If the lack of buyers for a prime office tower and a mansion in Hong Kong are any guide, China Evergrande Group’s liquidators are in for a long road ahead. 

Alvarez & Marsal, the company chosen this week to unwind the fallen Chinese property developer, is still trying to sell Evergrande’s US$1.6 billion former Hong Kong headquarters building after it was seized in separate proceedings in 2022. That’s even after a rebranding and roadshows by agents in mainland China to attract investors. 

Residential distressed assets aren’t any easier to offload. A luxury house formerly owned by Evergrande’s founder Hui Ka Yan remains on the market following a foreclosure in 2022. 

The struggle to sell either of these prominent pieces of real estate underscores the magnitude of the task to carve up Evergrande’s assets. The unwinding is taking place during one of Hong Kong’s worst property slumps, making it harder for creditors to get a decent price in any sale. 

Creditors “will likely have to offer a discount,” said Kathy Lee, head of research at Colliers International Group. The prolonged sale of Evergrande’s former flagship tower shows that they will have to adjust prices to meet expectations in a market where values are likely to keep falling, she added.

Alvarez & Marsal didn’t immediately reply to requests for comment. 

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With questions over whether Chinese authorities will make Evergrande’s onshore projects up for grabs, the focus is likely to turn to assets outside of the mainland. Evergrande has more than HK$22.4 billion (S$3.84 billion) in key assets offshore, of which HK$15.5 billion, or almost 70 per cent, are real estate properties in Hong Kong, according to court documents. 

These properties – which include the former Evergrande headquarters tower in the Wan Chai district – have also been marked as encumbered in the documents, an indication that there are claims against them that the liquidators will have to work through. 

Properties that are encumbered are those that have been used as security by other creditors, making it more difficult for unsecured ones like bondholders to get paid unless they are sold at a high price. 

Another Chinese developer’s winding up in Hong Kong is already facing hurdles. Jiayuan International Group’s liquidators said this week that they haven’t found sufficient funding needed for restructuring and are running into onshore creditors who are taking “more vigorous actions” to recover their claims.

Hong Kong’s commercial real estate sector has lost its appeal as investors become deterred by record vacancies and rising interest rates. Slumping office rents mean the return on rental income usually can’t cover the mortgage costs. Buyers are hard to come by even after prices tumbled 35 per cent from their 2018 peak. 

The city’s vacancy rate rose to an unprecedented 16.4 per cent by the end of 2023, according to CBRE Group. That’s weighed on Grade A office rents, which slipped 6 per cent last year. CBRE expects office values to fall as much as 15 per cent and rental costs to slide by 10 per cent in 2024.

Apart from distressed Chinese companies, funds are also trying to sell office buildings at significant discounts to avoid increasing interest payments on loans. 

The housing market is also slumping. Prime residential prices are likely to fall more than 10 per cent this year, according to Savills, making it the softest major market tracked by the real estate company. 

Weak investment appetite has even prompted Hong Kong’s government to refrain from selling any residential or commercial land plots in the first quarter of the year.

The release of Evergrande’s assets in Hong Kong will add to the already increasing number of seized property sales in the city. “The market this year will be dominated by distressed assets,” Lee said. BLOOMBERG