Paul Chan Mao-po said the financial situation is quite solid. The performance of Hong Kong stocks is related to the mainland economy – The Epoch Times

[The Epoch Times, December 05, 2023](The Epoch Times reporter Yang Ri reported in Hong Kong) Financial Secretary Paul Chan Mo-po said at the Financial Affairs Committee of the Legislative Council yesterday (4th) that it is expected that there will still be great uncertainty in the economy next year. The comprehensive deficit for this year is expected to be slightly more than 100 billion yuan, higher than the estimate when this year’s budget was announced in February. As for Hong Kong being described as the site of an international financial center, he thinks it is “untenable”.

Reports indicate that as cash flow pressure increases, developers are using more non-bank financing to pay for new projects or refinancing loans, but higher interest rates will exacerbate the debt burden of the real estate industry. Even some of Hong Kong’s largest developers, such as New World Development, are seeking to reduce borrowing after aggressive expansion.

Bloomberg said that the potential financing gap for Hong Kong real estate developers has attracted many players to provide loans, including family offices, private equity companies and asset management companies. These institutions are willing to provide high-risk, high-yield loans with asset collateral.

A Country Garden affiliate secured a HK$900 million (US$115 million) loan from investment firm Flow Capital (HK) Ltd. earlier this year.

Zhao Yanjun, a real estate finance lawyer at Mayer Brown LLP in Hong Kong, said some family offices and asset managers are building new businesses, like private credit funds, seeking to add to their private credit portfolios.

Hong Kong’s sluggish market conditions support the opportunity, with revenue from office and retail stores declining at a time when financing costs are soaring. Although Hong Kong’s real estate industry has not experienced the same severe situation as the mainland market, residential sales have plummeted and vacancy rates have soared. And with many developers operating in both places, plummeting valuations in the mainland have also had a spillover effect.

Zeng Jinkun, executive director of CBRE Hong Kong Investment Banking Department, said that the team has evaluated more than 30 high-return private credit transactions, with mortgage assets including office buildings, data centers and luxury homes. Zeng Jinkun described that developers are facing the double blow of rising financing costs and falling asset valuations, and borrowers are becoming increasingly distressed.

The industry decline is severe. According to data from CBRE, in the three months to September this year, the vacancy rate of commercial buildings in Hong Kong was close to a record high of 15.8%. An office building in which Goldman Sachs Group holds a majority stake reduced the price by more than 30%. Last month, Hong Kong Home sales fell 33% year-on-year.

Market observers say Hong Kong’s private lending market is in its infancy, with more inquiries than completed transactions. Some lenders are worried about lower-than-expected returns because many properties have not yet been repriced, according to people familiar with the matter.

Bloomberg believes that the situation may suddenly change next year. As banks prepare to release their annual results and repricing assets in the first quarter of next year, when asset prices fall and NPL cases increase, banks may sell real estate loans at discounts before they default on overdue loans, which may drive more Borrowers look for other sources of financing. ◇

Editor in charge: Chen Minqi