Hong Kong property leasing recovery continues, with office improving faster than retail

Overview

This report is Morgan Stanley's 2Q26 update on the Hong Kong property leasing market. The core conclusion is that the recovery is still continuing: office rents are continuing to recover and vacancy rates are improving, with Central performing the strongest; retail rents are still declining year-on-year, but the pace of decline has narrowed versus 1Q26. The report maintains an Attractive industry view on Hong Kong property and prefers Swire Properties and Link REIT among landlord stocks.

Core views

First, the office market recovery is clearer, with overall office rents rising 1.7% QoQ in 2Q26, Central up 3.3% QoQ, while overall vacancy fell to 13.1%. Second, regional divergence remains, with rents in HK East and Kowloon East falling 0.8% and 1.1% QoQ, respectively. Third, Grade A Office capital values rebounded 0.8% QoQ due to rental improvement, but remain 50% below the 3Q18 peak, and the report expects the subsequent trend to be positive. Fourth, retail rents remain under pressure, with prime retail rents down 1.4% QoQ and 8.4% YoY in 2Q26, but the YoY decline narrowed versus about 10% in 1Q26.

Analysis framework

The report mainly uses indicators such as rental indices, vacancy rates, net absorption, capital values, P/B, forward dividend yield, shareholder returns, and asset disposals to assess the cyclical position of Hong Kong office and retail property, and combines stock valuation and capital recycling progress to identify preferred names.

Methodology notes

• Valuation MethodTarget Forward Dividend Yield

  Link REIT base-case valuation

  The report mentions that Link REIT's base-case value is derived from a target 12-month forward dividend yield of 5.65%, which is composed of a forecast 10-year U.S. Treasury yield of 4.05% and a 1.6% spread.

• Valuation MethodSOTP

  Swire Properties sum-of-the-parts valuation

  The report mentions that Swire Properties' base-case value comes from SOTP analysis, in which Hong Kong office and retail use capitalization rates of 4.75% and 5.75%, respectively, mainland China office and retail use capitalization rates of 7.0% and 8.0%, respectively, and Hong Kong development properties use DCF and an 8% WACC.

• Industry RatingMorgan Stanley Industry View

  Attractive

  Attractive indicates that the analyst expects the industry under coverage to perform attractively relative to the relevant broad market benchmark over the next 12-18 months.

Asset mapping & comparison

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

• Swire Properties (1972.HK)

  Preferred landlord stock, rated OW

  Strengths

  Office exposure, 0.5x P/B, 5.7% forward dividend yield, and shareholder return factors such as dividend growth and buybacks.

  Weaknesses

  If the recovery in Hong Kong office and retail is slower than expected, it will weigh on rental and asset value recovery.

  Comparison

  Relative to the sector, the report places more value on its exposure to office recovery and attractive valuation.

  Risks

  Hong Kong office and retail recovery slower than expected, slowing retail recovery in mainland China, and difficulty disposing of non-core assets.

• Link REIT (0823.HK)

  Preferred landlord stock, rated OW

  Strengths

  0.7x P/B, 6.8% forward dividend yield, visible retail recovery, new CEO announced, progress in non-core asset disposals, and buybacks initiated.

  Weaknesses

  Yield-based valuation is sensitive to the interest-rate path, and deterioration in retail and office fundamentals would affect returns.

  Comparison

  The report believes its retail recovery, capital recycling, and buyback catalysts are attractive.

  Risks

  Fed rate cuts slower than expected, further deterioration in Hong Kong retail and office markets, and key management transition taking longer than expected.

• Hong Kong Property landlords

  Industry thematic exposure

  Strengths

  Office rents are recovering, vacancy rates are falling, Central is performing strongly, and retail rent declines are narrowing.

  Weaknesses

  Rents in HK East and Kowloon East are still falling, and retail rents remain in a year-on-year decline range.

  Comparison

  Office recovery signals are stronger than retail, and Central is stronger than non-core areas.

  Risks

  Less-than-expected declines in interest rates, slower recovery in tenant demand, and an unsustained rebound in retail sales.

• JONES LANG LASALLE INC (US.JLL)

  Relevant to the report title and entity identification, but the main text primarily uses the JLL rental update as a data source for the Hong Kong property sector

  Strengths

  The report does not provide a clear investment rating or target price for JLL stock.

  Weaknesses

  It lacks direct analysis of JLL.US's own earnings, valuation, and share-price catalysts.

  Comparison

  The core asset mapping in this article is more focused on Hong Kong property landlord stocks rather than JLL.US.

  Risks

  If this report is misread as an individual-stock report on JLL.US, its direct investment guidance value for that stock may be overstated.

Key data

• 2Q26 Office Rent+1.7% QoQ; +3.2% YTDCentral rent +3.3% QoQ, +7.3% YTD.
• Office Vacancy Rate13.1%Improved by 0.4 percentage points as of June; net absorption was 492,000 square feet.
• Central Vacancy Rate8.8%Down 0.8 percentage points QoQ.
• HK East / Kowloon East Rent-0.8% / -1.1% QoQShows that the office recovery remains regionally divergent.
• Grade A Office Capital Value+0.8% QoQ; 50% below the 3Q18 peakCapital values rebounded due to improving rents.
• Prime Retail Rent-1.4% QoQ; -8.4% YoYThe decline narrowed versus about -10% YoY in 1Q26.
• Swire Properties Valuation0.5x P/B; 5.7% forward dividend yieldThe report prefers its office exposure, valuation, and shareholder returns.
• Link REIT Valuation0.7x P/B; 6.8% forward dividend yieldThe report believes the retail recovery is visible and focuses on the new CEO, non-core asset disposals, and buybacks.

Impact & implications

If the recovery in Hong Kong office and retail leasing continues to broaden, rental expectations, capital values, and dividend-yield valuations for landlord assets may find support. The report prefers Swire Properties and Link REIT for their office exposure, valuation discounts, stable dividends, and capital recycling catalysts.

Risks

• Fed rate cuts slower than expected may limit yield compression and property valuation recovery.
• Further deterioration in Hong Kong retail and office fundamentals.
• Link REIT key management transition takes longer than expected.
• Swire Properties faces risks including slower-than-expected recovery in Hong Kong office and retail, slowing retail recovery in mainland China, and difficulties in disposing of non-core assets.
• Rents in HK East and Kowloon East are still declining, indicating that the recovery is not fully synchronized.

What to watch

• Whether Hong Kong office rents continue to rise QoQ, especially whether areas outside Central can turn positive.
• Whether overall office vacancy and Central vacancy continue to decline.
• Whether the YoY decline in retail rents continues to narrow and turns stable.
• Whether Grade A Office capital values can sustain the rebound trend seen in 2Q26.
• Progress in Link REIT's non-core asset disposals, buyback execution, and new CEO transition.
• Swire Properties' progress in capital recycling, dividend growth, buybacks, and ramp-up of new investment properties.
• The impact of the interest-rate path and the 10-year U.S. Treasury yield on REIT and property stock valuations.