Hong Kong’s small builder debt woes mount despite property rally

[HONG KONG] Some of Hong Kong’s small property developers are grappling with renewed liquidity strains despite signs of recovery in the local real estate market, putting them on shakier ground than larger players in the sector.

One such developer, Far East Consortium International, saw the biggest daily drop in its bond prices since late 2022 on Thursday (Apr 2) after it said it would defer a distribution payment on a US$360 million perpetual bond. Far East Consortium, which has residential and commercial property developments in Hong Kong, mainland China and other regions, has been plagued by liquidity strains for years, but this is the first time it has made such a move. 

Far East Consortium’s struggles come despite growing optimism over Hong Kong’s property sector, which had languished for years in a prolonged slump. The city’s home prices are forecast to climb as much as 15 per cent this year, according to JPMorgan Chase. That’s helped ease pressure on larger companies like Sun Hung Kai Properties, which recently secured a HK$20 billion (S$3.2 billion) bank loan at its lowest borrowing cost in years.

Smaller property firms face a longer road to recovery. Many are more exposed to commercial real estate, where the recovery has been slower, and their size makes it harder to have a pipeline of projects ready to go when the market starts to rebound.  

“Larger players roll over bank loans supported by their diversified, high‑quality portfolios and they are viewed as systemically important,” said Lei Zhu, Head of Asian Fixed Income, Fidelity International. “In contrast, smaller developers typically own older or single‑asset properties that have seen sharp valuation declines in the high‑rate environment.”

With liquidity still strained after the downturn, a range of smaller builders are trying to either delay debt payments or refinance, but negotiations have been rocky.

Lai Sun Development, controlled by local tycoon Peter Lam, is in talks with creditors as it tries to delay payment on a bond due in July. It recently offered creditors a 20 per cent upfront payment on the principal if they agree to extend the remaining amount for three years. Creditors, however, are demanding a better deal, people familiar with the matter said.

Just three weeks ago, it rushed to refinance a five-year HK$3.3 billion equivalent loan, securing a HK$3 billion equivalent facility just as the original one was coming due, people familiar with the matter said. Part of the new loan was shortened to about one year with a one-year extension option, the people added. It faced similar last-minute loan talks last October.

The builder told investors in recent days that it has a HK$1.6 billion loan, backed by the Causeway Bay Plaza Phase 2 tower, coming due in June, and a total of HK$8.65 billion in loans remains outstanding, the people said.

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Other small developers have encountered push back from banks. Lifestyle International Holdings, operator of the iconic Sogo department stores, is trying to refinance an HK$8 billion loan due in June, but some lenders are still reluctant to sign on to the deal and talks have dragged on for months, people familiar with the matter said. 

Sogo stores, especially the flagship in Causeway Bay, have long been among Hong Kong’s prime retail destinations. But the business has faced pressure from the growing e-commerce penetration, the rise of low-end stores and weak consumer sentiment.

Lai Sun and Lifestyle didn’t immediately respond to requests for comment.

Smaller firms have limited market access and insufficient recurring income, Fidelity’s Lei Zhu said. Without fresh equity or asset sales at acceptable valuations, prolonged negotiations and repeated liability management plans are likely to persist, she added. BLOOMBERG