Hong Kong property concerns deepen among bankers and regulators

HONG Kong bankers and regulators are signalling growing concern over the city’s deepest real estate downturn since the Asian financial crisis.

In recent months, the de facto central bank here has intensified scrutiny of lenders’ decisions on distressed loans.

It has called banks more frequently to gauge their willingness to extend credit lines to even smaller developers. And bankers are increasingly reassessing the lofty valuations assigned to collateral that backs hundreds of billions of dollars of shaky property loans.

The moves, described by more than two dozen bankers and property consultants who asked for anonymity to discuss private information, add to signs of stress in a sector that remains a pillar of Hong Kong’s economy.

The property slump has restrained growth even as the Asian financial hub makes progress in other areas, such as reclaiming the world’s top spot for stock listings and further expanding its bond market.

“What surprised me is the possibility that protections are now extending even to smaller players,” said Jason Bedford, a visiting senior research fellow at the East Asian Institute of the National University of Singapore, referring to regulatory interest in credit lines for smaller developers.

“That’s a pretty alarming signal. It raises the risk that we may be entering a broader extend-and-pretend phase.”

In response to Bloomberg’s queries, a Hong Kong Monetary Authority spokesperson said the regulator does not comment on individual companies’ affairs.

“It is the HKMA’s long-standing supervisory requirements that banks must manage credit risk prudently,” said the spokesperson. “In general, banks in Hong Kong have been pragmatic in providing credit support to customers.”

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Commercial real estate loans account for approximately 8 per cent of about HK$10 trillion (S$1.7 trillion) in total lending in the city’s banking system, according to data from S&P Global Ratings. Latest government figures show that local office prices have plunged about 50 per cent from their 2018 peak.

HKMA calls

While the HKMA has repeatedly described the city’s banking system as well capitalised, it has in recent months become notably more proactive in scrutinising lenders’ loan decisions.

Since May, a number of banks have received at least three calls from HKMA officials who questioned them on issues such as reasons for not participating in a property refinancing deal, according to people familiar with the matter.

Previously, the regulator would call those lenders once or twice a year at most, checking factual details on specific transactions only, said the people. 

A case in point is Lai Sun Development, a cash-strapped builder that began talks with lenders to refinance a HK$3.6 billion loan in January.

After negotiations for almost six months, only about half of the original loan’s 20 lenders expressed willingness to extend the credit line, said people with knowledge of the matter.

Then weeks before the loan’s maturity on Oct 6, at least five banks in the consortium received calls from HKMA officials, with the latter seeking feedback including hesitation or concerns about offering refinancing to Lai Sun, said the people.

The regulator reiterated general encouragement for more sympathy toward struggling borrowers.

The calls were widely interpreted as signalling the HKMA’s intention to give the developer a lifeline, the people said. Shortly after, Lai Sun secured a HK$3.46 billion refinancing deal. 

The regulator has made its presence increasingly felt in such deals, following its involvement in prominent developer New World Development’s efforts to avert a debt crisis in June.

Other borrowers that have drawn similar scrutiny from the HKMA include defaulted developer Emperor International Holdings, real estate asset manager Gaw Capital Partners, and Spring Real Estate Investment Trust, according to people familiar with the situation.

Spring REIT said it has completed refinancing a loan for a Beijing project “in its ordinary course of business.” 

Gaw declined to comment, while Lai Sun and Emperor didn’t immediately respond to requests for comment.

The HKMA’s increased engagement has come as the city’s commercial real estate sector has emerged as a growing threat to banks. 

HSBC Holdings, for one, took the unusual step to push its Hong Kong subsidiary, Hang Seng Bank, to offload portfolios of bad real estate debt, Bloomberg News reported in September.

HSBC proposed last month to take Hang Seng private and warned separately that the city’s commercial property sector continues to face “downward pressure.” 

Frothy valuations

In another sign of angst, bankers are increasingly taking aim at real estate consultancy firms, expressing concerns about what they consider inflated valuations of commercial properties used as loan collateral. 

Despite the sharp drop in commercial real estate prices in recent years, some of the assessments from valuation providers have failed to reflect that, according to people familiar with the matter. 

One such example is the YF Life Tower, an office building on the outskirts of Hong Kong’s central business district.

The tower’s owner managed to refinance a loan at end-2023, based on a HK$6.24 billion valuation provided by CBRE Group, a figure similar to its 2018 levels, people familiar with the matter said.

The lenders were skeptical because the assessment used a comparable property in a much more central location with a harbour view, the people said. As a result, the banks reduced the loan-to-value ratio and cut the loan size to about HK$2.5 billion from HK$3.1 billion, they said. 

Even so, a subsequent valuation by Jones Lang LaSalle earlier this year arrived at HK$6.21 billion. 

Jones Lang LaSalle declined to comment while CBRE didn’t immediately respond to requests for comment.

Another example is the Worfu Mall, collateral for a roughly HK$1.5 billion loan that suffered a default earlier this year. Currently under receivership, the shopping center has been up for sale since January. 

Interested buyers of the mall have made indicative bids as low as less than half of the loan, according to people familiar with the situation.

“Valuation practices in Hong Kong fall short of global standards,” said Leo Lo, founder of property consultancy firm CHFT Advisory and Appraisal. “Landlords, not banks, control the process here. They shop around for the most optimistic valuations, and surveyors who don’t play along risk losing business.”

The expanding list of such incidents has prompted some lenders to run monthly, rather than semi-annual, health checks on valuations, bankers say. 

Orderly exit 

While many analysts agree that Hong Kong’s financial system remains sound enough to withstand any near-term blow, the worst may be yet to come. 

Local prime office rents are set to fall a further 7 per cent through the end of 2026, Bloomberg Intelligence estimates. 

“I don’t see any evidence of impending market collapse in the HKMA’s activities, but regulators are always concerned about the potential for a lot of players trying to exit all at once,” said Arthur Morris, assistant professor at the Hong Kong University of Science and Technology.

“Think of the HKMA as air traffic control, they want to make sure everyone doesn’t come in for a landing at the same time.” AFP