Citigroup has published a research report revising its outlook for the Hong Kong property market.

The report indicates that following a strong first half of 2026, the retail sector is expected to lead in the second half, with forecasts for retail property rents to remain stable. Furthermore, new home transaction volume in the first half of the year surged 34% year-on-year to a 22-year high, while developer sales increased by 95%. With the number of available units at a four-year low, the bank has raised its 2026 property price growth forecast from 8% to 12%.

Key Investment Preferences

Given a retail outlook that exceeds expectations, the strength in the residential and Central office sectors aligns with market projections. For the second half of 2026, the bank's preferred investment order is retail first, followed by Central office space, residential properties, and then other office segments. The top stock picks are Swire Properties Ltd (01972), Link REIT (00823), and Sun Hung Kai Properties Ltd (00016).

Drivers of the Retail Recovery

The bank estimates Hong Kong's retail sales will surpass HKD 400 billion in 2026, driven by tourist arrivals, stable non-discretionary consumption, robust luxury goods demand, local economic expansion, and a strong Renminbi/Hong Kong Dollar. As retail sales typically lead spot rents by about 8 months, and further lead rental adjustments by 12 to 18 months, the report anticipates a recovery in retail mall spot rents could begin in the second half of 2026, following 13 consecutive months of retail sales growth.

Additionally, considering the high renewal rent cycle concludes in 2026, the bank expects the downward adjustment in retail mall rents to bottom out starting in 2027. Major landlords' malls are operating at over 97% occupancy, with players like Swire Properties, Hongkong Land, and Hysan Development Company Ltd (00014) already seeing positive rental adjustments. To capitalize on the retail recovery, the bank favors Swire Properties and Link REIT, and suggests an opportunistic strategy towards Wharf REIC Ltd (01997).

Analysis of Recent Market Volatility

The report notes that new home transactions in the first half of 2026 hit a 22-year high, while secondary market transactions reached a 5-year high. However, new unit sales in the first half of July fell 60% month-on-month, and secondary registrations dropped 33%. The bank attributes this to cyclical factors: (1) a slowdown in new project launches; (2) stock market adjustments; (3) buyer caution awaiting clarity on the implementation of China's outbound investment regulations, which may require 1 to 2 months to stabilize; (4) narrowing negotiation margins; and (5) seasonality.

Structural Support for Property Prices

Regarding property prices, despite recent market adjustments, the bank believes the market is structurally supported by limited supply. Completions for 2026/27 are projected at 15,000 to 16,000 units annually. Land supply averaged 15,400 units per year from the 2022 to 2026 fiscal year. With available units at a four-year low, total inventory at a two-year low, and demand intact, the market fundamentals remain supportive. Within the residential-focused stocks, the bank prefers Sun Hung Kai Properties due to its ample sales pipeline and the prospect of dividend per share growth alongside profit expansion.