Real estate markets in Mainland China and Hong Kong have been subdued since the pandemic, however falling values are beginning to entice buyers back into the market.

Nonetheless, prospective bargain hunters need to consider the outlook for their chosen sector and market and whether they can find sound assets with sellers motivated to cut pricing to attractive levels.

In Mainland China, there is a significant amount of unsold commercial real estate on the market, primarily due to the downturn in the real estate sector and reduced transaction volumes over the past two years, says James Macdonald, Head of Research at Savills China. There have been policy moves to support the sector, but these take time and some observers believe more state support will be needed.

Consequently, says Macdonald: “There is a notable presence of distressed assets, many originating from developers facing liquidity challenges or funds struggling with refinancing.”

He points to investor interest in distressed and dislocated opportunities in the retail and logistics market, but less interest in the office sector due to weaker fundamentals and oversupply. Savills data show office investment volumes slumped by a quarter last year, whereas retail volumes rose by a similar amount. Meanwhile the residential rental sector has performed strongly and offers few distressed opportunities.

The pace of distressed deals in China has been relatively slow due to a persistently large bid/ask spread. This is reinforced by local banks in mainland China being encouraged to provide forbearance or refinancing to debtors.

“This approach aims to prevent a collapse in property values and gives developers more time to resolve debt issues,” says Macdonald. “The pressure is mainly on developers facing bond repayment pressures or foreign investors with overseas loans.”

Meanwhile, in Hong Kong, bank forbearance is far more limited and this has forced a number of asset owners to seek sales at substantial discounts to top-of-the-market prices. For example, two floors at The Center (pictured above), a 73-storey office tower, were recently sold to Singapore’s DBS Bank at close to HK$26,000 ($3,333) per sq ft, compared with a peak price of $55,854 per sq ft for that building in 2017.

A number of the city’s tycoons have been forced to sell residential and commercial properties at substantial discounts. In the residential sector, high net worth individuals and private equity buyers have been on the hunt for bargains, while in the office sector, there has been a surge in non-profits buying for their own occupation.

For example, Hong Kong Metropolitan University bought the Chung Kei Center in Hung Hom for HK$2.65 billion, a 62% discount to the asset’s 2022 book value and a 41% discount to the price paid by entities linked to Chen Hongtian, chairman of China developer Chung Kei in 2016. The building was sold by receivers after Chen pledged it as collateral to a consortium of banks.

Simon Smith, Head of Research & Consultancy, Asia Pacific, at Savills, says: “Banks want their balance sheets to be cleared and are putting pressure on asset owners in Hong Kong. Even the biggest names in the city are not immune.

“There is definitely an opportunity to acquire high-quality assets at a discount, however in sectors plagued by oversupply, such as offices and retail, buyers should be cautious.”

Further reading:
Savills Hong Kong Research

Contact us:
James Macdonald