The Hong Kong real estate market is in a thoughtful reset. Traditional sectors still matter, but the better opportunities right now sit in places investors once treated as niche. Data infrastructure is trading. Student housing is getting policy tailwinds. Logistics is weak near term but building the next cycle’s pipeline. Office demand is back in select buildings while rents soften citywide. In short, the center of gravity is shifting, and the cash flow that looks safer through the cycle is not always where it used to be.
The setup: a cautious market where end-users are doing the heavy lifting
Large non-residential deals over HK$100 million totaled HK$9.7 billion in Q2, up 92% quarter on quarter and 106% year on year. Yet activity is still described as subdued, shaped by cautious sentiment and tighter bank approvals. Year to date, investment volume sits at HK$14.8 billion. Pricing has adjusted, with office gross yields at 3.03% and capital values around HK$9,520 per square foot. In this environment, end-users have been the most decisive buyers, taking five of seven Q2 transactions and using price corrections to lock in long-run occupancy economics.
One deal set the tone. Hong Kong Exchanges and Clearing bought nine top floors at One Exchange Square plus adjacent space for HK$6.3 billion, establishing a permanent headquarters. That single office transaction made 76% of Q2 consideration. It also underlined a practical theme for 2025: owner-occupation as a risk hedge when leasing markets are loose and financing is tight.
Data centers: from “alternative” to anchor
The quarter’s number two transaction was a data-center package in Fanling. Grand Ming agreed to dispose of iTech Tower 3.1 and 3.2 for a combined HK$2.15 billion to what is believed to be an overseas data infrastructure buyer. One tower is substantially complete, the other is earlier in construction with a remaining cost arrangement of HK$650 million. The signal is clear. Operators and capital recognize Hong Kong’s position as a regional data hub, and they are paying real money for scale and delivery.
Investors have long said they want durable income with structural demand. In this slice of the Hong Kong real estate market, the demand drivers are not complicated: AI workloads, cloud growth, and latency-sensitive traffic across Greater Bay. The deal flow is still selective, but the bid is present. For portfolio construction, this is the type of asset that can pull in long leases, inflation linkage in some cases, and low tenant churn. Given the city’s high office availability and retail turnover, the appeal of contracted, utility-like rent streams is obvious.
Student housing: policy is opening a conversion pipeline
The other genuine “alternative” story is student accommodation. Late June brought more detail on the pilot scheme that streamlines conversions of under-performing commercial or hotel buildings into student housing. The measures touch zoning and plot ratio flexibility and aim to narrow the demand-supply gap with private participation. In a market where cash yields matter, student housing offers secure rental profiles and clear user demand, so it is unsurprising the buyer universe includes cash-rich investors and specialist operators. Expect more en-bloc pursuits of assets with clear conversion math.
Logistics: soft today, constructive tomorrow
Logistics is in a holding pattern. Prime warehouse rents fell another 1.0% in Q2 to HK$14.0 per square foot per month, the third straight quarterly decline, with vacancy at 8.3% citywide. Strip out the Cainiao Smart Gateway that delivered heavy new space in 2023 and vacancy looks tighter at 5.6%. Leasing is happening, but the mix shows caution. Kerry Logistics took 72,000 square feet en-bloc in Yuen Long and Wilson Logistics leased 28,000 square feet in Kwai Chung; several renewals rounded out the tape.
The macro backdrop explains the tone. The PMI slipped to 49.0 in May. Port throughput for January to May was 5.6 million TEU, down 0.6% year on year and 22% below the same five-month stretch in 2021. Imports and exports did rise 17% and 15% year on year in April and May, but that was largely rush shipping ahead of new U.S. tariff rules. With sentiment fragile and a supply pipeline still to be absorbed, the base case is further rent pressure. The forecast calls for an 8% decline in prime warehouse rents for 2025. That is not a collapse. It is a normal correction that sets the stage for the next upswing once e-commerce and 3PL growth retake the wheel.
Office: demand is back for the right buildings, but pricing is still adjusting
On the surface, the office snapshot looks contradictory. New lease area hit 1.2 million square feet in Q2, the highest since early 2020, powered by expansions and relocations in banking, finance, and insurance. Jane Street pre-committed more than 207,000 square feet at Site 3 on the Central waterfront. FWD Life Insurance took over 107,000 square feet at Devon House. Yet overall availability is still 19.3% and citywide net absorption slowed to 71,400 square feet. Rents fell another 1% in Q2 and are down 3.4% year to date to HK$43.5 per square foot, with a full-year decline of 7% to 9% expected.
There is a way to read this that fits both realities. Tenants are active when a building helps them with cost and talent. Occupiers say cost, talent retention, and operational excellence drive decisions. That pushes demand toward high-amenity assets and flight-to-quality moves, even while the broader market is working through excess space. In other words, more leasing does not mean broad pricing power. It means the winners are separating. Submarket data back this up, with Greater Central still posting premium rents while non-core pockets carry much higher availability.
A brighter spot sits upstream. By June 11 the Hong Kong Stock Exchange ranked first globally for IPO proceeds in 2025 with HK$109 billion raised. If that cadence holds, it will support occupier pipelines across banks, brokers, and professional services. That helps leasing, though it will not erase the supply overhang overnight.
