Hong Kong Banks Begin Offloading Distressed Real Estate Assets Amid Market Slump

Hong Kong's commercial real estate sector is experiencing its worst downturn in recent history, with average prices plummeting over 40% since 2018 and no end in sight. This has eroded the value of collateral backing bank loans, leading to increasing defaults and pressure on banks' commercial real estate portfolios.

Traditionally, banks have been reluctant to sell underlying real estate assets at a loss. However, recent transactions, including the sale of Cheung Kei Center at a loss of HK$2.6 billion, indicate a shift in this approach.

"Banks are realizing that if they don't sell, the values will go lower and lower," said James Mak, chief sales director at Midland Commercial Realty Ltd.

While Hong Kong banks are well-capitalized and unlikely to face systemic issues, investors are becoming concerned about rising non-performing loans. Karen Wu of CreditSights notes that some mid-sized and smaller developers are facing difficulties, raising concerns about the quality of $80 billion in commercial real estate loans at major banks.

In late November, Bloomberg Intelligence reported that office vacancies and softening rents are threatening loan portfolios. Analysts Francis Chan and Patrick Wong warn that declining collateral values could force banks to write off more loans in 2025.

Hang Seng Bank reported a significant increase in impaired commercial real estate loans in 2024. However, the bank maintains that collateral levels remain strong and the impact on its financial performance has been minimal.

Data from Colliers International shows that distressed sales and capital loss deals accounted for almost 40% of Hong Kong commercial real estate transactions in 2024. In 2023, such deals represented 21% of the total volume.

Some banks have taken over assets from distressed borrowers. A subsidiary of Chiyu Banking Corp. recently acquired a commercial building in Sheung Wan at a valuation of HK$1.298 billion, despite the building having a mortgage of over HK$1.5 billion.

The sale of Cheung Kei Center in November resulted in losses of HK$2 billion for seven lenders, including Hang Seng Bank. The building was originally acquired for HK$4.5 billion in 2016, significantly higher than its recent sale price.

Similarly, the sale of an office premise in the Capital Center building incurred a loss for Bank of East Asia Ltd., which had provided a HK$198 million loan to the defaulting borrower.

"Most Hong Kong banks have proactively downgraded such exposures to non-performing," said S&P analyst Emily Yi.

Despite the market turmoil, Hong Kong banks maintain strong balance sheets and capital buffers, according to Goldman Sachs credit analysts. They believe that even a further 35% decline in commercial real estate prices would be manageable for banks.

However, Thomas Chak of Colliers warns that asset value declines could lead to discounts of up to 60% on some commercial real estate transactions. Lenders with impaired loans face a dilemma of offloading assets at a loss or waiting for a potential recovery in property values.