UBS said in a report that Mainland China's imposition of a 20% tax on returns from Hong Kong insurance products could slow insurance sector demand for office properties. A bigger risk is that the 20% tax could be extended to Hong Kong residential properties, including rental income and capital gains.

The report noted that the latest gross rental yield for Hong Kong residential properties is about 3.2%, while fixed mortgage rates are 2.73% (for three- to five-year tenors). However, after deducting management fees, rates and property tax, net rental yield generally falls to about 2.2%. If Mainland authorities impose a 20% tax on offshore property investment income, similar to the treatment of insurance returns, UBS estimates that net rental yield for Mainland investors would further decline to around 1.8%, broadly in line with returns in China's tier-1 cities.

Due to rising uncertainty over outbound investment policies and tax treatment, the broker believes momentum in the residential market may slow further in 2H26. This is particularly important because, based on non-Hong Kong identity card holder/surname analysis, Mainland buyers account for about 7%/33% of residential transaction value. Meanwhile, any additional Federal Reserve rate hikes would pose another downside risk, as Hong Kong banks may withdraw fixed-rate mortgage products at 2.73%.

The report said market momentum remained weak in Jul. In the primary market, sell-through rates for new projects softened further to 16-51% by end-Jul, down from 45-74% in Jun; average weekend transactions for new projects during Jun to Jul were only 81 units, down 49% YoY. In the secondary market, average weekly transaction volume for the top 35 housing estates during Jun to Jul remained weak at only 42 deals, down 43% YoY; recent weekend viewing reservations for the top 10 housing estates fell 12-18% YoY, worsening from -6% to -10% at end-Jun; secondary listings also rebounded.

For offices, market data showed that as of Oct 2025, insurance companies occupied 6% of Hong Kong Grade A office stock. By district, exposure was concentrated in Kowloon East (28%), followed by Hong Kong East (23%), Tsim Sha Tsui (17%) and Wan Chai (14%). In contrast, Central and Admiralty/Sheung Wan accounted for only 4% and 2%, respectively. UBS therefore expects landlords with greater exposure to decentralized office markets to be relatively more negatively affected, including SWIREPROPERTIES (01972.HK) +0.040 (+0.174%) Short selling $12.00M; Ratio 6.902% , WHARF REIC (01997.HK) +1.640 (+5.467%) Short selling $262.98M; Ratio 23.416% , HYSAN DEV (00014.HK) -0.170 (-0.940%) Short selling $2.07M; Ratio 8.439% and SHK PPT (00016.HK) -2.300 (-1.983%) Short selling $394.66M; Ratio 26.487% .

The broker reiterated its cautious stance on Hong Kong developers, especially SHK PPT and HENDERSON LAND (00012.HK) -0.720 (-2.620%) Short selling $94.87M; Ratio 29.439% , as their valuations appear expensive from a dividend yield perspective. It also believes the Hong Kong office sector may face another round of selling pressure if insurance company demand slows. Within the office sector, UBS expects HANG LUNG PPT (00101.HK) -0.050 (-0.678%) Short selling $23.09M; Ratio 23.644% and CHAMPION REIT (02778.HK) -0.025 (-1.111%) Short selling $240.66K; Ratio 5.330% to show relatively stronger resilience. (ha/u)(HK stocks quote is delayed for at least 15 mins.Short Selling Data as at 2026-08-06 16:25.)