Credit rating agency S&P Global stated that the Hong Kong commercial real estate industry is currently facing the most severe downturn since the Asian financial crisis, with the expectation that some non-first and second-tier real estate companies, as well as financially aggressive ones, will be most severely affected, and smaller banks closely associated with these real estate companies will also be impacted.

S&P mentioned that non-first and second-tier real estate companies include mainly rental companies owning office and retail properties. If small real estate developers are also involved in office and retail property projects, it is believed that they will face pressure. Small to medium-sized banks may underestimate the credit risk in the real estate industry. Compared to large banks, small to medium-sized banks in Hong Kong have a higher proportion of exposure to real estate-related loans, leading to greater risks for these banks when facing market fluctuations.

S&P believes that in the current high-interest rate environment, the increase in interest costs has led to an 8% decrease in net profit of major developers last year. Some individual investors or small real estate companies may be forced to sell properties at a significant discount after finding it difficult to repay loans with rental income, exacerbating the downward trend.

S&P stated that the downturn in the Hong Kong commercial property market may put pressure on the asset quality of banks. However, it is believed that large banks have their risks under control when it comes to Hong Kong commercial real estate companies, and the related credit losses are expected to remain manageable. These large banks include HSBC and its subsidiary Hang Seng Bank, BOC Hong Kong, and Standard Chartered Hong Kong. Overall, it is expected that the Hong Kong banking industry may face more loan impairment losses from Hong Kong commercial real estate in the second half of this year, raising the non-performing loan ratio to around 2.2%, with smaller to medium-sized banks possibly facing more acute pressure.

S&P mentioned that looking ahead, with Hong Kong interest rates possibly declining, it will gradually alleviate the debt pressure of real estate companies and refinancing conditions. It is expected that Hong Kong interest rates will decrease in the fourth quarter, following a trend similar to the US Federal Reserve interest rates. Currently, the expectation is for the Fed to cut rates by a total of 50 basis points this year and a total of 125 basis points next year.