Office rents in Hong Kong are projected to slip to levels last seen in 2012, a scenario that would erode the value of commercial properties owned by the city’s biggest landlords and force weak owners to sell their assets at deep discounts, according to S&P Global Ratings.

Prime office rents could slide by as much as 10 per cent this year, the rating company said in a report released on Thursday, doubling its previous forecast for a 5 per cent drop. Fresh supply of office space from newly completed projects would intensify pressure on asset owners in a tenant’s market, it added.

“Hong Kong landlords are contending with economic uncertainty and rising competition from new builds,” credit analyst Oscar Chung said in the report. “We expect they will employ more tactics to retain tenants, including deeper cuts in rent rates for renewals.”

Lower valuation could be “the next pain point for Hong Kong office landlords”, S&P said, echoing market concerns, after the Hong Kong Monetary Authority took note of rising bad debts in the commercial real estate sector.

Prime office rents have slumped 62 per cent from a peak in October 2018, according to government data, as social unrest, the Covid-19 pandemic and an economic recession slammed the market. Rents in nine areas including Sheung Wan, Central, Wan Chai-Causeway Bay and Tsim Sha Tsui fell to HK$309 to HK$914 per square metre, approaching levels last seen 13 years ago.

Some 3 million sq ft of new premium office space is expected to enter the market in the coming months, the biggest net increase in supply in 17 years, including 2.6 million sq ft from the International Gateway Centre of Sun Hung Kai Properties (SHKP)’s project in West Kowloon.

Weak demand and the city’s economic challenges suggested a meaningful recovery is not imminent, according to S&P. Given the state of the market, “major landlords” have had to cut rents to keep existing tenants, a trend that was “likely to continue”, it said in the report.

Some investors were seizing the opportunity to pick up bargains amid the market distress, said Tom Ko, executive director and head of capital markets at Cushman & Wakefield in Hong Kong.

“Some new investors and end users are becoming major buyers,” he said. “Traditional investors are still in divestment mode to lower their debt ratio.” Recent distressed sales could provide clearer valuation trends, S&P said. In 2024, four in 10 of transactions involving properties worth at least HK$100 million were sold under receivership or at a loss, it said, compared with two in 10 in 2023. The Cheung Kei Center in Hung Hom and Bonham Majors in Sheung Wan were sold at 41 per cent and 24 per cent below their acquisition costs, it noted.

“Consequently, a bigger and faster correction in major landlords’ investment portfolio value may ensue,” S&P said.

China’s stimulus blitz in late September helped revive demand, while three rounds of interest-rate cuts also revitalised the market and net absorption rate in office space. While some deals were noted, the rebound did not continue as doubts about the speed of future rate cuts set in.

SHKP managed to rope in UBS as its anchor tenant, leasing out 460,000 sq ft or about one-fifth of the available space in its West Kowloon office tower.

“The recent uptick in absorptions in the office market has helped but not cured the city’s high supply problem,” S&P said. “Landlords will also have a hard time in pre-leasing new buildings.”

S&P said it surveyed assets held by eight major landlords for its report: Hongkong Land, IFC Development, Hang Lung Properties, Hysan Development, Swire Properties, Wharf Reic, Champion Reit and Sunlight Reit.

While average rents fell 19 per cent from 2020 to 2024, the fair value of the companies’ investment properties only declined by 13 per cent. Most of the landlords have not been motivated to sell or rent their grade-A office assets at downturn prices, S&P said.

“Some landlords have already taken action to get through another challenging year,” S&P said. “They are reducing shareholder returns and capital expenditures, or raising funding by asset sales or equity. Ultimately, it will come down to their willingness to protect their credit quality.”