HONG KONG, July 11 (Reuters) - Higher-for-longer

interest costs and ample retail and office vacancies have pushed

the sales of distressed investment properties in Hong Kong

higher in the second quarter, a trend realtors expect to

continue in an already tepid real estate market.

An increasing acceptance among lenders and landlords to book

steeper losses has driven up the number of these deals in a

market forecast to remain lacklustre due to the higher interest

rates and falling rental income, realtors said.

Distressed properties are either on the brink of

foreclosure, already owned by a bank or have been repossessed by

the mortgage lender. They could offer an attractive investment

because of their usually relatively lower prices.

Half of the 22 investment properties transacted in the

second quarter were foreclosure sales or those that sold at a

loss, according to data by real estate services firm Colliers.

That compares with a quarter in the previous quarter and 26%

for all of 2023. The company counts only deals valued at more

than HK$100 million ($12.80 million).

"We'll see more distressed deals and discounted stocks in

the market in the second half," said Colliers Hong Kong co-head

of capital markets & investment service Thomas Chak.

"That'll put pressure on market prices."

Colliers set up a restructuring services team in Hong Kong

last year, its second in the Asia-Pacific after Australia, to

meet rising demand from lenders to recover their loans.

"When rates start going down, it could be a turning point,"

said Reeves Yan, head of Hong Kong capital markets of real

estate consultancy CBRE ( CBRE ). "The number of distressed deals could

stabilise."

CBRE ( CBRE ) expects office prices, which have already fallen more

than 50% since peaking in mid-2019, to ease about 5-10% for the

whole of 2024.

Yan said buyers in most of the large office deals in the

first half were foreign investors, while funds and mainland

Chinese companies were not as active due to high financing costs

and their own financial issues.

Collier's Chak also said some family offices from Singapore,

Malaysia, mainland China and Hong Kong were putting more money

into Hong Kong real estate in the past year, with demand for

retail space faring better than office space, where vacancies

are at a record high 16% amid an increase in new supply.

STEEP LOSSES

Not all lenders, however, are keen to sell distressed

properties in the current market.

Realtors said Chinese state-owned financial institutions are

usually more reluctant to book losses than smaller local banks,

and would rather put sales on hold until the real estate market

recovers.

For example, lenders to embattled developer China Evergrande

Group's ( EGRNF ) headquarters in Hong Kong, led by state-owned

China Citic Bank Corp Ltd, have yet to decide

whether to offer the property for sale a third time because the

valuation has dropped below their loan value of HK$7.6 billion

loan, according to an industry source.

Two tender sales of the office tower in the second half of

2022 have lapsed, Reuters has reported. Citic Bank did not

immediately respond to requests for comment.

Currently, a harbourfront office tower in the Kowloon

peninsula has been put up for another tender sale that will

close next month, with the expected selling price falling by a

third compared to last year.

The lenders - seven mostly local banks that include Hang

Seng Bank ( HSNGF ) - have together extended a HK$4.5 billion

loan pledged to the property, called the One Harbour Gate East

Tower and which was formerly owned by Chinese property tycoon

Chen Hongtian.

The banks now expect to sell the office tower for just

HK$3 billion after an unsuccessful tender offer last year,

according to a person with direct knowledge who declined to be

named as the information remained confidential.

Hang Seng Bank ( HSNGF ) did not immediately respond to requests for

comment.

($1 = 7.8099 Hong Kong dollars)