese companies and funds, have stopped repaying their mortgages or are considering doing so because rents no longer cover costs, said Mr Chan.
The trend is more common in Kowloon, where vacancies are higher, he added.
Even though recent disposals were able to break even or achieve a profit, it is only a matter of time before funds have to realize the earlier investments they made, according to Mr Benjamin Chow, head of Asia real assets research at MSCI.
“With the deteriorating macroeconomic outlook and the prospect of a ‘higher-for-longer’ interest rate environment, fund managers will have to choose between selling at a hefty discount today, versus lengthening the investment horizon with more expensive financing and at the cost of diluting their IRR (internal rate of return),” Mr Chow said.
KaiLong Group, a Chinese fund manager, has been trying to sell an office building in the Sheung Wan area that is also held by Goldman Sachs Group.
The Shanghai-based firm was still struggling to find a buyer after cutting its asking price by at least one-third, Bloomberg News reported in November.
The downturn is hurting larger players as well. In 2019 and 2020, Gaw Capital purchased three towers from Swire Properties for a combined HK$25 billion (S$4.3 billion) – landmark deals at the time.
The buildings have vacancy rates of 14 per cent, 19 per cent and 28 per cent, according to the firm. These rates compare with a 13.5 per cent vacancy rate in the district, JLL data shows.
Hong Kong’s vacancy rate citywide rose to an unprecedented 16.4 per cent by the end of 2023, according to CBRE Group.
That has put pressure on Grade A office rents, which slipped 6 per cent in 2023.
CBRE expects rental costs to drop as much as 10 per cent in 2024. Office values could fall between 10 per cent and 15 per cent, it forecasts.
To be sure, the situation for investors in Hong Kong is not as grim as the United States, where the value of distressed commercial real estate neared US$80 billion in the third quarter, the highest in a decade.
Hong Kong has seen few enforced sales even as banks watch out for a potential increase in loan defaults, said Ms Jasmine Chiu, real estate partner at law firm Mayer Brown.
“There are other options available to banks, which include offloading non-performing loans to the private market or loan restructuring with borrowers.”
Still, according to Mr Chow, the pressure to sell remains, particularly for closed-end funds that need to protect returns. BLOOMBERG
