Dwindling numbers: People shopping in Tsim Sha Tsui, a bustling shopping hotspot, in Hong Kong. The country’s central business district’s office vacancy is at a record high. — Reuters
HONG KONG dazzles with its soaring skyscrapers and swanky shopping malls, and the city has its bankers to thank.
Over the years, landlords routinely relied on banks to finance ambitious projects and expected good relationships to remain. But lenders are getting nervous.
Next year, close to HK$200bil (US$25.6bil) of bank loans taken out by Hong Kong’s property developers will be due, and only 15% of them have been – or are close to being – refinanced, according to HSBC Holdings Plc estimates.
Whether banks will continue lending to the business elites has become a hot issue, as commercial real estate woes plague the world’s biggest cities.
In late August, New World Development Co halted a brutal slide in its bond prices after saying it had secured HK$30bil of low-interest bank loans.
The selling had been triggered by a little-known blogger who accused the builder of borrowing at 11% to 12% in private markets.
Already, some lenders are stepping back from smaller, leveraged landlords.
In September, Lai Sun Development Co, whose holdings include Ocean Park Marriott Hotel and the Michelin-starred Italian restaurant 8 1⁄2 Otto e Mezzo Bombana, only managed to roll over 80% of a HK$3.6bil four-year loan, originally taken out to build the Marriott resort.
HSBC subsidiary Hang Seng Bank Ltd and DBS Group Holdings Ltd are no longer on the deal.
One month later, just about 75% of a HK$4.2bil loan, backed by Harborside HQ, a grade-A office building in Kowloon Bay, was refinanced.
Empty offices
Hong Kong central business district’s office vacancy is at a record high. Hong Kong is not back to its old days.
In a recent survey, only one in three firms expect rising business turnover next year.
Office vacancies in the central business district are at a record high.
On the retail front, tourist arrivals have ramped up to a mere 60% of the 2018 level, while residents head north every weekend to dine and shop, taking advantage of mainland China’s deflationary environment.
Retail sales are only back to 84% of the 2018 level, before the city got hammered by the 2019 pro-democracy movement and then Covid-19.
Good old days
Hong Kong retail sales have not fully recovered.
Financial metrics aside, loan officers can tell many of the urban rejuvenation projects are on shaky ground.
Hysan Development Co, the biggest landlord in Causeway Bay – once the world’s most expensive shopping district – is working on a mega development in the neighbourhood, financed in early 2022 by a green loan worth HK$13bil.
The total cost, including land and construction, is estimated at HK$25bil, while annual capital expenditure leading to the scheduled 2026 completion is expected to soak up half of Hysan’s operating cash flow.
Yet Causeway Bay is a shadow of its glorious past. During a recent visit, I was amazed how empty Hysan Place, a luxury shopping and office centre opened just a decade ago, was at 8pm.
Moody’s Investors Service recently lowered its outlook to negative, citing Hysan’s elevated leverage.
Kai Tak, the city’s former commercial airport that is now being developed into a prime business district, is also problematic.
The area has undergone several rounds of urban planning revisions.
Proposals for a monorail were set aside, while residents fought with the government over plans to build temporary public housing units.
These changes were met with anemic sales, and HK$47bil of project loans, taken out by the likes of Wheelock Properties Ltd, are due over the next two years, according to HSBC.
Granted, Hong Kong banks have incentives not to rock the boat. Pulling loans will trigger a market meltdown, top tenants to flee, and possible fire sales and asset write-downs.
This will eventually come back to bite the lenders themselves.
Case in point: As of the first half, HSBC had US$44bil of commercial real estate loans booked in Hong Kong, including an US$8.1bil exposure to mainland China, which in turn accounted for almost all of the bank’s stage three assets, or those that are non-performing and carry substantial credit risks.
In other words, HSBC hardly put aside any credit loss provisions for their commercial real estate exposure in Hong Kong.
Going into 2024, Hong Kong’s commercial bankers will have an uneasy dance with the property tycoons.
They know the numbers don’t work for the city’s ambitious commercial real estate projects, but do they really want to challenge the status quo?
The best hope then, is that the Federal Reserve will cut rates aggressively and a flood of liquidity will revive the financial centre. — Bloomberg
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. The views expressed here are the writer’s own.
