Hong Kong’s Overleveraged Commercial Real Estate Tycoons Unravel, Prices Plunge, Creditors Begin to Take Over

Another 34% markdown. The haste with which creditors want to execute the sale adds to the gloom.

On Monday, the cash-strapped Hong Kong-based billionaire Pan Sutong suffered the ultimate ignominy. The jewel of his real estate empire, the 28-storey Financial Global Centre, which houses his real estate development firm, Goldin Financial Holdings, was put on the market by his creditors, who, seeking repayment of $495 million of debt, took claim of it in July. The sale, under tender, has been entrusted to Knight Frank, which estimates that it should fetch somewhere in the region of HK$12 billion. That would represent a 34% markdown on the HK$18.3 billion at which Goldin had valued the property in December 2019.

The haste with which the creditors want to execute the sale adds to the gloom pervading Hong Kong’s commercial real estate sector.

Just over a month ago, another liquidity-challenged Hong Kong property baron, Chan Ping-chi, was forced to accept a 35% discount for his stake of the 42nd floor of the Center office. Chan was part of a consortium of property-flipping local entrepreneurs who sought to capitalize on Hong Kong’s ever-rising property prices. To that end, they bought 75% of the 70-storey building off Hong Kong’s richest man, Li Ka-Shing, in 2018 for the sum of $5.2 billion, making it the world’s most expensive skyscraper.

“There’s a saying in Hong Kong property circles that if the city’s richest man, Li Ka-Shing, is selling, you don’t want to be the buyer,” the Japan Times points out.

To begin with, the consortium’s short-term property flipping was hugely lucrative. In the first year, they offloaded more than eight floors and a dozen office suites for about $1.3 billion, generating hundreds of millions of dollars in profit. But this year, Chan’s heavily discounted sale is the only transaction thus far recorded, according to property-data provider Real Capital Analytics. Almost one-fifth of the building stands empty and rents are down around 20% from a year ago.

Both Chan and Pan took on huge volumes of fresh debt to fuel their respective property binges. In the case of Chan and his cohorts, they reportedly financed their purchase of the Center with bonds paying interest rates of over 15%. But last year, prices stopped rising, and then began falling, as a confluence of factors pummeled the city’s economy.

Beijing imposed capital controls on money flowing out of China, depriving the Hong Kong property market of much of its life blood. Trade tensions between the U.S and China began escalating, leaving Hong Kong slap bang in the middle. And the city was rocked by student protests, which recently met the immovable force of the Chinese Communist Party. And now, there’s the virus crisis.

The Hong Kong economy is now in the throes of its deepest ever recession on record. Office rents are slumping, vacancy rates are rising and the value of some of the world’s most expensive commercial real estate is plunging.

Continue reading the article on Wolf Street

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