HONG KONG • There is concern among Hong Kong's commercial lenders as building values fell 30 per cent in the past 12 months, and they may call in or restructure loans if values fall further.
If lenders demand repayment of loans or try to tighten terms, it could set off a wave of property sales that might depress prices even further in the Chinese-run territory, which is already stuck in a recession due to the US-China trade spat, violent street protests last year and the coronavirus.
"The market is not going to get better in the next half to one year," said a real estate investor who provides financing in the city. "If you're in the Hong Kong market, I'd say de-risk if you can. Get your money back."
Banks and non-bank lenders - the brokers and investment firms that make up the unregulated "shadow bank" sector - have lent billions of dollars over the past few years in the world's most valuable real estate market.
Lenders and borrowers were happy when prices were rising, but there is now concern as values decline. Mezzanine investors, firms which lend money in shorter time frames and at higher interest rates, are seen as most at risk.
Under Hong Kong Monetary Authority rules, banks cannot lend more than 40 per cent of the asset value to commercial property buyers in order to minimise the damage caused by defaults. Mezzanine investors and other shadow banks are not bound by that.
"There are mezzanine investors that are overly aggressive in providing exceptionally high loan-to-value (LTV) at circa 80 per cent against underlying assets' true value," said Mr Ryan Chung, managing director at Huatai International, a major mezzanine investor.
"Given office rental has retreated roughly 10 per cent in the first half (of this year) and occupancy rate is on the soft side, it definitely impacts the asset valuation and potentially triggers financial covenants," said Mr Chung, referring to the conditions of loans.
He said some lenders are now demanding new property valuations in order to check that the latest value does not breach the LTV limit set out in the covenant.
Recently, mezzanine investors demanded that Goldin Financial repay about HK$3.5 billion (S$621 million) on a loan facility pledged to an office tower in a second-tier eastern Kowloon business district.
Goldin sold a residential plot this week for HK$3.5 billion in order to repay the debt, taking a HK$2.75 billion loss on its original investment. The creditors took possession of the 27-storey property.
Goldin bought the tower in 2018 from its chairman for HK$17 billion, making the total LTV ratio 60 per cent. Goldin said this month the property had a market value of between HK$15 billion and HK$16.5 billion, but some valuers and creditors told Reuters that even a valuation of HK$15 billion - which would put the LTV ratio at 68 per cent - was too high.
Falling valuations are worrying banks, which are discussing the gap between "economic realities and market valuations", one executive at a major foreign bank with significant mortgage business in Hong Kong told Reuters.
Defaults have already happened, said the financing investor who predicted no improvement in the market, but banks are not disclosing them.