Alternative capital can help entrepreneurs keep hold of high-end Hong Kong properties
26 September 2024
Hong Kong’s ultra-luxury residential property market has been dominated by distressed sales in 2024, highlighting the difficulty some of the city’s leading entrepreneurs have faced in raising capital over the past year. In July, for example, a relatively low-profile business family sold Houses A to D at 26 Plantation Road for HK$1.1 billion (US$141 million), representing a 35% discount to market prices, to repay a HK$1.6 billion private loan secured against the property.[1] The buyer was described by the broker who arranged the sale as “a local with financial strength.”
In another notable fire sale, an ultra-luxury mansion held by a company linked to a top executive of bankrupt China property giant Evergrande Group was seized by receivers and disposed of in May for HK$450 million, more than 40% below its valuation in 2023.[2]
These are just two of several properties snapped up by opportunistic buyers in Hong Kong’s most exclusive neighborhood, The Peak, in the three months ending July 2024 at prices averaging 46% below their Covid-era valuations, according to international property agency Savills.[3] The agency attributed the sharp decline in prices largely to “several instances of distressed sales, where property owners were compelled to sell to settle outstanding debts.”
Figure 1: Significant luxury transactions by average prices, November 2022 to July 2024
Savills added that it expected more financially pressured owners to look to offload “some of their most valuable assets that are rarely on the open market” – an opportunity that it expected would attract plenty of interest from cash-rich buyers.
Selling at the bottom?
Sellers may soon come to regret offloading their properties in distressed deals following the US Federal Reserve’s decision to start cutting interest rates in September. This will not only make their loan repayments more manageable, but also paves the way for Hong Kong mortgage rates to come down.
Hong Kong’s property market has already experienced a bounce after the government scrapped its decade-old property market curbs from April, including removing all extra stamp duties and easing mortgage restrictions.[4] This led to total property sales in the city reaching a ten year-high in April. With interest rates finally coming down, the initial uptick that followed could now turn into a sustained recovery.
High borrowing costs have arguably been the single biggest factor weighing on Hong Kong’s home prices over the past two years. Lower interest rates could bring buyers who have been waiting on the sidelines back to the city’s high-end property market. After all, the fundamentals behind Hong Kong’s sky-high luxury property prices remain firmly in place, including the city’s role in connecting China to the world, its status as a leading global financial center, and its very limited land supply, especially in areas like The Peak.
Another positive sign is that Hong Kong’s rental markets have remained relatively stable, supported by an ongoing influx of professionals that has been helped by government schemes to attract talent from abroad.[5] Property agent Knight Frank predicts this could drive an increase in luxury residential rents of up to 5% this year.
Several analysts, including those at Goldman Sachs, expect Hong Kong home prices to bottom out this year, before reversing direction.[6]
In line with the shifting prospects of the city’s beleaguered property market, the beaten-down stocks of Hong Kong-listed developers may also be worth looking at.
Meanwhile, in Mainland China, the latest sales data shows wealthy buyers have been snatching up luxury homes in Tier-1 cities such as Shanghai, Beijing, Guangzhou and Shenzhen in August following several rounds of easing of property rules this year.[7] Unlike Hong Kong, however, China’s luxury property market is expected to see significant new supply in the second half of 2024, which could cut short the nascent recovery.[8]
Avoiding distressed sales
The recent forced sales in Hong Kong’s ultra-luxury property market underline the risks facing investors who pledge real assets as security for loans. In some cases, access to alternative capital, such as equity-backed financing, can help these investors avoid fire sales by monetizing their long-term shareholdings instead. And in the case of EquitiesFirst’s financing model, borrowers can retain the upside if those shares go on to increase in value.
Access to flexible and convenient financing could prove especially valuable at this juncture, allowing entrepreneurs to raise capital without having to sell luxury properties at prices well below their peak of July 2018.[9]
Long-term shareholders in Hong Kong-listed property developers may also wish to either raise capital to increase their positions ahead of the market reversal or diversify their positions through investments in other sectors, especially as the Hong Kong government looks at more steps to boost the local bourse.[10]
[1] https://www.scmp.com/business/article/3269972/hong-kongs-ho-shun-pun-family-sells-4-homes-peak-us141-million
[2] https://www.scmp.com/business/article/3263513/seized-hong-kong-peak-mansion-linked-china-evergrande-founder-hui-ka-yan-sells-40-discount-us58
[3] https://pdf.savills.asia/asia-pacific-research/hong-kong-research/hong-kong-residential/market-in-minutes-residential-sales-aug-2024-e—final.pdf
[4] https://www.scmp.com/special-reports/article/3271668/how-hong-kong-property-market-bouncing-back-2024-especially-luxury-sector?module=perpetual_scroll_0&pgtype=article
[5] https://www.scmp.com/special-reports/article/3271668/how-hong-kong-property-market-bouncing-back-2024-especially-luxury-sector?module=perpetual_scroll_0&pgtype=article
[6] https://www.scmp.com/business/companies/article/3251739/goldman-sachs-says-hong-kong-home-prices-will-rebound-2025-after-hitting-bottom-year-raises-office
[7] https://www.scmp.com/business/china-business/article/3277646/chinas-ultra-rich-are-snatching-luxury-homes-bet-first-tier-cities
[8] https://www.scmp.com/business/china-business/article/3277646/chinas-ultra-rich-are-snatching-luxury-homes-bet-first-tier-cities
[9] https://www.scmp.com/business/article/3252461/hong-kongs-luxury-homes-market-shows-signs-life-waves-price-discounts-entice-some-bottom-fishing
[10] https://www.reuters.com/markets/asia/hong-kong-leader-says-government-considering-more-steps-boost-stock-market-2024-04-08/
26 September 2024
Hong Kong’s ultra-luxury residential property market has been dominated by distressed sales in 2024, highlighting the difficulty some of the city’s leading entrepreneurs have faced in raising capital over the past year. In July, for example, a relatively low-profile business family sold Houses A to D at 26 Plantation Road for HK$1.1 billion (US$141 million), representing a 35% discount to market prices, to repay a HK$1.6 billion private loan secured against the property.[1] The buyer was described by the broker who arranged the sale as “a local with financial strength.”
