Hong Kong property losses hit PE funds after US$17 billion rush
Offices, near their worst vacancy rates, have also tanked 49% in value
[HONG KONG] When Blackstone bet on Hong Kong’s commercial real estate sector in 2014, it bought a 20,000-square-foot retail space in the bustling Mong Kok district for HK$700 million (S$117 million) to target mainland Chinese tourists seeking brand-name wear.
Today, the space that once housed Forever 21 is valued at less than half that amount and Blackstone is in talks with Taipei Fubon Commercial Bank to renegotiate terms of a loan for that property, according to sources familiar with the matter who asked not to be named discussing private information. The building’s high-profile retail tenant has been replaced by 24/7 gyms and an outdoor gear store.
The soured bet by the world’s largest alternative asset manager offers a glimpse into the risks for global private equity (PE) funds that poured US$17 billion into Hong Kong’s once-booming commercial real estate market between 2010 and 2019, according to data from Colliers. From Gaw Capital Partners to Schroders, investors are facing a dilemma: Sink more cash into struggling properties or forfeit them to lenders.
“At the moment, we have not seen many private equity firms willing to throw in more money,” said Dick Tang, a director at insolvency and turnaround service provider Perun Consultants. “Their demand to us is to deal with the redemption issue when they have troubles to withdraw or exit their investments.”
The average price of retail space in the city plunged 41 per cent as at August from a 2018 peak, according to Hong Kong government data. Offices, near their worst vacancy rates, have also tanked 49 per cent in value.
That’s eroding the collateral value behind many bank loans, which could lead to margin calls, refinancing challenges and in more severe cases distressed asset disposals.
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Blackstone is still paying the interest for its borrowing and has been in talks with Fubon bank, the sources said. The lender, meanwhile, had not marked down the loan as of the first week of October, one of the sources said.
Fubon Bank did not respond to requests for comment. Blackstone declined to comment.
Other private equity firms and investors are seeing similar trends with their portfolios. Across the Victoria Harbour, Gaw Capital, backed by one of the city’s wealthy families, is running into troubles with its Cityplaza Three and Four commercial assets. In 2019, the firm co-purchased the property for HK$15 billion in partnership with Hengli Investments Holding Group. City-wide political protests and ensuing Covid-19 lockdowns triggered an economic downturn, leading to high office vacancy rates.
Rental income from the Cityplaza towers was insufficient for interest payments. Under such circumstances, Hengli was expected to cover 35 per cent of the shortfall, while Gaw contributed the remaining 65 per cent – in proportion to their stakes in the properties. But since September 2023, Hengli has not put in anything, prompting Gaw Capital to cover the full gap with its own funds, sources familiar said in June last year.
After about a year of negotiations with banks, Gaw capital finally managed to amend the loan in May. The banks agreed to provide a reworked facility that carries an initial tenor of two years with an automatic one-year extension, sources familiar said that month. Another two-year extension is available at the lenders’ discretion, they added.
Gaw Capital did not respond to requests for comment. In early October, the firm’s chairman Goodwin Gaw said that he was still “very bullish” about Hong Kong for the next 12 to 18 months.
“Many fund managers will try their best to work with banks to preserve the value of the asset as much as possible,” said Thomas Chak, head of capital markets & investment services at Colliers Hong Kong. That’s “contrary to the idea that funds would easily drop the keys”, as they will try to preserve their relationships with the banks, he added.
At times, the decision is not in the hands of the funds themselves. Some investors behind these private equity firms have been hesitant to commit more capital, concerned that there may be little to no equity value remaining, according to sources familiar.
Also, banks can grow impatient with no market turnaround in sight. Some are now calling defaults and appointing receivers to sell the underlying assets, even at a loss.
Within just a few months, two properties managed by Schroders’s real estate investment arm were seized by bank creditors. The firm faced a third challenge relating to a loan for a three-floor commercial space at Harbourfront Landmark in Hong Kong’s Hung Hom district, Bloomberg reported earlier.
In a statement to Bloomberg News, a Schroders spokesperson said that the loan for Harbourfront Landmark has been extended. The firm is “actively looking for opportunities” particularly in residential property as it sees the local real estate market bottoming out, the spokesperson added.
In more complex situations, banks have struggled to enforce their loans. When Phoenix Property Investors struggled to honour the payment of more than HK$1 billion loans for Cubus, a commercial building in Causeway Bay, last year, more than 10 lenders were unable to reach a consensus on whether to take action and call the loan default. A unanimous approval from all banks was required, according to sources familiar with the matter.
Lenders have tried to engage lawyers to change the terms of the loan, the sources said. And the lenders are now pivoting to find an external firm to improve the operation of the building, one of the sources added.
A spokesperson from Phoenix Property Investors said the firm “has reached a confidential agreement with its lenders”, without elaborating further.
For now, the outlook for investors in Hong Kong’s commercial property space remains grim.
“There will be more distressed sale inquiries to come in the next year,” Tang added. BLOOMBERG
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