WHEN Blackstone Inc bet on Hong Kong’s commercial real estate sector in 2014, it bought a 20,000-sq-ft retail space in the bustling Mong Kok district for HK$700mil (US$90mil) to target mainland Chinese tourists seeking brand-name wear.
Today, the space that once housed Forever 21 is valued at less than half that amount and Blackstone is in talks with Taipei Fubon Commercial Bank Co to renegotiate terms of a loan for that property, according to sources. The building’s high profile retail tenant has been replaced by 24/7 gyms and an outdoor gear store.
The soured bet by the world’s largest alternative asset manager offers a glimpse into the risks for global private equity or PE funds that poured US$17bil into Hong Kong’s once-booming commercial real estate market between 2010 and 2019, according to data from Colliers.
From Gaw Capital Partners to Schroders Plc, investors are facing a dilemma: Sink more cash into struggling properties or forfeit them to lenders.
“At the moment, we have not seen many PE firms willing to throw in more money,” said Dick Tang, a director at insolvency and turnaround service provider Perun Consultants.
“Their demand to us is to deal with the redemption issue when they have troubles to withdraw or exit their investments.”
The average price of retail space in the city plunged 41% as of August from a 2018 peak, according to Hong Kong government data. Offices, near their worst vacancy rates, have also tanked 49% in value.
That’s eroding the collateral value behind many bank loans, which could lead to margin calls, refinancing challenges and in more severe cases distressed asset disposals.
Blackstone is still paying the interest for its borrowing and has been in talks with Fubon bank, the sources said. The lender, meanwhile, hadn’t marked down the loan as of the first week of October, one of the sources said.
Other PE firms and investors are seeing similar trends with their portfolios.
Across the Victoria Harbour, Gaw Capital – backed by one of the city’s wealthy families – is running into troubles with its Cityplaza Three and Four commercial assets. In 2019, the firm co-purchased the property for HK$15bil in partnership with Hengli Investments Holding Group Ltd. City-wide political protests and ensuing Covid lockdowns triggered an economic downturn, leading to high office vacancy rates.
Rental income
Rental income from the Cityplaza towers was insufficient for interest payments.
Under such circumstances, Hengli was expected to cover 35% of the shortfall, while Gaw contributed the remaining 65% – in proportion to their stakes in the properties.
But since September 2023, Hengli hasn’t put in anything, prompting Gaw Capital to cover the full gap with its own funds, sources said in June last year.
After about a year of negotiations with banks, Gaw capital finally managed to amend the loan in May. The banks agreed to provide a reworked facility that carries an initial tenor of two years with an automatic one-year extension. Another two-year extension is available at the lenders’ discretion.
In early October, Gaw Capital chairman Goodwin Gaw said during an interview with Bloomberg TV that he was still “very bullish” about Hong Kong for the next 12 to 18 months.
Preserving value
“Many fund managers will try their best to work with banks to preserve the value of the asset as much as possible,” said Thomas Chak, head of capital markets and investment services at Colliers Hong Kong.
That’s “contrary to the idea that funds would easily drop the keys,” as they will try to preserve their relationships with the banks, he added.
At times, the decision isn’t in the hands of the funds themselves. Some investors behind these PE firms have been hesitant to commit more capital, concerned that there may be little to no equity value remaining.
Also, banks can grow impatient with no market turnaround in sight. Some are now calling defaults and appointing receivers to sell the underlying assets – even at a loss.
Within just a few months, two properties managed by Schroders’s real estate investment arm were seized by bank creditors. The firm faced a third challenge relating to a loan for a three-floor commercial space at Harbourfront Landmark in Hong Kong’s Hung Hom district, Bloomberg reported earlier.
In a statement to Bloomberg News, a Schroders spokesperson said the loan for Harbourfront Landmark has been extended.
Looking for opportunities
The firm is “actively looking for opportunities” particularly in residential property as it sees the local real estate market bottoming out, the spokesperson added.
In more complex situations, banks have struggled to enforce their loans. When Phoenix Property Investors struggled to honour the payment of more than HK$1bil loans for Cubus, a commercial building Causeway Bay last year, more than 10 lenders were unable to reach a consensus on whether to take action and call the loan default – an unanimous approval from all banks was required. — Bloomberg
Pearl Liu, Trista Xinyi Luo and Apple Ka Ying Li write for Bloomberg. The views expressed here are the writers’ own.