Art image from South China Morning Post
HONG KONG: In the rarefied air up on The Peak, the owner of the penthouse in the Opus Hong Kong development – which has been called the city’s most expensive apartment building – unexpectedly put his unit up for sale.
Some of the city’s wealthiest residents rub shoulders here. But it is rare that a unit in the 12-floor building, which twists upwards toward the clouds and was designed by the famed architect Frank Gehry – his first residential project in Asia – would come on the market for a second-hand sale.
The penthouse belongs to tycoon Chen Changwei, chairman of Hengli Investments, who developed residential and commercial projects in China and managed properties in Hong Kong, London and on the mainland.
The 5,444 sq ft unit, which changed hands for HK$509 million (US$65.3 million) in 2015, was offered with another asset that Chen wanted to offload, some ground floor shops at Pearl City Mansion in Causeway Bay. He bought them from New World Development in 2021 for HK$1.1 billion, according to people familiar with the matter.
Chen’s rush to cash out came as Hengli and Hong Kong-based private equity firm Gaw Capital sought last month to sell two grade-A office buildings in eastern Hong Kong Island that they bought five years earlier at a market peak for HK$15 billion.
Adverse conditions in the office market have touched a HK$10.3 billion loan that Gaw and Hengli took out, which was backed by the buildings. Rental income was not sufficient to cover the interest payments, so the two companies had to inject equity into the borrowing entity of the loan to cover the shortfall, people familiar with the matter said.
Hengli, however, has not paid its share since late last year, the people said.
This is illustrative of a broader trend. All across Hong Kong – from The Peak to South Island and elsewhere – high-net-worth individuals have found themselves caught in a tight spot between their ritzy, overleveraged properties and a quickly draining pool of liquidity.
This is because their businesses are slowing, borrowing costs are high and their financial strains are becoming more severe. Analysts say high interest rates have caused borrowing costs for developers to skyrocket as lenders raised prime rates five times – for a total of 87.5 basis points – to their highest levels since 2007.
Among those looking forward to the US Federal Reserve’s interest rate cuts, few are as anxious as Hong Kong’s property tycoons who are now dealing with sluggish home sales, empty office buildings, and mutinous tenants demanding lease renegotiations.
About 60 per cent of listed property companies’ debt is borrowed at floating rates. Banks charge New World Development an average 1.1 to 1.2 per cent over Hong Kong Inter-bank Offered Rate (HIBOR), whose movements track the fed fund rate because of the Hong Kong dollar peg.
A one percentage-point rate cut can save chief executive officer Adrian Cheng, a third-generation heir from a tycoon family, HK$1.1 billion (US$141 million) and improve earnings by a third, according to Morgan Stanley estimates.
New World, one of Hong Kong’s most indebted developers, paid HK$2.5 billion in financing costs in the second-half of 2023, eroding 44 per cent of the firm’s operating profit.
But more importantly, the Fed’s easing cycle can start to help big landlords make an investment case for the assets they try to sell, or use as collateral for bank loans. Currently, the city’s entire real estate market - from residential to retail to offices - suffers from negative carry, in that the rent an owner can expect to collect is nowhere close to paying for financing costs.
Leasing out Grade-A offices, for instance, yields on average only about 3.2 per cent, not enough to cover the one-month HIBOR's 3.9 per cent.
imagesAlready, the negative math is giving landlords headaches with creditors. Consider The Center, an office tower in the Central business district that billionaire Li Ka-shing sold for US$5.2 billion in 2017. Mainland builder Hopson Development has been sounding out private credit funds to refinance a HK$1.3 billion loan due this month.
The collateral, consisting of two floors at The Center, could sustain only a HK$700 million deal, Debtwire reported in May. The amount they can borrow may be even lower now. Office vacancy rates have soared to 15 per cent in Central, up from just 2 per cent in 2017, when Li notched the record deal.
Woes at New World are also snowballing. The developer is writing down as much as HK$9.5 billion on its assets for the 2024 fiscal year, thereby hurting a deleveraging plan and adding urgency to the need for cash.
New World’s latest US$400 million bond, issued in early August at a 8.625 per cent coupon rate, is now trading at about 13 per cent yield. Its stock price has almost halved this year.
But Hong Kong’s beleaguered real estate market looked set for some relief after the city cut its base interest rate for the first time since 2020, mirroring the Federal Reserve’s policy easing, Bloomberg has reported.
The Hong Kong Monetary Authority lowered rates by a half percentage point to 5.25% Thursday from the highest level since 2007. That move was widely anticipated as the city has a currency peg to the greenback and follows the Fed in lockstep.
"Tumbling housing prices may finally arrest their decline in 2025 as Fed rate cuts open a path to cheaper mortgage financing,” Bloomberg Intelligence analysts led by Patrick Wong wrote in a note.
The Hang Seng Index rose as much as 1.2%, with the tech and property gauges advancing more than 2%.
The finance hub’s de facto central bank’s decision echoed the Fed’s own move hours earlier to cut rates, though Chairman Jerome Powell cautioned against assuming the half-point reduction set a pace that policymakers would continue.
High borrowing costs have weighed on the former British colony’s economy and housing market in recent years, with home prices falling to the lowest since 2016. The Fed pivot could bring some much-needed respite at a time when Hong Kong developers’ stocks are trading at all-time low valuations.
"When interest rates in the United States and Hong Kong are lowered, it will be beneficial to the operations of Hong Kong enterprises and have a positive impact on the asset market,” Financial Secretary Paul Chan said.
Potential rate cuts of 2 percentage points could trigger more purchases of property as rental yields rise above mortgage rates, according to Raymond Cheng, head of China property research at CGS International Securities Hong Kong.
HSBC Holdings Plc, the city’s largest lender, and peers usually announce their best lending rate later in the day following the HKMA rate decision. If the bank cuts, it would be the first policy easing from HSBC since 2019.
Howard Lee, acting chief executive of HKMA, said at a Thursday briefing that there was room for market interest rates to ease, although he said interest rates will remain relatively high in the foreseeable future.
"The public should carefully assess and continue to manage the interest rate risk while making property purchase, mortgage or other lending decisions,” Lee told reporters.
With the Fed rate cut freeing up space for Asia’s central banks, the focus now shifts to how much and how quickly the region’s rate setters will move, or in some cases whether they ease policy at all.
Hong Kong’s Chan cautioned that the city’s rate decisions "may not necessarily follow the trend” because they also depend on factors including local capital flows and market condition.
Places such as India and the Philippines face inflationary risks, while South Korea may prioritize financial stability. The Bank of Japan is expected to keep borrowing costs unchanged on Friday. - Agencies