Retail: tourism is up, sales are not, and the street is reshuffling
Tourist arrivals rose 11.9% year on year in the January to May period. Retail sales fell 4.0% year on year to HK$155.1 billion. That sounds odd until you look at the mix. Visitors and locals are spending more on experiences and value. High-end categories that used to rely on visitor spend were weak, with jewellery and watches down 8.8% and fashion and accessories down 5.7%. Medicines and cosmetics grew 3.4%. Food, alcohol, and tobacco rose 2.7%.
Vacancies on the core high streets moved up. Causeway Bay jumped to 13.2%. Mongkok rose to 9.5%. Central stood at 8.6% and Tsimshatsui held at 9.4%. Rents followed the vacancy trend. Causeway Bay fell 3.6% quarter on quarter, Tsimshatsui 3.4%, Mongkok 1.7%, while Central was broadly flat thanks to local demand. F&B rents edged lower by roughly 1% across districts. The market is sorting itself out. Landlords are cutting to secure occupancy, mass-market brands are entering streets they once avoided, and experiential or value offerings are taking frontage once reserved for luxury. The base case is flattish to mildly lower rents in the second half, with a full-year adjustment of 1% to 3%.
Capital markets: who buys what in 2025
The buyer list is telling. Alongside the HKEX purchase in Central, an entrepreneur acquired an entire office tower in Tin Hau for HK$650 million to support business needs. A top floor in Central sold at more than a 50% discount to its 2018 price. Another top floor in Kwun Tong traded at a 40% loss to the seller. In retail, the most notable deal was a 15,000 square foot store in Shau Kei Wan bought by its tenant for HK$119 million, with a second multi-floor buy in Wanchai by a local group around HK$110 million. The office share of Q2 capital flows was 76%. Industrial was 22% because of the Fanling data center sale. Retail was 2%. The message is straightforward. End-users and specialists are acting. Generalist capital is mostly waiting for more proof that rents and vacancies have found a floor.
This is also why alternative real estate investment is moving into the core sleeve. If you need to put money to work now, you want visibility on use and income. Data centers offer that when contracted. Student housing can offer that when policy lowers friction and the operating partner is competent. Even in retail, the better risk-adjusted opportunities today are not trophy units at peak rents. They are mass-market locations taken at corrected levels where turnover can grow into rent.
The investor playbook for the next 12 to 24 months
- Data infrastructure and ready-to-convert industrial. Pursue assets with clear power, cooling, and floor loading paths and credible delivery timetables. The Fanling transaction shows capital will pay for near-term capacity and pipeline. Align the underwriting with long-term contracted income and conservative stabilization assumptions.
- Student housing conversions with policy tailwinds. Target aging hotels and under-letted commercial blocks with layouts that reduce conversion capex. Work within the pilot scheme’s streamlined process and use realistic rent and occupancy inputs. The early movers will capture the better locations and the earliest comp set.
- Select an office with amenities tenants actually use. Activity is real in buildings that help employers recruit and retain. Incentives matter, but the differentiator is the user experience. Focus on projects with services and community programming, not just fresh lobbies. Use today’s pricing to lock spreads, but build in a multi-year glide path for rents given the 7% to 9% decline expected for 2025.
- Logistics in value-add and forward positions. Near-term rent pressure is not a reason to step away. It is a reason to underwrite with discipline and structure. Where you can de-risk via pre-leases to 3PLs or e-commerce operators, do it. In stabilised assets, focus on locations with lower new-supply risk and realistic re-letting periods.
- High street at the right rent and street. Follow the tenant reshuffle. Causeway Bay and Tsimshatsui have been corrected. Central is flatter. The winners are concepts that convert footfall into sales without relying only on luxury basket sizes. A slightly smaller, better-priced frontage that fits the new demand curve can outperform a marquee address with the wrong rent-to-sales ratio.
Risks to price and timing
Two things can slow the handover from “alternative” to “mainstream” in allocations. First, financing. Banks are still selective on commercial mortgages, which caps leverage and slows bid formation for discretionary buyers. Second, vacancies remain high across major sectors, which keeps landlords in incentive mode and extends the rental discovery process. Even with three-month HIBOR easing since May, the overall read across is still slow normalization. The base case from the research desks is that investment activity stays measured through the second half. That argues for patience on entry and focus on asset quality.
Trade policy is another swing factor. April and May’s rush shipments tell you that tariff uncertainty can distort order books and near-term rents in logistics. Planning around that is not about calling macro. It is about underwriting occupancy risk with wider vacancy and downtime assumptions and making sure tenant credit is a line item, not an afterthought.
What changes from here
If capital markets stabilize and leasing momentum continues in the right buildings, the market will get a better read on true clearing prices. The IPO calendar helps the office story at the margin. Government support for student housing will pull more stock into productive use. Data center demand will not be linear, but it is not a fad. Meanwhile, retail is already doing its reshuffle in plain sight. None of this is a quick fix. It is a practical path to more durable income streams in a city that is still adjusting after a long shock.
Bottom line
In 2025 the definition of “core” in the Hong Kong real estate market is broader than it used to be. A balanced allocation still includes office and retail, but the parts of the market that line up best with today’s risk tolerance and tomorrow’s growth are the ones investors used to label “alternative.” Data infrastructure with real tenants. Student housing with policy support. Logistics that will carry the next e-commerce cycle. And offices that help employers win talent. Build around those pillars and the portfolio can compound through the noise. That is the simple case for why alternative real estate investment is not a side bet anymore. It is the main story.
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