Private Credit Lenders Eye Distressed Property Developers in Hong Kong
November 27, 2023
Private credit lenders are circling distressed property developers in Hong Kong, with a record US$23.4 billion of bank loans coming due next year for the downtrodden sector. The potential funding gap is drawing a range of players – including family offices, private equity firms, and asset managers, such as PACM Group Holdings Ltd. – who can stomach offering high-risk, high yield loans for collateral assets in one of the world’s most expensive property markets.
According to Jasmine Chiu, a Hong Kong-based lawyer in real estate finance practice for Mayer Brown LLP, there is a growing interest among family offices and asset management companies to establish private credit funds and increase their portfolios in private credit. Hong Kong’s listless market conditions, with stagnant revenues from office buildings and retail space, coupled with surging finance cots, underpin this opportunity.
While the city’s real estate sector has not experienced a crash similar to China’s, home sales have plunged, and vacancy rates have soared, the spillover effects of valuations plummeting in the world’s second-largest economy have affected many developers operating on both sides of the border.
Recent deals indicate the demand and returns in private loans. Agile Group Holdings Ltd. Borrowed up to HK$894 million at 20% interest, while Flow Capital (HK) Ltd. Offered a HK$900 million loan to a unit or distressed developer Country Garden Holdings Co. Some private equity clients, who previously invested in commercial properties, have shifted their focus to becoming private credit lenders.
Asset-backed lending, particularly in Hong Kong, is seen as an attractive avenue for lenders. "Using specific properties as collateral in this fast-growing area of private credit offers potential opportunities. CBRE Group Inc.’s Hong Kong team has evaluated numerous high-yield private credit deals backed by assets such as office buildings, data centres and luxury homes.
The Hong Kong private credit market is still in its early stages, with more inquiries than completed deals. Some lenders express concerns that returns may fall short of their targets as many property assets remain resilient and have not yet been repriced. However, conditions may change dramatically next year as banks reprice their assets in the first quarter to report annual results.
Private credit funds will closely monitor signs that distress cases are rising, and asset prices are falling, which may prompt banks to sell loans at a discount before they become delinquent. This potential development would drive more borrowers to seek alternative funding sources.
While the challenges ahead are significant, private credit lenders see special situation investment opportunities in Hong Kong’s real estate market. However, the high cost of Hong Kong assets remains a hurdle, and the yields offered by most deals are still below targeted returns.
In the coming months, second- and third-tier developers or fund managers owning assets at that level may face numerous challenges, highlighting the evolving landscape of Hong Kong’s property market.
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