Sales of distressed commercial real estate in Hong Kong surged in the first half of the year, accounting for approximately three-quarters of the total volume, according to property consultancy CBRE. This marks a significant increase from the typical less-than-10-percent share of such sales.

The dramatic rise is attributed to the climbing interest rates, which have reached a 23-year high since March 2022. As a result, many investors are struggling to service their debt. In the first six months of the year, overall commercial property deals in Hong Kong amounted to HK$23.1 billion (US$2.95 billion), marking the second-lowest half-year total since the second quarter of 2008. Distressed sales comprised HK$16.8 billion or 73 percent of the total investment, with data covering commercial property deals each valued at over HK$77 million.

“In the second half, there will be something like 50 percent of [distressed sales] because interest rates are still at a high level and a rate cut is unlikely to happen earlier than September,” said Reeves Yan, executive director and head of capital markets at CBRE Hong Kong. He noted that many existing asset owners are under significant pressure due to high interest costs of around 6 percent, while the return on property assets is about 3.5 percent.

In one notable transaction in May, a 5,171 sq ft mansion at Black’s Link on The Peak, linked to Hui Ka-yan, the founder of the liquidated China Evergrande Group, was sold by creditors for HK$448 million, 44 percent less than its appraised value of HK$800 million. The mansion, classified as commercial real estate, was mortgaged to banks and owned through a company.

Another high-profile property, One HarbourGate East Tower in Hung Hom, seized from Chinese tycoon Chen Hongtian last year, has been put up for sale again amid weak office market sentiment. Receivers have reintroduced the tower for a new round of bidding, with Savills as the sole agent. The prime harbourfront property was valued at around HK$7 billion in 2022 and was first put on the market in May 2023. It was originally purchased for HK$4.5 billion in 2016.

Despite the increasing number of distressed assets on sale, some investors are preparing to enter the market at what they believe could be an opportune moment. “We see a lot of dry powder available in the market,” said Eugene Wong, partner at Mayer Brown. Jasmine Chiu, another partner at the law firm, added, “Investors believe that the property sector could be at the bottom now because we have been at an interest-rate peak period for some time already. They will decide whether a distressed property is at the right price.”