Hong Kong to Halt Commercial Land Sales in Attempt to Cure Office Slump

Hong Kong will put commercial land sales on hold for the coming financial year, the city’s financial secretary Paul Chan Mo-po announced on Wednesday, citing “considerable challenges” afflicting the sector and high vacancy rates.

“In view of the high vacancy rates of offices in recent years and the relatively ample supply in the next few years, the Government will not roll out any commercial site for sale in the coming year to allow the market to absorb the existing supply,” Chan said during his budget speech on Wednesday. The government may also re-designate some commercial sites for residential use and allow greater flexibility of land use, he added.

The move to cut the supply of new office and retail projects in Hong Kong comes as the government has struggled to sell commercial land, and owners of existing properties have battled rising vacancy and crumbling asset values.

With amount of grade A office space leased in Hong Kong having shrunk by 87,500 square feet (8,129 square metres) last month as tenants downsized or closed down, analysts question the utility of reducing supply in a market where demand continues to fall.

Less Supply, Still No Demand

“The current supply (of office space) will take about 7 to 10 years to be absorbed,” said Hannah Jeong, head of valuation and advisory services at CBRE Hong Kong. Pointing to the need to spark business growth, Jeong added that, “Boosting the demand side is also important, including government support to attract more enterprises.”

With much of the demand for office space in Hong Kong’s Central commercial hub driven the by the city’s once-booming stock market, landlords have suffered as weak economic conditions and sliding investor confidence have seen initial public offerings decline in recent years.

During 2024 the Hong Kong exchange hosted 63 IPO which raised a total of HK$82.9 billion, according to KPMG. While this represents an improvement from the record low of HK$46.3 billion raised a year earlier, IPO fund raising on the HKEX in 2024 was less than 21 percent of what was raised in 2020, and was the lowest amount in over a decade, apart from the market’s 2023 debacle.

With deal activity evaporating, office rents having fallen about 38 percent from their October 2018 peak, according to JLL data, and average vacancy in grade A buildings in the city rose to a more than two-decade record of 13.3 percent in January, up from 13.2 percent in December, according to the consultancy.

That slide in demand helped bring down average rents by 0.2 percent in January, with JLL saying in December that it expects a full-year decline in leasing rates of 5 percent to 10 percent.

Irrelevant Changes

For the 2024-25 fiscal year Hong Kong offered only two commercial sites for sale with none of those plots located in Central district, or other major office hubs.

“Responses to land sales were already disappointing in 2024 and since the sites being offered are outside the Central area, [the curtailment of commercial land sales] won’t do much to address the vacancy rates in Central,” said Lorraine Tan, Morningstar’s director of equity research Asia.

Tan also expects limited impact from the government’s decision to allow some commercial sites to be converted to other uses. “It’s likely removing lower grade commercial inventory but there is a fair bit of excess high grade commercial inventory,” she said.

Lesser Levy for Lower-Priced Homes

In addition to reducing the supply of commercial sites, with the city’s residential market still still sliding, the government announced that it would reduce the amount of stamp duty levied on trades of properties costing from HK$3 million to HK$4 million.

While property purchases at HK$3 million or less had previously been subject to a nominal HK$100 stamp duty, and deals from HK$3 million to HK$4 million were charged a levy of 1.5 percent of the transaction value, that threshold for the HK$100 nominal duty has been moved up to HK$4 million under the new budget.

This measure is expected to benefit about 15 percent of property transactions and reduce tax revenue by about $400 million annually, according to the government. Morningstar’s Tan predicts that the impact of this change on buyer behaviour will be “immaterial”.

“Purchasers are lacking confidence in the trajectory of property values rising so a reduction in stamp duty to HK$100 on a HK$4 million purchase is not a factor,” she said.

Despite the government having removed all cooling measures, relaxed the maximum loan-to-value ratio and cut interest rates one year ago, home prices dropped 6.8 percent in 2024, according to data released by JLL in December.

The government’s stamp duty cut will have “no stimulating effect” on the housing market but will instead affect government revenue, according to Joseph Tsang, chairman of JLL Hong Kong.

“The housing market outlook will mainly depend on economic conditions, interest rates, and geopolitical developments. With the high inventory of residential properties, housing prices are likely to continue falling,” Tsang said.