Fitch Ratings: The residential property market in Hong Kong is expected to maintain a modest recovery trend, while the commercial real estate sector may continue to face pressure.

Rating agency Moody's has stated that the residential property market in Hong Kong is expected to maintain a mild recovery trend, but the extent of the rebound is limited. The commercial real estate sector is predicted to remain under pressure, with high vacancy rates and ongoing structural headwinds facing long-term demand, which may constrain the willingness to acquire commercial land in the short term. Moody's pointed out that due to the low interest rate environment, increased wealth effects from a strong stock market, and rising rental yields, residential property prices and transaction volumes in Hong Kong have increased, stabilizing market sentiment. New immigration policies, including the talent scheme, have also boosted demand, with new home sales expected to reach the highest level in over a decade by 2025. However, ongoing promotional policies by developers and cautious market conditions suggest that the rebound in the residential market is not expected to significantly or sustainably boost government revenue. Regarding commercial real estate, Moody's expects the sector to remain under pressure, with office rents expected to be significantly lower than pre-pandemic levels. Despite increased leasing activity in recent months in Hong Kong's traditional core business districts due to strong capital market performance, high vacancy rates and ongoing structural headwinds facing long-term demand may restrict the willingness to acquire commercial land in the short term. Given the cautious macroeconomic outlook, developers may adopt a selective strategy when acquiring new residential land, which could dampen government land premium revenues. Exposure to commercial real estate remains a major risk for banks, especially those providing substantial loans to vulnerable small and medium-sized borrowers. The banking sector in Hong Kong is expected to maintain a cautious stance, with a focus on asset quality and credit standards rather than pursuing loan growth, even as residential mortgage activities rebound. Banks' funding, liquidity, and capital positions remain robust, but Moody's anticipates that the banking sector will not significantly boost property market activity. Residential mortgage loan asset quality is strong, but the weaker commercial real estate segment may continue to be under pressure. Moody's forecasts that Hong Kong's fiscal flexibility will continue to be constrained by the decline in property-related revenues, but the short-term impact may be offset by the stamp duty on stock trading. As of the fiscal year ending in March 2025, property stamp duty and land revenues accounted for approximately 5% of total government revenue, and their share of GDP has declined from over 6% five years ago to less than 1%. One reason for this is that the Hong Kong government, in response to high office vacancy rates and weak market demand, decided to suspend new commercial land auctions in the current fiscal year. The recent recovery in residential market sentiment has provided only limited support, and property-related revenues are expected to remain significantly lower than historical levels.