Hong Kong’s property distress catching up with city’s banks
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Close to 40 per cent of the HK$34 billion in Hong Kong commercial real estate transactions in 2024 were distressed sales or capital loss deals.
PHOTO: ST FILE
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HONG KONG – Distressed property sales in Hong Kong are beginning to bite banks that used to be well protected against loan losses.
The city’s commercial real estate sector is going through one of its worst slumps in history,
Close to 40 per cent of the HK$34 billion in Hong Kong commercial real estate transactions in 2024 were distressed sales or capital loss deals, where owners – including banks – sold properties for less than what they originally paid, according to data from Colliers International.
In 2023, such deals for offices, retail spaces, hotels, serviced apartments and industrial assets, made up 21 per cent of the total transaction volume. The data covers deals of least HK$100 million.
“Banks are realising that if they don’t sell their commercial properties, the values will go lower and lower,” said Mr James Mak, chief sales director at Midland Commercial Realty, a property brokerage. “They have to sell at a loss because that’s how the market is now.”
Most Hong Kong lenders have sizeable exposures to the city’s real estate industry, but the deepening slump is unlikely to cause systemic issues for the banking sector, which is well capitalised.
Still, pressure on their commercial real estate portfolios is increasing, and investors are becoming more concerned about rising bad loans, said Ms Karen Wu, a credit analyst at research firm CreditSights.
The recent debt turmoil at builder New World Development, which is trying to extend some of its loans, have also put the issue in focus.
Some of the city’s banks had been recovering from the hit they took from the downturn in mainland China’s real estate market.
“Now, there are potentially bigger problems arising from Hong Kong’s commercial property sector,” Ms Wu said. So far, the troubles have mostly been at mid-sized and smaller developers, she added.
Rising office vacancies and softening rents in Hong Kong are threatening the quality of US$80 billion (S$107.7 billion) of commercial real estate loans at five major banks in the city, according to a report by Bloomberg Intelligence in late November.
The lenders, which include Hang Seng Bank, its parent HSBC Holdings, Bank of East Asia, Bank of China’s Hong Kong unit and Standard Chartered, have made about 40 per cent of Hong Kong’s total property development and investment loans.
The vast majority of the commercial real estate debt is performing, but the risks are elevated, analysts Francis Chan and Patrick Wong said in the report.
“Declining collateral values might pressure the banks to take charges on more loans in 2025,” they wrote.
Hang Seng Bank last summer reported a sharp increase in credit-impaired Hong Kong commercial real estate loans to HK$13.5 billion as at June 2024, from HK$1.1 billion at the end of 2023. That caused its non-performing loan ratio for the portfolio to jump to 9.6 per cent from 0.8 per cent.
Some banks have taken over assets from troubled borrowers. A company owned by Chiyu Banking Corp., a Hong Kong lender, earlier in January took over a commercial building in the city’s Sheung Wan district at a market valuation of HK$1.298 billion, according to a land registry record and a person familiar with the matter.
The building had a mortgage from Chiyu Bank of more than HK$1.5 billion, said the person.
The November sale of Cheung Kei Centre caused seven lenders, including two Chinese banks and Hang Seng Bank, to realise a total of HK$2 billion in losses on a HK$4.6 billion mortgage they made in 2019, according to land records.
Lenders earlier seized the waterfront building from Chinese businessman Chen Hongtian after his Hong Kong company ran into liquidity problems.
The 17-storey tower, which has offices and retail space, was originally acquired by Mr Chen’s Cheung Kei Group in 2016 for HK$4.5 billion, or 42 per cent more than the price it was recently sold for.
In late 2023, the 14th floor of Capital Centre, a grade A office building in Hong Kong Island’s Wanchai district, was sold for HK$145.9 million, according to land records.
The office premises had been pledged to a HK$198 million loan taken out by Skyfame Realty, a Chinese real estate developer that has since defaulted on the debt, according to Skyfame’s last interim report.
The sale meant that Bank of East Asia, which made the loan, incurred a loss. A bank spokesperson said the transaction’s financial impact was reflected in its 2023 accounts.
‘Manageable Losses’
Hong Kong’s banks have long taken a conservative approach towards property loans. Fitch Ratings estimated in 2024 that the average loan-to-value ratio was less than 50 per cent for all commercial property-backed loans among banks it rated.
That means there are assets worth at least US$200 million backing every US$100 million in debt.
Goldman Sachs credit analysts said Hong Kong’s banks have strong balance sheets and capital buffers that will help them withstand the downturn. They said in a mid-December report that even if commercial real estate prices decline another 35 per cent, losses would still be manageable for banks.
“We believe worries about the Hong Kong banking sector are overblown,” they said.
The continuing asset value declines mean some commercial real estate transactions could see discounts of as much as 60 per cent from the original purchase price, said Mr Thomas Chak, head of capital markets and investment services at Colliers.
Mr Raymond Kwong, an associate director at PwC Hong Kong’s restructuring and insolvency practice, said: “A lot of those loans were borrowed three to five years ago, when the valuation was at the peak.”
Some lenders with bad loans have to decide whether to offload assets and realise potential losses, or wait for an indeterminate period for property values to recover, he said. BLOOMBERG
