Distressed property sales in Hong Kong are beginning to bite banks that used to be well protected against loan losses, Bloomberg reports
The city’s commercial real estate sector witnessed average prices of office buildings, shopping malls and other properties falling over 40 percent from their highs in 2018, eroding the value of the collateral backing many bank loans. Defaults are also rising as more property owners and developers face cash flow difficulties.
Bloomberg said that close to 40 percent of the HK$34 billion (US$4.36 billion) in Hong Kong commercial real estate transactions in 2024 were distressed sales or capital loss deals, where owners—including banks—sold properties for less than what they originally paid, according to data from Colliers International.
Most Hong Kong lenders have sizeable exposures to the city’s real estate industry, but the deepening slump is unlikely to cause systemic issues for the banking sector, which is well capitalized.
Still, pressure on their commercial real estate portfolios is increasing, and investors are becoming more concerned about rising bad loans
Some of the city’s banks had been recovering from the hit they took from the downturn in mainland China’s real estate market.
Rising office vacancies and softening rents in Hong Kong are threatening the quality of US$80 billion of commercial real estate loans at five major banks in the city, according to a report by Bloomberg Intelligence in late November.
The lenders, which include Hang Seng Bank, its parent HSBC Holdings, Bank of East Asia, Bank of China’s Hong Kong unit and Standard Chartered, have made about 40 percent of Hong Kong’s total property development and investment loans.
‘Manageable Losses’
Hong Kong’s banks have long taken a conservative approach towards property loans. Fitch Ratings estimated in 2024 that the average loan-to-value ratio was less than 50 percent for all commercial property-backed loans among banks it rated.
That means assets worth at least US$200 million are backing every US$100 million in debt.
Goldman Sachs credit analysts said Hong Kong’s banks have strong balance sheets and capital buffers that will help them withstand the downturn. They said in a mid-December report that even if commercial real estate prices decline another 35 percent, losses would still be manageable for banks.