Sales of distressed properties in Hong Kong are beginning to impact banks that used to have effective hedging against loan losses, Bloomberg News reported Sunday.

The average prices of office buildings, malls, and similar properties have slumped more than 40% from their peak in 2018, chipping away from the value of loan securities, the report said.

Defaults are also increasing due to cash flow problems, Bloomberg said.

Banks with problem loans and mortgages have been hesitant to sell underlying real estate assets at a loss, the report said.

However, that is bound to change, as banks are now realizing that if they do not sell now, values will continue to drop, the report said, citing James Mak, chief sales director at property brokerage Midland Commercial Realty.

"They have to sell at a loss because that's how the market is now," Bloomberg quoted Mak as saying.

Hong Kong banks have significant exposure to the real estate sector but the decline is not seen to cause systemic issues due to good capitalization, the report said, citing CreditSights credit analyst Karen Wu.

(Market Chatter news is derived from conversations with market professionals globally. This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed.)