In another notable fire sale, an ultra-luxury mansion held by a company linked to a top executive of bankrupt China property giant Evergrande Group was seized by receivers and disposed of in May for HK$450 million, more than 40% below its valuation in 2023.[2]
These are just two of several properties snapped up by opportunistic buyers in Hong Kong’s most exclusive neighborhood, The Peak, in the three months ending July 2024 at prices averaging 46% below their Covid-era valuations, according to international property agency Savills.[3] The agency attributed the sharp decline in prices largely to “several instances of distressed sales, where property owners were compelled to sell to settle outstanding debts.”
Figure 1: Significant luxury transactions by average prices, November 2022 to July 2024
Savills added that it expected more financially pressured owners to look to offload “some of their most valuable assets that are rarely on the open market” – an opportunity that it expected would attract plenty of interest from cash-rich buyers.
Selling at the bottom?
Sellers may soon come to regret offloading their properties in distressed deals following the US Federal Reserve’s decision to start cutting interest rates in September. This will not only make their loan repayments more manageable, but also paves the way for Hong Kong mortgage rates to come down.
Hong Kong’s property market has already experienced a bounce after the government scrapped its decade-old property market curbs from April, including removing all extra stamp duties and easing mortgage restrictions.[4] This led to total property sales in the city reaching a ten year-high in April. With interest rates finally coming down, the initial uptick that followed could now turn into a sustained recovery.
High borrowing costs have arguably been the single biggest factor weighing on Hong Kong’s home prices over the past two years. Lower interest rates could bring buyers who have been waiting on the sidelines back to the city’s high-end property market. After all, the fundamentals behind Hong Kong’s sky-high luxury property prices remain firmly in place, including the city’s role in connecting China to the world, its status as a leading global financial center, and its very limited land supply, especially in areas like The Peak.
Another positive sign is that Hong Kong’s rental markets have remained relatively stable, supported by an ongoing influx of professionals that has been helped by government schemes to attract talent from abroad.[5] Property agent Knight Frank predicts this could drive an increase in luxury residential rents of up to 5% this year.
Several analysts, including those at Goldman Sachs, expect Hong Kong home prices to bottom out this year, before reversing direction.[6]
In line with the shifting prospects of the city’s beleaguered property market, the beaten-down stocks of Hong Kong-listed developers may also be worth looking at.
Meanwhile, in Mainland China, the latest sales data shows wealthy buyers have been snatching up luxury homes in Tier-1 cities such as Shanghai, Beijing, Guangzhou and Shenzhen in August following several rounds of easing of property rules this year.[7] Unlike Hong Kong, however, China’s luxury property market is expected to see significant new supply in the second half of 2024, which could cut short the nascent recovery.[8]
Avoiding distressed sales
The recent forced sales in Hong Kong’s ultra-luxury property market underline the risks facing investors who pledge real assets as security for loans. In some cases, access to alternative capital, such as equity-backed financing, can help these investors avoid fire sales by monetizing their long-term shareholdings instead. And in the case of EquitiesFirst’s financing model, borrowers can retain the upside if those shares go on to increase in value.
Access to flexible and convenient financing could prove especially valuable at this juncture, allowing entrepreneurs to raise capital without having to sell luxury properties at prices well below their peak of July 2018.[9]
Long-term shareholders in Hong Kong-listed property developers may also wish to either raise capital to increase their positions ahead of the market reversal or diversify their positions through investments in other sectors, especially as the Hong Kong government looks at more steps to boost the local bourse.[10]
[1] https://www.scmp.com/business/article/3269972/hong-kongs-ho-shun-pun-family-sells-4-homes-peak-us141-million
[2] https://www.scmp.com/business/article/3263513/seized-hong-kong-peak-mansion-linked-china-evergrande-founder-hui-ka-yan-sells-40-discount-us58
[3] https://pdf.savills.asia/asia-pacific-research/hong-kong-research/hong-kong-residential/market-in-minutes-residential-sales-aug-2024-e—final.pdf
[4] https://www.scmp.com/special-reports/article/3271668/how-hong-kong-property-market-bouncing-back-2024-especially-luxury-sector?module=perpetual_scroll_0&pgtype=article
[5] https://www.scmp.com/special-reports/article/3271668/how-hong-kong-property-market-bouncing-back-2024-especially-luxury-sector?module=perpetual_scroll_0&pgtype=article
[6] https://www.scmp.com/business/companies/article/3251739/goldman-sachs-says-hong-kong-home-prices-will-rebound-2025-after-hitting-bottom-year-raises-office
[7] https://www.scmp.com/business/china-business/article/3277646/chinas-ultra-rich-are-snatching-luxury-homes-bet-first-tier-cities
[8] https://www.scmp.com/business/china-business/article/3277646/chinas-ultra-rich-are-snatching-luxury-homes-bet-first-tier-cities
[9] https://www.scmp.com/business/article/3252461/hong-kongs-luxury-homes-market-shows-signs-life-waves-price-discounts-entice-some-bottom-fishing
[10] https://www.reuters.com/markets/asia/hong-kong-leader-says-government-considering-more-steps-boost-stock-market-2024-04-08/
