Hong Kong office rents turn positive, while retail remains a drag; Morgan Stanley prefers HKL and Swire Properties

Overview

This report uses JLL's 1Q26 Hong Kong rental data as an event trigger to assess the recovery pace of Hong Kong office and prime retail properties. The core conclusion is that office rents and vacancy rates have improved, with Central showing particular strength supported by financial-sector demand; however, retail rents have not kept pace with the improvement in retail sales, and vacancy has instead risen. Therefore, the report takes a selectively positive view on the Hong Kong property sector, favoring landlord stocks with capital recycling capability and higher total shareholder returns.

Core views

Office is the area of marginal improvement this quarter, with overall rents turning positive QoQ and both rents and vacancy in Central improving; retail remains the drag, with prime retail rents still down double digits YoY and vacancy rising materially. At the stock level, the report prefers Hongkong Land and Swire Properties, believing their low P/B multiples, high dividend yields, and capital recycling actions can support relative returns.

Analysis framework

The report primarily uses JLL rent and vacancy data to track market conditions, and combines this with property company valuations, NAV discounts, capitalization rates, dividend yields, capital recycling, and total shareholder returns to assess stock attractiveness.

Methodology notes

• Valuation methodssum-of-the-parts

  Sum-of-the-parts valuation

  The report mentions using a sum-of-the-parts approach to estimate base-case value, applying different capitalization rate assumptions for Hong Kong office, Hong Kong retail, China office, and China retail.

• Valuation methodsnav_discount

  Net asset value discount

  A 35% NAV discount is applied to Swire Properties and a 25% NAV discount to Hongkong Land, with the discount levels compared against historical averages or standard deviation positions since 2011.

• Valuation methodsgross_cap_rate

  Gross capitalization rate

  Gross capitalization rates of 4.75% and 5.75% are used for Hong Kong office and retail, respectively; 7.0% and 8.0% are used for China office and retail, respectively.

• Valuation methodsdcf_wacc

  Discounted cash flow and weighted average cost of capital

  Hong Kong development properties are valued using a DCF method with a WACC assumption of 8%.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Hongkong Land (HKLD.SI)

  Preferred name in the report, rated Overweight

  Strengths

  About 0.6x P/B and a 3.3% forward dividend yield; valuation could benefit if Hong Kong office and retail improve, capital recycling accelerates, or value-accretive acquisitions emerge.

  Weaknesses

  Core business EBIT may still remain under pressure, and the share price may already reflect much of the upside.

  Comparison

  Compared with typical Hong Kong property stocks, the report places greater emphasis on its capital recycling and total shareholder return potential.

  Risks

  Difficulty in raising third-party capital, challenges in capital recycling, and worsening supply-demand mismatch in Hong Kong offices.

• Swire Properties (1972.HK)

  Preferred name in the report, rated Overweight

  Strengths

  About 0.5x P/B and a 4.8% forward dividend yield; active capital recycling, with stronger recovery in Hong Kong office and retail serving as upside catalysts.

  Weaknesses

  Slow recovery in Hong Kong office and retail, slower recovery in China retail, and difficulty disposing of non-core assets may constrain value realization.

  Comparison

  The report lists it as one of its preferred Hong Kong landlord stocks, emphasizing higher total shareholder returns.

  Risks

  Ramp-up of new investment properties may disappoint, capital recycling may come in below expectations, and Hong Kong and China retail recovery may remain slow.

• Hong Kong office

  Core asset class under observation

  Strengths

  Overall rents turned positive QoQ in 1Q26, while rents and vacancy in Central improved, supported by financial-sector demand.

  Weaknesses

  Regional divergence persists, Kowloon East rents declined, and capital values are still edging down.

  Comparison

  Marginal improvement was more evident this quarter relative to retail properties.

  Risks

  Worsening supply-demand mismatch, weakening tenant demand, and continued declines in capital values.

• Hong Kong prime retail properties

  Asset class with lagging recovery

  Strengths

  Hong Kong retail sales grew 12% YoY in 2M26, providing a demand base for subsequent rent recovery.

  Weaknesses

  Prime retail rents in 1Q26 were still down 10% YoY, and vacancy rose to 12.6%.

  Comparison

  Clearly lagged the quarter-on-quarter improvement in office rents.

  Risks

  Weak performance in core shopping districts, rising vacancy due to lease expiries at new malls, and failure of the consumer recovery to transmit into rents.

Key data

• 1Q26 overall office rents+1.5% QoQHong Kong office rents turned positive quarter-on-quarter.
• 1Q26 Central office rents+3.8% QoQCentral significantly outperformed the overall market.
• 1Q26 Kowloon East office rents-2.5% QoQRegional divergence remains evident.
• Office capital values-0.8% QoQCapital values fell slightly.
• Overall office vacancy rate13.5%As of March, down 0.6 percentage points QoQ.
• Central office vacancy rate9.6%Down 1.4 percentage points QoQ and 1.9 percentage points YoY, supported by financial-sector demand.
• 1Q26 overall prime retail rents-1.3% QoQ / -10% YoYDespite 12% YoY growth in Hong Kong retail sales in 2M26, rents still lagged.
• Overall prime retail vacancy rate12.6%As of March, up 3.9 percentage points QoQ, mainly due to lease expiries at new malls and weakness in core shopping districts.
• Hongkong Land valuation summary0.6x P/B; 3.3% forward yield; OverweightOne of the report's preferred stocks.
• Swire Properties valuation summary0.5x P/B; 4.8% forward yield; OverweightOne of the report's preferred stocks.

Impact & implications

The improvement in office data helps ease market concerns about the downcycle in Hong Kong's office sector, especially as financial-sector demand in Central may lift expectations for rents and occupancy among high-quality landlords. However, retail rents and vacancy rates still show that the consumer recovery has not yet fully transmitted to the leasing side, implying that earnings recovery for retail property owners will still take time. For investors, the report emphasizes selecting landlord stocks with better asset quality, deeper valuation discounts, and stronger capital recycling capability, rather than turning broadly bullish on all Hong Kong property names.

Risks

• Hong Kong office and retail recover more slowly than expected.
• China retail recovery slows.
• Execution difficulties in disposing of non-core assets or carrying out capital recycling.
• Difficulty in raising third-party capital.
• Worsening supply-demand mismatch in Hong Kong offices.
• Continued pressure on core business EBIT.
• Share prices of some names may already reflect much of the upside.

What to watch

• Whether JLL Hong Kong office rents continue to grow quarter-on-quarter in subsequent quarters.
• Whether the divergence in office rents and vacancy rates between Central and Kowloon East widens.
• Whether the improvement in Hong Kong retail sales can feed through to prime retail rents.
• Whether prime retail vacancy can decline from 12.6%.
• Progress in capital recycling, asset disposals, and shareholder returns at Hongkong Land and Swire Properties.
• Whether NAV discounts, P/B multiples, and dividend yields continue to provide valuation support.