Hong Kong Banks Cut Financing to Struggling Property Developers

Summary

    Major Hong Kong banks have ceased fresh financing to highly leveraged or weak property companies, forcing them to seek costly loans in the private credit market. As housing costs are anticipated to rise, this could be a challenging year for developers. The Property Index dropped by 30% in 2023, suggesting a cautious outlook. The decline in house prices is anticipated to continue, exacerbating the woes of developers. Private credit providers are patching the funding deficit, and despite the challenges, most developers are expected to avoid defaults.

Hong Kong Property Market Facing Financial Challenges

In a recent development, major banks in Hong Kong have stopped providing funding to the city’s highly indebted or vulnerable property companies. Four sources familiar with the matter have indicated that developers are being compelled to look for pricier loans in the private credit market.

Uncertain Future for Hong Kong Property Market

The once-thriving property market in Hong Kong faces growing uncertainty with many banks either decreasing pre-existing loans or asking developers to provide additional collateral, according to sources.

Consequently, the cost of funding is projected to rise, with lacklustre home sales and a record high in office vacancy rates, making this year even more difficult for developers than the previous one.

Investor Sentiments

Investors do not anticipate a default from Hong Kong developers like their mainland China counterparts. However, they are also not optimistic about a swift sector rebound. The Property Index plunged 30% in 2023 and 60% from its peak in April 2019, indicating a cautious outlook.

Office Space Vacancy Rates

UBS and Citi predict a 10% drop in house prices this year, following a 20% decrease from the peak in 2021, while the vacancy rate for Grade A office space is at a record high of 16.4%.

Struggle Against Rising Funding Costs

Developers have struggled against surging funding costs after years of affordable loans. The one-month HIBOR interbank lending rate in Hong Kong rose to its highest since 2007 at 5.66% in November, a stark contrast to the 0.2% rate in early 2022.

Reducing Risk Exposure

Despite these challenges, developers are expected to avert defaults thanks to lower debt ratios compared to mainland China. Several commercial banks have reduced their exposure to the sector, nervous about developers’ repayment capacity, as expressed by individuals in the credit market and real estate industry.

Private Credit Providers

Private credit providers are bridging the funding gap caused by the banks. Developers have increasingly turned to them since last year due to their inability to borrow from banks.

Investors Remain Cautious

Last week, Citi drastically cut the rating and target prices for several property firms warning of possible negative cashflows due to high capital expenditure. This continues to create caution among investors.

Forex Impact

In relation to Forex or trading, these real estate market fluctuations could impact Hong Kong’s financial sector, possibly affecting HKD-related assets.

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