Why property giant New World’s debt woes have Hong Kong on edge
If it is unable to secure its multibillion-dollar loan deal, the fallout of its cash crunch could ripple across Hong Kong’s already beleaguered real estate market
[HONG KONG] Bankers in Hong Kong are on edge as New World Development, one of the city’s top real estate developers, attempts to pull off an HK$87.5 billion (S$14.3 billion) refinancing deal by the end of the month.
Once among the most deep-pocketed property giants in the city, New World has faced mounting liquidity pressure over the past couple of years. Its net debt reached 96 per cent of shareholder equity at the end of 2024, according to Bloomberg Intelligence, making it one of the most leveraged developers in Hong Kong.
Investors are growing increasingly sceptical of the firm’s ability to manage its debt burden, after it reported its first loss in two decades in the 2024 financial year. Confidence was further eroded when New World opted to defer interest payments on some perpetual bonds to postpone its debt obligations. As of early June, the company’s shares had slumped more than 90 per cent from their peak in 2019.
If New World is unable to secure its multibillion-dollar loan deal, the fallout of its cash crunch could ripple across Hong Kong’s already beleaguered real estate market, which has been in the midst of a downturn for several years.
Founded in 1970 by Cheng Yu-Tung, a former gold shop apprentice from mainland China’s Guangdong province, New World is one of Hong Kong’s “Big Four” property developers. The family-owned company has built scores of apartment blocks throughout the city and owns iconic assets including the sprawling commercial complex Victoria Dockside along Hong Kong’s famous harbor.
A decades-long property boom propelled the Cheng family into the financial hub’s wealthiest echelons. Now worth US$22.6 billion, they’re one of the richest families in Asia, according to the Bloomberg Billionaires Index.
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Management of New World was gradually handed over to Adrian Cheng, the grandson of the founder, across the 2010s. He made his mark by infusing art elements into the residential towers and offices that New World built, as well as bidding for mega projects like the city’s largest stadium, the Kai Tak Sports Park. Under his leadership, the firm transformed into a brand that appealed to the sophisticated middle class and amassed multiple trophy properties in town.
But after overseeing the plunge of New World’s earnings into the red, Cheng stepped down as chief executive officer in September – a rare abrupt departure in Hong Kong’s property industry, where the biggest players are all controlled by families that carefully plan their succession. Adding to the turmoil, his replacement, Eric Ma, only lasted two months before departing, and Echo Huang was promoted to the top job in November.
The company’s strategy of debt-fuelled expansion wasn’t so much of a problem when the property markets in both Hong Kong and mainland China were booming.
However, Hong Kong’s real estate market entered an unprecedented downturn in 2021. The combination of anti-government protests several years before that, as well as a controversial national security law and strict Covid-19 restrictions that followed, prompted an exodus of local residents and made the international community think twice about the city’s business environment. This weighed on demand for residential and commercial properties.
Compounding those challenges, Hong Kong’s interest rates move in step with the US Federal Reserve. As the Fed raised rates across 2022 and 2023 to combat spiking inflation, elevated borrowing costs increased New World’s financial burden and made investments in real estate less attractive to regular homebuyers and investors.
Home sales and rental income from offices and shopping malls are a major source of revenue for developers like New World. But home prices in Hong Kong are hovering at their lowest in nine years and office rents have plunged 40 per cent since their peak in 2019. Malls are also struggling with higher vacancies and lower rents, particularly as the slowdown in mainland China’s economy means there are fewer tourists visiting Hong Kong who are willing to splurge.
The rush to build more apartment blocks and skyscrapers during the height of the market has left a glut of properties that are further suppressing prices as demand slows. New World’s mega projects – from Victoria Dockside to the city’s largest shopping mall, 11 Skies – now face a very different reality to when they were planned.
The company is also being squeezed by its relatively high exposure to the property market in mainland China, which has experienced a steep decline in home values over the past few years. The mainland represented more than half of New World’s contracted sales for the 12 months through June 2024. For Sun Hung Kai Properties, another top firm in Hong Kong, just 30 per cent of its property sales came from the same region over this period.
Saddled with around HK$210.9 billion in liabilities as of the end of last year, New World has been negotiating with banks since January to refinance HK$87.5 billion of loans – one of the biggest refinancing efforts ever by a Hong Kong company. As of May 30, New World had received written commitments from banks for 60 per cent of that amount and is hoping to secure the total by the end of June, people familiar with the matter told Bloomberg News.
The urgency to wrap things up is because a covenant waiver on the firm’s existing loans is set to expire on June 30. Without refinancing in place, some banks could, in theory, call in their loans. New World has pledged around 40 properties as collateral, including its crown jewel, Victoria Dockside.
A successful deal would help alleviate the liquidity concerns that have long dogged the company. But if the refinancing fails to materialise, there’s a risk New World could default if any of its creditors demand immediate repayment. At the very least, lenders may have to take a haircut on their loans, if any fraction can be recouped. The developer’s credibility in capital markets would be heavily damaged and in a worst-case scenario, New World may need to undergo restructuring like embattled peers in the mainland.
A potential fire-sale of New World’s assets could trigger a domino effect in the city’s property sector, putting further pressure on the already fragile market.
In the event of a high-profile default or restructuring by a major Hong Kong real estate developer, S&P Global Ratings estimates that homebuyers’ confidence would suffer, leading to sales of newly built residences halving in 2025 and prices falling by as much as 7 per cent.
A decline in prices would hit other developers’ margins and their debt-to-Ebitda ratio – a measure of leverage – could rise as a result. In addition, if Hong Kong home prices continue to drop this year, S&P anticipates funding conditions would tighten, triggering a credit squeeze. Banks are one of the largest sources of funding for property developers, and such lending is highly correlated with home values.
The level of exposure of various banks to New World is unclear, but they’re likely to be intertwined given New World is one of Hong Kong’s biggest businesses. If the developer failed to honour its debt obligations, most banks would likely see a sharp increase in their volume of non-performing loans – debt that’s considered unlikely to be repaid – and more pressure on their balance sheets.
The non-performing loan ratio of Hang Seng Bank, one of New World’s creditors, more than doubled in 2024, to 6.12 per cent, and a failure of the real estate giant would likely push this number even higher. BLOOMBERG
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