Hong Kong banks ‘resilient’ despite falling CRE property values

Many banks have solid earnings and excess capital to absorb potential losses.

Hong Kong banks should remain resilient even as commercial real estate (CRE) property values continue to fall, said S&P Global Ratings.

Rents keep sliding during the year, whilst the value of properties backing Hong Kong real estate (CRE) loans are expected to trend downward in 2026, the ratings agency said in a report on 26 February 2026.

Capitalization of the Hong Kong banking system would remain resilient even under severe valuation shocks, said Phyllis Liu, S&P Global Ratings credit analyst.

"Many banks have cut exposure to commercial real estate in the past five years, thus limiting the impact of losses in this segment. They also have solid earnings and excess capital to absorb potential losses,” Liu wrote.

S&P’s scenario analysis simulated collateral haircuts of 30% and 50% for the 20 largest licensed banks incorporated in Hong Kong. Banks studied represent more than 85% of sector assets.

Although the system overall is resilient, the performance of each individual bank is uneven, said Will Hau, credit analyst, S&P Global Ratings.

"A subset of small banks with high exposure to non-prime commercial properties, weaker earnings buffers, and aggressive risk appetite are more vulnerable to tail risks such as stressed liquidity conditions or economic downturns,” Hau said.

Hong Kong's commercial property is showing some signs of stabilization after several years of falling rents, S&P said. Office and retail rent levels declined by 1% and 2% since the second half of 2025, slower than with respective 5% and 7% declines in 2024.

Still, it's too early to call a bottom, given ample supply of office space and competition faced by local retailers, S&P said.

“We expect weakness in the commercial property sector will continue to erode the value of the collateral backing banks' exposures to commercial real estate,” it wrote.

In stressed and illiquid conditions, disposal prices can fall more sharply than spot market prices, exerting additional pressure on collateral haircuts.

“In addition, valuation practices also vary by banks, leading to potential dispersion between appraised and marketable prices,” S&P said.