HSBC has warned that almost three-quarters of its Hong Kong commercial property loan portfolio is showing signs of stress, as weak retail spending and sluggish demand for office space continue to weigh on the territory’s real estate market.
The UK-headquartered lender (Europe’s largest bank by assets), said $18.1bn (AUD $27.4bn) of its Hong Kong commercial real estate loans were now classed as having “increased credit risk”, up from $6.5bn (AUD $9.8bn) at the start of the year.
The increase follows an update to its internal probability-of-default model.
Hong Kong’s prime office rents have dropped more than 20 per cent since 2022, with vacancy rates at record highs of around 19 per cent, according to Cushman & Wakefield.
The Financial Times reports HSBC is the city’s largest lender and Hong Kong remains its biggest single market by income.
Out of a total Hong Kong loan book worth $234bn (AUD $354bn), $32bn (AUD $48.4bn) is tied to commercial real estate.
HSBC has set aside $1.1bn ($AUD 1.67bn) for expected credit losses in the second quarter, of which $400mn (AUD $605mn) relates to Hong Kong commercial property.
“Banks are now more aggressive in clearing up their non-performing loans this year. [In the second] quarter, we [see] about half of the transactions are financially stressed,” said Reeves Yan, head of capital markets at CBRE.
The data means 73 per cent of HSBC’s Hong Kong commercial real estate loans are now either impaired or flagged for increased risk — up from less than 30 per cent a year ago.
Michael Makdad, an Asian financial analyst at Morningstar, said: “Clearly, there are a number of stressed real estate companies in Hong Kong . . . it is definitely flashing significant warning signs and has done so for a while.”
Much of the strain is centred on Hang Seng Bank, HSBC’s local subsidiary, which has a larger exposure to smaller property developers now facing acute financial pressure.
“The problems are with smaller and medium-sized companies in the commercial real estate space, not the diversified groups,” said Gurpreet Singh Sahi, an analyst at Goldman Sachs.
Some market watchers believe Hong Kong’s prolonged property slump may be nearing a floor, pointing to major office transactions by firms such as Jane Street and the Hong Kong Exchange.
In a call with analysts last week, HSBC chief executive Georges Elhedery said: “Our Hong Kong real estate clients are working through some short-term challenges. But in the medium to long term, we remain confident in the supply and demand dynamic in Hong Kong and the appeal of Hong Kong real estate at large and, therefore, remain constructive and optimistic.”
