Hong Kong: Builders expect sale of distressed properties to rise
Real Estate

Hong Kong: Builders expect sale of distressed properties to rise

Higher-for-longer interest costs and ample retail and office vacancies have increased the sales of distressed investment properties in Hong Kong in the second quarter, which realtors expect to continue in an already weak real estate market. Realtors said that a growing acceptance among lenders and landlords to book steeper losses has driven up the number of these deals in a market forecast to remain lacklustre due to higher interest rates and falling rental income.

Distressed properties, which are either on the brink of foreclosure, already owned by a bank, or repossessed by the mortgage lender, could offer an attractive investment because of their usually relatively lower prices. According to data by real estate services firm Colliers, half of the 22 investment properties transacted in the second quarter were foreclosure sales, or those that sold at a loss. This compares with a quarter in the previous quarter and 26% for all of 2023. The company counts only deals valued at more than HK$100 million ($12.80 million).

Thomas Chak, Colliers Hong Kong co-head of capital markets and investment services, stated that more distressed deals and discounted stocks are expected in the market in the second half, which will put pressure on market prices. Colliers set up a restructuring services team in Hong Kong last year, its second in the Asia-Pacific after Australia, to meet rising demand from lenders to recover their loans.

Reeves Yan, head of Hong Kong capital markets at real estate consultancy CBRE, mentioned that when rates start going down, it could be a turning point, and the number of distressed deals could stabilize. CBRE expects office prices, which have already fallen more than 50% since peaking in mid-2019, to ease about 5?10% for the whole of 2024. Yan noted that buyers in most of the large office deals in the first half were foreign investors, while funds and mainland Chinese companies were less active due to high financing costs and their own financial issues.

Chak also indicated that some family offices from Singapore, Malaysia, mainland China, and Hong Kong have been putting more money into Hong Kong real estate over the past year, with demand for retail space faring better than office space, where vacancies are at a record high of 16% amid an increase in new supply.

However, realtors said not all lenders are keen to sell distressed properties in the current market. Chinese state-owned financial institutions are usually more reluctant to book losses than smaller local banks and would rather put sales on hold until the real estate market recovers. For example, lenders to embattled developer China Evergrande Group's headquarters in Hong Kong, led by state-owned China Citic Bank Corp. Ltd., have yet to decide whether to offer the property for sale a third time because the valuation has dropped below their loan value of HK$7.6 billion, according to an industry source.

Two tender sales for the office tower in the second half of 2022 have lapsed. Citibank did not immediately respond to requests for comment. Currently, a harborfront office tower in the Kowloon peninsula has been put up for another tender sale that will close next month, with the expected selling price falling by a third compared to last year. The lenders, which include seven mostly local banks such as Hang Seng Bank, have together extended a HK$4.5 billion loan pledged to the property, called the One Harbour Gate East Tower, formerly owned by Chinese property tycoon Chen Hongtian. The banks now expect to sell the office tower for just HK$3 billion after an unsuccessful tender offer last year, according to a person with direct knowledge who declined to be named as the information remained confidential.

Hang Seng Bank did not immediately respond to requests for comment.

Higher-for-longer interest costs and ample retail and office vacancies have increased the sales of distressed investment properties in Hong Kong in the second quarter, which realtors expect to continue in an already weak real estate market. Realtors said that a growing acceptance among lenders and landlords to book steeper losses has driven up the number of these deals in a market forecast to remain lacklustre due to higher interest rates and falling rental income. Distressed properties, which are either on the brink of foreclosure, already owned by a bank, or repossessed by the mortgage lender, could offer an attractive investment because of their usually relatively lower prices. According to data by real estate services firm Colliers, half of the 22 investment properties transacted in the second quarter were foreclosure sales, or those that sold at a loss. This compares with a quarter in the previous quarter and 26% for all of 2023. The company counts only deals valued at more than HK$100 million ($12.80 million). Thomas Chak, Colliers Hong Kong co-head of capital markets and investment services, stated that more distressed deals and discounted stocks are expected in the market in the second half, which will put pressure on market prices. Colliers set up a restructuring services team in Hong Kong last year, its second in the Asia-Pacific after Australia, to meet rising demand from lenders to recover their loans. Reeves Yan, head of Hong Kong capital markets at real estate consultancy CBRE, mentioned that when rates start going down, it could be a turning point, and the number of distressed deals could stabilize. CBRE expects office prices, which have already fallen more than 50% since peaking in mid-2019, to ease about 5?10% for the whole of 2024. Yan noted that buyers in most of the large office deals in the first half were foreign investors, while funds and mainland Chinese companies were less active due to high financing costs and their own financial issues. Chak also indicated that some family offices from Singapore, Malaysia, mainland China, and Hong Kong have been putting more money into Hong Kong real estate over the past year, with demand for retail space faring better than office space, where vacancies are at a record high of 16% amid an increase in new supply. However, realtors said not all lenders are keen to sell distressed properties in the current market. Chinese state-owned financial institutions are usually more reluctant to book losses than smaller local banks and would rather put sales on hold until the real estate market recovers. For example, lenders to embattled developer China Evergrande Group's headquarters in Hong Kong, led by state-owned China Citic Bank Corp. Ltd., have yet to decide whether to offer the property for sale a third time because the valuation has dropped below their loan value of HK$7.6 billion, according to an industry source. Two tender sales for the office tower in the second half of 2022 have lapsed. Citibank did not immediately respond to requests for comment. Currently, a harborfront office tower in the Kowloon peninsula has been put up for another tender sale that will close next month, with the expected selling price falling by a third compared to last year. The lenders, which include seven mostly local banks such as Hang Seng Bank, have together extended a HK$4.5 billion loan pledged to the property, called the One Harbour Gate East Tower, formerly owned by Chinese property tycoon Chen Hongtian. The banks now expect to sell the office tower for just HK$3 billion after an unsuccessful tender offer last year, according to a person with direct knowledge who declined to be named as the information remained confidential. Hang Seng Bank did not immediately respond to requests for comment.

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