HONG KONG – While New World Development’s mounting debt has captured market attention and shaken one of Asia’s wealthiest families, Hong Kong’s smaller property firms have lenders on even higher alert.

Banks are tightening the screws on mid-sized developers that have at least HK$173 billion (S$28 billion) in debt.

They are demanding stricter refinancing terms, asking for credit enhancements such as collateral or guarantees, and, increasingly, halting new lending altogether, according to people familiar with the matter. 

Local developer Lai Sun Development is facing extra bank scrutiny as it seeks to refinance an October loan, said the people.

Wang On Properties was forced to offer credit enhancements to banks because of cash flow concerns, other people added. 

The shift underscores growing caution in a sector long regarded as a cornerstone of Hong Kong’s economy.

Smaller and mid-sized developers are being squeezed by a mix of high interest rates and plunging asset values, the result of Hong Kong’s deepest property downturn in decades.

As these firms slash spending and rush to offload assets, the fallout is beginning to reverberate beyond their balance sheets.

The pressure threatens to erode bank margins, weigh on the local job sector, and send ripples through overseas markets where Hong Kong developers have long been active players.

What was once a reliable engine of growth is now a source of growing financial fragility.

The lenders are taking extra steps to minimise fallout that is already mounting.

Just in the past days, several Hong Kong lenders were called out by Moody’s for risks in their lending to commercial real estate in the city.

The credit assessor downgraded Dah Sing Bank’s rating and also emphasised asset quality challenges posed by loans to the sector at Bank of East Asia, whose outlook it held at “negative”.

In another sign of growing stress, about HK$46 billion in short-term debt of 11 publicly traded smaller developers in the Asia financial hub is at “risky” levels in the next 12 months, according to a Jefferies Financial Group report in February. 

The Hong Kong Monetary Authority and banks are handling developers’ financing needs on a case-by-case basis, Hong Kong Financial Secretary Paul Chan said in an interview with local media on June 23.

Hong Kong’s listed second-tier developers, including Lai Sun, Far East Consortium International and CSI Properties have racked up at least HK$173 billion in debt, according to the Jefferies report.

That accounts for about 12 per cent of the HK$1.4 trillion loans for property development and investment in Hong Kong by the end of March, according to data from the Hong Kong Monetary Authority.

Some banks have stopped renewing financing terms with a number of small to mid-sized real estate firms altogether, pushing the city’s rich property families to turn to private credit lenders. 

That is affecting companies beyond listed ones.

Parkview, known for its namesake luxury residential development in Hong Kong, obtained a HK$300 million bridge loan from investment firm PAG last month, after banks were reluctant to extend funds, according to people familiar with the matter. 

Tai Hung Fai Enterprises, the property business run by billionaire Edwin Leong, also tapped a security agent firm ran by Dignari Capital Partners‘s Grace Tan for a HK$300 million loan in March, putting up its head office units as collateral, according to filings.

Asset firesale

During the property boom era, Hong Kong’s mid-sized real estate families took on debt more aggressively to fund expansion.

But that left them more vulnerable to a downturn than deep-pocketed conglomerates like Sun Hung Kai Properties and Swire Properties.

The financial hub’s residential values are still hovering around an eight-year low.

The city’s skyscrapers are struggling to find tenants, with grade-A office vacancy rates at a record high of 17.5 per cent in the first quarter and rents expected to drop as much as 10 per cent in 2025, according to CBRE Group.

Companies are rushing to conduct fire sales.

Far East Consortium, which owns residences and offices from Singapore to Australia and Britain, is offering new apartment units for its Pavilia Forest project at below break-even price. 

It is experiencing “one loss at a time” when selling each unit, chairman David Chiu said in November.

The company pledged to cut debt by HK$6 billion in the next 18 months, he added.

More disposals will hit the market.

CSI Properties said in February it planned to offload HK$9 billion of assets in four years.

A month later, Lai Sun Development announced plans to sell HK$8 billion in two years.

“The deterioration in Hong Kong smaller developers’ financial health can fuel a domino effect on the economy,” said Natixis senior economist Gary Ng.

He added that risks include a repricing in collateral, and a collapse in construction activities that would pinch income for the local workforce in a worst-case scenario. BLOOMBERG

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