Knight Frank Experts Bullish on 2026 HK Property Market: Residential Prices to Rise 8-10%, Core Office Rents Rebound

Overview

This report records key points from a conference call between Morgan Stanley and experts from real estate consultancy Knight Frank, focusing on the current state and 2026 outlook for Hong Kong's residential and office markets. Core conclusions indicate that Hong Kong's real estate market is at the early stage of an upward cycle; while absolute inventory levels remain above historical lows, absorption rates have accelerated significantly. The institution maintains an 'Attractive' rating for the Hong Kong real estate sector, believing recent stock pullbacks are primarily due to interest rate expectations, while fundamentals are improving.

Core views

Regarding the residential market, Knight Frank experts predict mass-market housing prices will rise 8-10% in 2026, and luxury home prices by 5-8%. This assessment is based on trends of wealth returning to Hong Kong (from Singapore and the Middle East) and easing inventory pressure. Although current inventory units stand at 20,000 (higher than the 12,000 units in 2021), the absorption cycle has shortened significantly to 11.7 months (from a peak of 23.5 months), indicating that market demand is effectively absorbing supply. The office market shows structural differentiation and recovery. Core Central office rents are expected to rise 8-12% in 2026. First-quarter 2026 data shows rents in Premium Central rose 9.2% year-over-year, while Island East rents fell 10.6%, suggesting tenants are moving towards 'flight to quality'. In terms of net absorption, the financial services (BFSI) sector accounted for 44%, largely from expansions by existing firms. Unexpectedly, flexible workspace contributed 18% of strong demand. Landmark projects like 'The Henderson' are nearing full occupancy, and properties such as IGC are favored by banks and wealth management firms. Based on these improving fundamentals and macro analysts' expectations for flat rates in 2026 and rate cuts in 2027, Morgan Stanley maintains its 'Attractive' sector rating. Key recommended targets include Cheung Kong Group, Henderson Land, Sun Hung Kai Properties, Hongkong Land, and Link REIT, viewing them as beneficiaries of the market recovery.

Analysis framework

The research report employs an 'Expert Interview + Macro Verification' analytical approach. Firstly, it verifies the market supply-demand turning point bottom-up by citing frontline market data from the authoritative third-party firm Knight Frank (rental changes, inventory absorption, tenant structure). Secondly, it combines internal macro team judgments on the interest rate trajectory (flat in 2026, cuts in 2027) to assess the potential impact of funding costs on asset valuations. Finally, using sum-of-the-parts (SOTP) valuation and net asset value (NAV) discount analysis, it screens out top developers and REITs with defensive leverage or high-quality asset reserves as investment targets.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Inventory Absorption Cycle Analysis

  Judging market supply-demand balance by comparing current absolute inventory levels with sales speed (absorption months). The report notes that while total inventory is high, the absorption cycle has halved, implying a significant improvement in actual supply-demand relations.

• Valuation MethodologySOTP Sum-of-the-Parts Valuation

  NAV Discount Valuation

  For diversified real estate companies, valuing development properties, investment properties, and other businesses separately, summing them up, and referencing historical average discount rates (e.g., more than one standard deviation) to determine target prices, reflecting the gap between true asset value and market sentiment.

• Industry/Industrial Analysis Framework

  Flight to Quality

  During economic or market adjustment periods, tenants tend to relocate from non-core areas or lower-grade properties to top-tier assets in core areas, leading to rising rents for core assets rather than pressure on non-core assets.

Asset mapping & comparison

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

• CK Asset Holdings Ltd (1113.HK)

  One of the top picks, benefiting from residential price recovery and defensive leverage levels

  Strengths

  Defensive leverage levels, potential success in new residential project launches

  Weaknesses

  Further geographic diversification may deepen conglomerate discount

  Comparison

  More diversified business than pure property investors, but may face risks of capital outflow from pure property funds

  Risks

  Prolonged high-interest-rate environment, rising cost pressures on bar and hotel businesses

• Henderson Land (0012.HK)

  One of the top picks, core business valuation based on forward NAV discount of 30%

  Strengths

  Agricultural land conversion premiums may exceed expectations; disposal of non-core assets

  Weaknesses

  New project sales absorption weaker than expected could pose risks

  Comparison

  Valuation discount at historically high levels, offering room for repair

  Risks

  Interest rates higher than expected; rising shareholder loan balances

• Sun Hung Kai Properties (0016.HK)

  One of the top picks, benefiting from sustainable recovery in Hong Kong new-home sales

  Strengths

  Strong performance in new project absorption; acceleration of new investment project ramp-ups

  Weaknesses

  Macro risks and regulatory concerns

  Comparison

  Presence in both Hong Kong and mainland China; less risk from drag of mainland sales slowdown, though still present

  Risks

  Hong Kong and China residential sales weaker than expected; weakness in office and retail rents

• Link REIT (0823.HK)

  One of the top picks, valued based on target forward dividend yield of 5.65%

  Strengths

  Potential for yield compression due to Federal Reserve rate cuts; inclusion in Stock Connect

  Weaknesses

  Key management transition period may be longer than expected

  Comparison

  As a REIT, highly sensitive to interest rates, benefiting from downward yield trend

  Risks

  Federal Reserve rate cuts slower than expected; further deterioration in Hong Kong retail and office markets

• Hongkong Land (HKLD.SI)

  One of the top picks, benefiting from turnaround in Hong Kong retail and office markets

  Strengths

  Faster capital recycling; opportunities for value-add acquisitions

  Weaknesses

  Core business EBIT still faces challenges

  Comparison

  Focused on Hong Kong core commercial assets, offering higher elasticity

  Risks

  Worsening supply-demand mismatch in Hong Kong office market; difficulties in raising third-party capital

Key data

• 2026 Mass-Market Housing Price Forecast Increase8-10%Knight Frank Expert Forecast
• 2026 Luxury Housing Price Forecast Increase5-8%Knight Frank Expert Forecast
• 2026 Core Central Office Rent Forecast Increase8-12%Knight Frank Expert Forecast
• Current Residential Inventory Absorption Cycle11.7 monthsSignificant drop from peak of 23.5 months
• Office Net Absorption - BFSI Share44%Financial services sector is the primary demand source
• Office Net Absorption - Flexible Space Share18%Demand exceeds expectations
• 2026Q1 Top-Tier Central Rent YoY Change+9.2%Indicates strong recovery of core assets

Impact & implications

The report argues that substantial improvements in market fundamentals (particularly accelerating inventory absorption and rising core rents) will provide support for valuation repair of real estate stocks. Despite recent stock pullbacks due to interest rate expectation volatility, leading developers and REITs are expected to regain investor favor as 2027 rate cut expectations solidify and 2026 sales/lease data materialize. Companies possessing high-quality core assets (such as Central district offices and premium residential land banks) will see significantly improved earnings visibility.

Risks

• Interest rates higher than expected or remaining at high levels long-term
• New project sales absorption slower than expected
• Macro risks and regulatory concerns
• Weakness in residential sales in Hong Kong and mainland China
• Office and retail rent performance weaker than expected
• Extension of key management transition period

What to watch

• Whether actual 2026 residential price increases align with the 8-10% forecast
• Sustainability of core area office rents and performance of non-core areas
• Policy changes by the Federal Reserve and Hong Kong Monetary Authority regarding interest rates
• Absorption rates of new project launches by leading developers
• Progress on the inclusion of Link REIT into Stock Connect