HK commercial real-estate issuers under pressure amidst high interest rates, vacancies 

Still, valuation and funding risks remain relatively low for rated entities.

Persistently high interest rates and growing vacancy rates are putting pressure on commercial real estate issuers in Hong Kong, according to Fitch Ratings. 

Despite these challenges, valuation and funding risks remain relatively low for rated entities.

Under Fitch's stress scenario, which assumes a steady Fed funds rate of 5.5% throughout 2024 and 2025, the average interest coverage ratios for rated issuers could weaken significantly by 2025 compared to previous years. 

Whilst some entities like Link Real Estate Investment Trust and Swire Properties Limited are expected to fare better, others like Hysan Development Company Limited and Sun Hung Kai Properties Limited may face increased vulnerability.

“We believe that our rated issuers’ loan-to-value ratios will remain below the 30%-35% range, even if a 1pp increase in cap rate causes office fair values to decline by 20%,” Fitch said. 

“Additionally, tenants' flight to quality is likely to benefit our rated entities, given the prime locations of their properties,” it added.

Moreover, the report suggested that tenants' preference for high-quality properties may offer some respite to rated entities, given the prime locations of their assets.