Demand in Central and Admiralty is picking up, but vacancies of up to 30 per cent and tight bank lending continue to weigh on noncore areas

Hong Kong’s office market is becoming increasingly divided, with demand returning to prime business districts while noncore areas remain weighed down by weak leasing activity and scarce buyers, analysts say.

The reluctance of banks to finance commercial-property purchases has reinforced the split, allowing cash-rich owner-occupiers to acquire discounted offices in traditional commercial districts while the vacancy rates in some secondary locations remain as high as 30 per cent, according to a local property agency.

Office transactions picked up in the first half of the year, with about 503 deals completed, the highest half-year level since the second half of 2021, the property agency added. Grade A offices led the recovery, with transactions surging 78 per cent year on year to 119 deals.

The recovery has been most visible in top prime offices in the core-business district.

The property agency said the number of transactions for top-tier offices jumped 78 per cent from a year earlier to 119 in the first half, with lower-priced deals at Lippo Centre in Admiralty and The Center in Central suggesting that valuations have begun to stabilise after falling roughly 70 per cent from their peaks.

Vacancy rates also improved compared with the same period last year, declining to 4.95 per cent in Admiralty and 10.41 per cent in Central in June.

“The market has found support at current price levels,” a property agent said in a press release published on Tuesday, attributing the demand largely to financial firms, educational institutions and religious organisations buying office space for their own use.

The recovery, however, has yet to spread beyond the core business districts.

Vacancy rates in noncore office districts climbed to around 30 per cent, prompting developers to slash prices in an effort to dispose of unsold stock.

Some smaller local developers and mainland firms have already slipped into negative equity, with entire office buildings becoming distressed assets that have further dragged down market prices, the property agency said.

Meanwhile, another property agency said the market remained highly selective despite the pickup in transactions.

Office sales slipped 6 per cent from the previous six months to 539 deals in the first half. However, the total transaction value rose 2 per cent to HK$13.1 billion (US$1.67 billion) because of several large Central deals, showing that capital continues to concentrate in premium assets.

The divide has been exacerbated by banks’ conservative lending policies. The agent said commercial-property mortgages remained difficult to obtain, with more than 90 per cent of office purchases now made by owner-occupiers rather than investors. Most transactions were priced below HK$50 million because buyers had relied heavily on cash instead of leverage.

Looking ahead, the two agencies broadly agreed that the market would remain uneven. One of them expected prices in core districts to rise 3 to 5 per cent in the second half, while noncore offices could fall another 5 to 10 per cent.