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

Another 34% discount. The haste with which the creditors want to carry out the sale adds to the darkness.

From Nick Corbishley for WOLF STREET:

On Monday, Hong Kong-based billionaire Pan Sutong suffered the ultimate disgrace. The jewel of its real estate empire, the 28-story Financial Global Center, which houses its real estate development firm, Goldin Financial Holdings, was launched by its creditors who filed claims for $ 495 million in debt repayment at it July. The tender sale was entrusted to Knight Frank, who estimates it should be made somewhere in the HK $ 12 billion region. That would represent a discount of 34% on the HK $ 18.3 billion that Goldin valued the property at in December 2019.

The rush with which creditors are seeking to complete the sale adds to the darkness that pervades the commercial real estate sector in Hong Kong.

Just over a month ago, another Hong Kong real estate baron, Chan Ping-chi, had to accept a 35% discount on his stake on the 42nd floor of the center office. Chan was part of a consortium of local real estate entrepreneurs who wanted to capitalize on the ever-increasing property prices in Hong Kong. To that end, they bought 75% of the 70-story building in front of Hong Kong’s richest man, Li Ka-Shing, for $ 5.2 billion in 2018, making it the most expensive skyscraper in the world.

“There’s a saying in Hong Kong real estate circles that when the richest man in town, Li Ka-Shing, sells, you don’t want to be the buyer,” says the Japan Times.

At first, the short-term flipping of the consortium’s properties was extremely lucrative. In the first year, they dumped more than eight floors and a dozen office suites for about $ 1.3 billion, making hundreds of millions of dollars in profit. According to Real Capital Analytics, the provider of real estate data, Chan’s heavily discounted sale this year is the only transaction recorded to date. Almost a fifth of the building is empty and rents have fallen by around 20% compared to the previous year.

Both Chan and Pan took on huge amounts of new debt to fuel their respective real estate problems. In the case of Chan and his cohorts, they reportedly financed their purchase of the center with bonds that paid interest rates in excess of 15%. But last year prices stopped rising and then started falling when a confluence of factors hurt the city’s economy.

Beijing imposed capital controls on funds flowing out of China and deprived the real estate market in Hong Kong of much of its lifeblood. US-China trade tensions escalated and Hong Kong remained in the middle. And the city has been rocked by student protests that recently hit the immobile force of the Chinese Communist Party. And now there is the virus crisis.

The Hong Kong economy is currently in the deepest recession ever recorded. Office rents are falling, vacancy rates are rising, and the value of some of the world’s most expensive commercial properties is falling.

According to Jones Lang LaSalle Inc., the values ​​of class A office buildings in the city fell 7% last year, the first drop since 2008. With Covid-19 thrown in the blender this year, they could see them drop by another 20 % fall Commercial real estate services company warned. With office space at a 15-year high of 6% in Central, Hong Kong’s most expensive office district, rents are also falling after 13 consecutive months. In August alone, office rates fell by 2.5% compared to the previous month.

Today is not the best time to be a Hong Kong real estate tycoon, especially if your real estate empire was built quickly during the dizzying height of the city’s multi-decade boom and paid off with a ton of debt that you can no longer service without selling. many of your most valuable assets at discounted prices. Few are as effective as Sutong.

“Coronavirus has nothing to do with it. It’s overfunded, ”a person familiar with the situation told the Financial Times. “In my opinion, he is overwhelmed to a large extent.”

As of December 31, 2019, Goldin Financial Holdings had liabilities of HKD 18.5 billion (US $ 2.3 billion), of which HKD 11.9 billion (US $ 1.5 billion) was reported in March Interim report were due within one year. To service this debt, the company had total inventory of only HKD 2.4 billion.

In an attempt to keep its main creditors – the Industrial and Commercial Bank of China, Industrial Bank, Shanghai Commercial Bank, and HSBC – at bay, Goldin has dumped assets as soon as possible. In April, Pan even remodeled his own home on Hong Kong’s Deep Water Bay. In July, Goldin sold vacant land on the unique runway of Hong Kong’s former Kai Tak Airport for $ 450 million, 21% less than two years ago.

Last month, the sale of Goldin’s factoring division raised an additional $ 260 million. Pan even applied to Li Ka-shing for a rescue. Although the bailout should have been carried out, it has not stopped creditors from starting the liquidation of its most prized assets.

On Friday, Goldin announced that it is anticipating a loss of HKD 6.1 billion ($ 790 million) for the fiscal year ending June 2020. In response, Goldin stocks fell to HKD 1.01 ($ 0.13) before being suspended. Shares have lost more than two-thirds of their value over the past year, down 97% from around HK $ 15 five years ago. By Nick Corbishley for WOLF STREET.

UK office workers are expected to return to work from home, retailers are not paying rents and UK commercial property owners are sinking deeper into the quagmire. Read on … Commercial Real Estate Fallout is even home to the Queen of England

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