Hong Kong’s commercial lenders are on the verge as building values fall
HONG KONG (Reuters) – Hong Kong commercial lenders are concerned about a 30% decline in building values in the past 12 months and will consider taking out loans or restructuring if values continue to decline.
If lenders ask for loan repayment or try to tighten terms, it could spark a wave of property sales that still raise prices in the China-led area, which is already in recession due to the US-China trade spit could press further. violent street protests last year and the new coronavirus.
“The market will not improve for the next half to a year,” said a real estate investor who is financing the city. “If you are in the Hong Kong market, I would say reduce the risk if you can. Get your money back. “
Non-bank banks and lenders – a series of brokers and investment firms that make up the unregulated shadow banking sector – have borrowed billions of dollars in the world’s most valuable real estate market in recent years.
Lenders and borrowers were happy when rates rose, but there are widespread concerns now as values fall.
Mezzanine investors, companies that lend money in generally shorter periods of time and at higher interest rates, are considered to be the most at risk.
Under Hong Kong Monetary Authority regulations, banks cannot lend commercial property buyers more than 40% of the asset to minimize the damage caused by default. Mezzanine investors and other shadow banks are not bound by it.
“There are mezzanine investors who are overly aggressive when it comes to providing an exceptionally high mortgage lending value (LTV) of approximately 80% of the true value of the underlying assets,” said Ryan Chung, chief executive officer of Huatai International, a major mezzanine investor in town.
“Given that office rent is down around 10% in the first half of this year (this year) and occupancy is on the low side, it definitely affects the valuation of the assets and potentially triggers financial covenants,” Chung said, referring to the fact on the loan terms.
Chung said some lenders are now calling for new property valuations to verify that the latest value doesn’t exceed the LTV limit set in the covenant.
Earlier this month, mezzanine investors called for Goldin Financial Holdings 0530.HK Repayment of approximately HKD 3.5 billion (US $ 451.55 million) on a loan facility pledged to an office tower in a subordinate business district in east Kowloon.
Goldin sold a residential lot this week for HKD 3.5 billion to repay the debt and lost HKD 2.75 billion on its original investment. The creditors who loaned the senior debt took possession of the 27-story property.
Goldin bought the tower from its chairman in 2018 for HK $ 17 billion, an LTV rate of 60%. Goldin said earlier this month the property has a market value of between HKD 15 billion and HKD 16.5 billion, but some appraisers and creditors told Reuters that even a HKD 15 billion valuation – which would bring the LTV rate to 68% – is too high.
Falling valuations worry banks internally discussing the gap between “economic realities and market valuations,” a senior executive at a major overseas bank with significant mortgage lending in Hong Kong told Reuters.
Failures have already occurred, said the financing investor, who had not forecast an improvement in the market, but the banks would not disclose them. “Everyone is rolling around (extending the loan due date) in hopes that things will come back,” the person said. It could take three to six months, he said, but after that the situation could be more serious.
Alfred Lam, chairman of the Hong Kong General Chamber of Real Estate Financing, said its members had not yet taken out any loans but concerns had increased.
“Our members are concerned,” he said. “Some of them have previously given high LTV. If prices drop another 10-20%, even if you receive the asset, you may not be able to cover the cost.”
Reporting by Clare Jim in Hong Kong; Additional coverage from Sumeet Chatterjee; Adaptation by Bill Rigby