Large distressed Hong Kong realty deals set to rise as more sellers accept losses

By Clare Jim

HONG KONG (Reuters) - Higher-for-longer interest costs and ample retail and office vacancies have pushed the sales of distressed investment properties in Hong Kong higher in the second quarter, a trend realtors expect to continue in an already tepid real estate market.

An increasing acceptance among lenders and landlords to book steeper losses has driven up the number of these deals in a market forecast to remain lacklustre due to the higher interest rates and falling rental income, realtors said.

Distressed properties are either on the brink of foreclosure, or already have been repossessed by the mortgage lender. They could offer an attractive investment because of their usually relatively lower prices.

Half of the 22 investment properties transacted in the second quarter were foreclosure sales or those that sold at a loss, according to data by real estate services firm Colliers.

That compares with a quarter in the previous quarter and 26% for all of 2023. The company counts only deals valued at more than HK$100 million ($12.80 million).

"We'll see more distressed deals and discounted stocks in the market in the second half," said Colliers Hong Kong co-head of capital markets & investment service Thomas Chak.

"That'll put pressure on market prices."

Colliers set up a restructuring services team in Hong Kong last year, its second in the Asia-Pacific after Australia, to meet rising demand from lenders to recover their loans.

"When rates start going down, it could be a turning point," said Reeves Yan, head of Hong Kong capital markets of real estate consultancy CBRE. "The number of distressed deals could stabilise."

CBRE expects office prices, which have already fallen more than 50% since peaking in mid-2019, to ease about 5-10% for the whole of 2024.

Yan said buyers in most of the large office deals in the first half were foreign investors, while funds and mainland Chinese companies were not as active due to high financing costs and their own financial issues.

Collier's Chak also said some family offices from Singapore, Malaysia, mainland China and Hong Kong were putting more money into Hong Kong real estate in the past year, with demand for retail space faring better than office space, where vacancies are at a record high 16% amid an increase in new supply.

STEEP LOSSES

Not all lenders, however, are keen to sell distressed properties in the current market.

Realtors said Chinese state-owned financial institutions are usually more reluctant to book losses than smaller local banks, and would rather put sales on hold until the real estate market recovers.

For example, lenders to embattled developer China Evergrande Group's headquarters in Hong Kong, led by state-owned China Citic Bank Corp Ltd, have yet to decide whether to offer the property for sale a third time because the valuation has dropped below their loan value of HK$7.6 billion loan, according to an industry source.

Two tender sales of the office tower in the second half of 2022 have lapsed, Reuters has reported. Citic Bank did not immediately respond to requests for comment.

Currently, a harbourfront office tower in the Kowloon peninsula has been put up for another tender sale that will close next month, with the expected selling price falling by a third compared to last year.

The lenders - seven mostly local banks that include Hang Seng Bank - have together extended a HK$4.5 billion loan pledged to the property, called the One Harbour Gate East Tower and which was formerly owned by Chinese property tycoon Chen Hongtian.

The banks now expect to sell the office tower for just HK$3 billion after an unsuccessful tender offer last year, according to a person with direct knowledge who declined to be named as the information remained confidential.

Hang Seng Bank did not immediately respond to requests for comment.

($1 = 7.8099 Hong Kong dollars)

(Reporting by Clare Jim; Graphics by Kripa Jayaram; Editing by Anne Marie Roantree and Miral Fahmy)