Hong Kong’s real estate market has come a long way in the past year. For a sign of the extent to which its outlook has improved, look no further than the rapid shift in expectations for the growth in house prices this year.
As recently as January, Morgan Stanley characterised its prediction of a 10 per cent rise in secondary home values as a non-consensus call. Fast forward to today, and its forecast is in line with those of most other industry experts.
The outlook for the city’s office market has also brightened. While there are sharp divergences between submarkets, rental growth is picking up. Grade A offices in three of the five districts tracked by CBRE experienced rental growth on a quarterly basis last quarter.
However, scepticism over the strength and breadth of the recovery abounds. This is partly because of years of false dawns and of dramatic deterioration in the geopolitical environment, which poses a threat to financial markets. Moreover, acute supply and demand imbalances continue to weigh on leasing and investment activity.
In the residential sector, excess inventory stood at 17,500 units last month, according to data from Midland Realty. While this is down sharply from 23,000 at the beginning of last year, it shows there is still a large amount of unsold stock waiting to be absorbed. Furthermore, new completions are expected to reach almost 17,000 units this year, much lower than the 24,300 in 2024, but a sign that supply pressures have not dissipated.
Although large and well-capitalised developers have begun to cut discounts and are cautiously raising prices at some newly launched projects, Knight Frank said home builders are still “actively clearing stock and are expected to introduce more incentives and flexible financing schemes to attract buyers”. This is moderating the pace of price gains.
In the office market, the recovery is uneven. While the Central business district is performing strongly – rents for grade A buildings rose nearly 6 per cent in quarterly terms last quarter – decentralised districts remain under severe pressure. CBRE expects rents in Kowloon East and Hong Kong East to decline a further 4-6 per cent this year.
In a report on April 1, S&P Global Ratings said “the improvement does not rise to the level of a turnaround” because “the sector remains oversupplied”. S&P believes “it will take more than two years for the market to meaningfully absorb supply (existing and new) – even if demand stays at 2025 levels, which was the highest since 2019”.
While all these vulnerabilities are cause for concern, it is important to put the recovery in Hong Kong’s property market into context. For the last several years, green shoots in the sector have been too fragile and sporadic to move the needle. Increases in leasing and investment activity came off a low base and had more to do with the diminishing severity of the downturn.
The picture is markedly different today. Hong Kong has regained its mojo. Last year, the city topped the global IPO ranking. In the first quarter of this year, it accounted for 35 per cent of global proceeds from initial public offerings, the largest share according to KPMG.
The dramatic revival in the city’s capital markets has been a game-changer. Major shifts in the geopolitical landscape and the global technology order have accentuated Hong Kong’s role as China’s gateway to international finance. “Hong Kong’s resilience to shocks was underestimated”, said Oscar Chan, head of Hong Kong capital markets at JLL.
The underpinnings of the recovery, moreover, have become stronger, in part because the sources of demand are more diverse. In the residential market, a broad mix of upgraders, first-time buyers, luxury buyers and mainland purchasers have buttressed the foundations of the rebound.
In the two years following the removal of cooling measures in February 2024, transactions in the primary and secondary markets involving mainland buyers were up 163 per cent compared with the two preceding years, according to data from Midland Realty.
In fact, sales involving mainland purchasers have stayed above 1,000 units for the last 13 months, the longest such streak since records began. “This suggests mainland demand is not transient but has become a structural source of support for the recovery,” said Benny Sham, research analyst at Midland Realty.
In the office market, Western financial institutions, notably hedge funds, have capitalised on geopolitical and financial volatility to expand their operations in Asia, proving a boon to leasing activity in Hong Kong. “Occupier demand is driven by multinational companies”, said Ada Fung, chief operating officer and head of advisory services for CBRE in Hong Kong.
The combination of the sharp decline in rents and the trickle-down effects of the IPO boom has fuelled demand for new, high-quality office space in core districts. Knight Frank notes that Central alone accounted for 50 per cent of new leases last year, resulting in a more bifurcated office market in which best-in-class buildings command significant rental premiums, even within Central itself.
While rental growth is unlikely to be broad-based until the supply-demand imbalance becomes less acute, “the peak of the supply boom has passed”, Fung said. This provides a more secure foundation for the recovery. Even S&P admits that “given the recent strained history of this market, [the improvement] is progress”.
The recovery in Hong Kong’s real estate market has its weaknesses. But it’s hard to deny that it is on a stronger footing.