Property developers in Hong Kong are making every effort to appease lenders and maintain access to funding as the sector stays in the doldrums.
Borrowers are adding security packages or guarantors and even cutting back on the size of refinancings to ensure they can raise much-needed funding from banks that remain reluctant to increase exposure to the city's once-booming property sector.
“Banks are taking a more prudent approach towards lending to the property sector nowadays,” said a Hong Kong-based senior loan banker at an international bank. “Unlike in the pre-Covid era, when property prices seemed to be always on the rise, now we simply do not know when they would rebound and how much more they could fall.”
He said that many banks would request property sector borrowers to either reduce the size of the financings or add collateral to strengthen the structures when they seek to refinance existing debts.
Hong Kong-listed property developer HKR International is seeking a refinancing of a HK$3.35bn (US$427m) club loan from 2020. The financing is likely to come in at HK$1.68bn, half the size of the original loan. The borrower is also adding its subsidiary CDW Building, which owns an eponymous 27-storey commercial building, as guarantor to increase the loan’s appeal.
Another borrower in the spotlight is New World Development, one of the largest property developers in Hong Kong, which used to raise loans on an unsecured basis. Last month, NWD completed a crucial HK$88.2bn refinancing, but not before coughing up around 40 of its properties with a combined value of HK$150.5bn as collateral. NWD is also raising a three-year loan of up to HK$15.6bn that carries a first-priority charge over its landmark Victoria Dockside development in Hong Kong’s Tsim Sha Tsui district.
The lenders' risk-aversion is not surprising. Office and residential property prices in the territory fell 22.6% and 8.2% year on year, respectively, in the last quarter of 2024, according to the government’s rating and valuation department. Prices of commercial properties, including retail space such as shopping malls, shops and restaurants, fell 18.2% over the same period.
"Self-fulfilling prophecy"
And lenders pulling back could push distressed real estate developers closer to the brink.
“Actions lenders take to lower risks by shrinking exposure to the sector may end up becoming the thin end of the wedge," said a banker from a foreign bank.
“It is like a self-fulfilling prophecy. Some real estate companies are barely managing in the current economic downturn, and their survival depends on whether they can successfully refinance their debts.”
Another senior loan banker at a local bank said: “We have seen in a recent case where a borrower sought to refinance a soon-maturing club loan. One of the lenders requested to reduce its share by 10%, and then everyone else followed suit. The company ended up having to repay part of the existing deal and accept a smaller refinancing.
“Fortunately, the borrower was able to find the cash, or we would have had another case of default."
Private credit to the rescue
While banks are increasingly wary, private credit funds are emerging to fill the void.
Hong Kong-listed Grand Ming Group Holdings is looking to raise a bridge loan of about HK$250m from private credit lenders after breaching financial covenants on bank loans of around HK$4.8bn. The borrower had obtained waivers from lenders of about HK$2.7bn of the debt as of earlier this month, according to its stock exchange filing on July 8. Grand Ming is also looking to sell two data centre projects in Hong Kong’s Fanling district to repay the loan.
However, private credit financings come at a cost as most private credit funds require double-digit returns from loans, whereas interest margins on bank borrowings in Hong Kong seldom go beyond 500bp over Hibor. The terms of Grand Ming’s bridge loan are not yet finalised, but the deal is likely to carry a one-year tenor and offer an interest rate in the low to mid-teens.
Private credit financiers are also selective about the locations and types of assets backing the loans.
“The more preferable segments for private credit lenders in the Hong Kong property loan market include residential assets, serviced apartments, and student accommodations at the moment,” said Robert Lay, senior director for debt advisory in Asia Pacific's capital markets at JLL.
Loans backed by residential properties are also preferable, according to Foster Lee, managing director and head of credit investments at Gaw Capital, which has invested heavily in Hong Kong’s property sector.
"For loan deals in the Hong Kong property market, we would prefer those with construction completed already, and those in the residential segments more than the industrial or commercial segments,” Lee said.
He also flagged his concerns over the high volume of vacant commercial properties, saying: “One of the major concerns we have over the Hong Kong property market is the high vacancy rate in the commercial segment. It means less cashflow for the owner to repay loans.”
Vacancy rates for commercial properties – including retail and other commercial use but excluding offices – rose to 11.8% at the end of 2024 from 10.3% in 2023, according to the government’s rating and valuation department.