FIRST PACIFIC Davis: The Hong Kong property market saw a growing divergence in the second quarter, entering a phase of selective recovery.

FIRST PACIFIC Davis has released a report stating that in the second quarter of 2026, the differentiation in the Hong Kong real estate market will further expand: the residential market remains resilient with support from mainland buyers, while commercial properties continue to undergo price adjustments. In the first half of the year, the investment total for non-residential properties with individual transaction amounts exceeding HK$50 million surged 120% year-on-year to HK$22.3 billion, with office and hotel properties accounting for 67.6% and 21.6% of the investment amount, respectively, marking the primary transaction sectors. This reflects a market shift from stagnation to a selective recovery; however, buyers still place a high emphasis on asset quality, pricing, financing conditions, and stable cash flow. The price adjustment for commercial properties continues. The price of Grade A office buildings has dropped approximately 49% from its peak in 2018, while the price of core street shops has fallen about 65% from its peak in 2013; some properties taken over were sold at prices 35% to 56% lower than the original purchase price or valuation. There are preliminary signs of stabilization in office investment activity, particularly focused on core assets that are well-located, of higher quality, and hold long-term self-use or investment value. In the second quarter of 2026, the overall vacancy rate of Grade A office buildings decreased by 0.4 percentage points quarter-on-quarter to 14.8%. Demand in the residential market remains robust. In the first half of 2026, mainland buyers accounted for residential transaction amounts of about HK$107.1 billion, which is roughly 75% of the total for the entire year of 2025; transactions for super luxury properties exceeding HK$100 million reached 134, a 91% increase compared to the same period last year, with mainland buyers involved in 69 of these transactions. The fundamentals of the hotel and student accommodation market are relatively sound. As of May 2026, the average hotel room rate had recovered to 98% of the peak level in 2018, with an occupancy rate of 84% in the second quarter; meanwhile, the number of non-local students for the 2024/25 academic year increased by 97% to approximately 92,000 compared to five years ago, with a shortfall of about 72,000 beds in student accommodation, supporting related refurbishment and investment demand. Mr. Tong Cheuk-hin, Director of the Research and Consultancy Department at FIRST PACIFIC Davis, stated: "The Hong Kong market is not lacking in capital; the current key issue lies in buyers being more rigorous in their expectations regarding price and returns. As the supply of distressed assets increases, it may continue to apply price pressure to the market in the short term, but a more thorough asset reassessment will also help facilitate a new round of transactions. The market is expected to maintain a selective recovery in the second half of the year, with funding allocation restrictions arising from foreign investment regulations, along with the supply of repossessed properties driven by lending institutions, likely becoming two significant factors influencing market performance in the second half of 2026. Capital will prioritize assets that are reasonably priced, of good quality, and supported by stable cash flows." Mr. Yuen Chi-Kwong, Managing Director of the Investment Department at FIRST PACIFIC Davis, stated: "In the first half of the year, the non-residential investment market saw a significant rebound, reflecting that end-users, institutions, and foreign funds have begun to seize opportunities following the price adjustments of quality assets. Among these, office and hotel properties are the most sought after in the market, while projects related to hotels, serviced apartments, and student accommodation with refurbishment potential continue to attract long-term capital. However, the market recovery is not uniform, and investors will continue to focus on prime locations, quality properties, and projects with clear asset appreciation potential."