Hong Kong’s real estate market is showing signs of recovery after a challenging period. After prices fell close to 30% since 2021, residential property prices bounced back 4.7% YoY in 2025, and have continued to gain momentum with a 10.57% return as of July 2026. Hong Kong secondary home prices have now risen by 18% since the March 2025 bottom. The recovery has been supported by three key catalysts: declining interest rates, equity market recovery, and the return of mainland Chinese buyers. The improving fundamentals suggest we are past the trough, although the pace of rebound could moderate in the second half of the year.
Residential remains the standout performer, having rebounded 18% from the March 2025 bottom in the secondary market. Lower mortgage rates – currently at 3.25–3.5%, down from peaks above 5% – have significantly improved affordability for homebuyers. Meanwhile, gross rental yields have risen to 3.5%, making property investments more attractive. Notably, while the residential property price index remains below its 2021 peak, the rental index has already reached an all-time high.
The Hang Seng Index has rallied strongly over the past two years, which has not only created a positive wealth effect but also boosted confidence in Hong Kong assets. The return of mainland Chinese buyers provided important demand support earlier in the recovery, although recent transactions suggest their participation has moderated. The absorption of excess inventory and continued rental strength suggest the physical market recovery remains intact. Together, these factors are contributing to the rebound in residential property prices.
Hong Kong retail sales growth turned positive in May 2025 and has continued to accelerate, reaching around +8% YoY in the most recent month. The strongest categories were Jeweler & watches, up 26% YoY, and Department stores, up 9% YoY. Tourist arrivals have been an important driver of the recovery, rising 7% YoY. We expect retail sales growth to hover in the 5–10% range, which should support retail landlords’ fundamentals and provide positive spillover effects across the broader sector.
The office sector remains the weakest segment of Hong Kong's property market, with citywide Grade A vacancy rates reaching 17.5% in 2025 and values now more than 50% below their peak. Hybrid work and a substantial new supply pipeline continue to weigh on fundamentals. The notable transactions by Alibaba and JD.com in Q4 2025 suggest opportunistic capital is willing to deploy at these levels, but these are isolated bright spots rather than signs of a broader recovery. We remain cautious on the sector.
We turned positive on the Hong Kong real estate credit market earlier this year, and this has been a strong call. The sector, excluding distressed names, has returned +4.25% year-to-date, outperforming broader fixed income returns of approximately 1.5–2.0%. There have been no Hong Kong real estate credit defaults this year, and higher-beta names have generally managed to roll over existing debt. The reopening of the refinancing channel is an important signal that the worst is likely behind us.
New World Development has been the standout performer this year. After coming under significant pressure last year, the company managed to roll over its loans with support from banks and has since benefited from the broader recovery in Hong Kong real estate. Several potential catalysts are being discussed for New World Development, including a possible rights issue, negotiations around the 11 Skies contract, the sale of hotel portfolios, and potentially further tenders for perpetual securities, which are currently preventing the company from paying dividends. If these catalysts materialize, they would be further positive for Hong Kong real estate credit. We added New World Development back to our coverage list in March 2026. However, given the company’s higher-beta profile, it is not an active recommendation.
On the credit side, we believe the worst is likely behind us, even if the pace of recovery slows in the second half. With the refinancing engine back, we are forecasting near-zero defaults for Hong Kong real estate credits this year. Our recommendations are higher-quality developers rated BBB and above, and a tactical opportunities in rated perpetual securities from quality issuers, where significant spread compression potential exists as fundamentals recover. On unrated bonds, we remain highly selective, preferring to allocate capital toward rated opportunities where risk-reward is more transparent.
Year-to-date, Hong Kong property stocks have surged 15%, significantly outperforming the Hang Seng Index’s -2%. This rally has likely been fueled by multiple brokers upgrading their 2026 home price growth forecasts to a range of 12–15% at the beginning of this year. Despite a mild correction in the 2Q, valuations of Hong Kong property stocks still appear stretched, with the share prices of several major developers approaching the high end of historical highs, even though secondary home prices remain around 15% below their peak.
Dividend yield of Hong Kong property stocks has declined from over 6% previously to around 4-5% currently, which looks unattractive relative to the 5%+ yields available from banking stocks or 7%+ from China oil stocks. Investment properties — which typically account for 50–70% of NAV for large-cap developers — continue to face headwinds amid structural shifts in Hong Kong consumers’ spending patterns and a persistent oversupply in the office segment. As such, with multiples having rebounded to above-average levels, we view valuations as expensive given the still challenging macroeconomic backdrop.
Admittedly, positive yield carry and sustained demand from the new immigrants scheme have provided some support to residential property prices. We believe that much of this optimism is already reflected in current valuations. We would therefore prefer to reassess Hong Kong property stocks when dividend yields revert to a more compelling 5%+ level. In our view, the market has already priced in a robust recovery in the Hong Kong housing market over the next two years.
The Hong Kong real estate sector is transitioning from crisis to recovery. The residential market has recovered meaningfully from its March 2025 bottom, the pace of rebound could moderate after a strong first half. We are positive in the Hong Kong credit market while see better value in other sectors in Equity.
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