HONG KONG : In the heart of Causeway Bay, a bustling Hong Kong shopping district that was once a more expensive retail destination than Fifth Avenue in Midtown Manhattan, a commercial building with shaky financing was recently thrust onto the market.
Cubus is just one building in the city’s vast commercial real estate market that is currently engulfed in turmoil. Despite the US Federal Reserve's rate cut this month, experts say the market might not turn the corner soon as underlying economic fundamentals remain too weak to draw big, quality tenants back. On top of that, investor confidence remains shaky.
"It's hard to use a number to quantify the decline because the market is so big," said Reeves Yan, head of capital markets at CBRE Hong Kong."But if I have to say, it will not be in terms of billions, it will be trillions." Banks are now in a precarious position because if they call the loans, their clients will likely default, which could ripple outward and metastasise into more severe problems. Instead, they prefer to work with borrowers to smooth out kinks with the hope that these do not turn sour, according to Sam Wong, an analyst at Jefferies. But this strategy leaves banks with scant wiggle room if Hong Kong's macroeconomic picture deteriorates further, he said.
Transaction volumes for commercial properties - including offices, retail spaces, industrial properties, and hotels - amounted to around HK$20.5 billion in the first half of 2024. That was down 87 per cent from a 2018 market peak, while the number of deals has nearly retreated to a level not seen since 2008, MSCI data showed.
Despite the Fed's half-point cut, rates are still high, as commercial banks have only gone halfway to pass the cheaper funding costs on to borrowers. But down the road, an environment of lower interest rates is sure to ease the debt burdens on highly leveraged firms and provide some funding relief.
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