Investment funds eye deeper discounts, fire sales as distress mounts in Hong Kong property sector
- A lot of capital waiting to pick up Hong Kong assets at 30 to 40 per cent discount, according to CBRE
- Supply of distressed assets is limited, logistics properties in demand amid lockdowns
Hong Kong’s cash-strapped property owners have been willing to sell their assets at a 20 per cent to 30 per cent discount as the economic fallout from the coronavirus pandemic mounts. Some investment funds are waiting out for bigger fire sales.
London-based real-estate investment fund manager Nuveen Real Estate said some assets had been priced at around 20 per cent to 30 per cent clearing even before the pandemic hit, as holders buckled under months of anti-government protests.
“There are some non-prime assets in decentralised locations in Hong Kong that are being offered for sale as sellers’ financials have been compromised by business shortfalls elsewhere and the need to raise cash,” said Harry Tan, head of research for Asia-Pacific at Nuveen. He declined to reveal more details about these assets.
Can Hong Kong’s free-falling real estate market avoid the cliff?
Some of the extreme cases included a jeweller’s shop on the Park Lane Shopper’s Boulevard near the Tsim Sha Tsui police station, according to Land Registry data. It was sold last month at HK$40 million (US$5.2 million) for a record HK$30 million loss including expenses.
“It is true that a lot of ready capital is looking for distressed assets to buy,” said Reeves Yan, executive director, capital markets at property consultancy CBRE Hong Kong. “Generally, they are expecting a discount of 30 per cent to 40 per cent” in this environment, he added.
Still, there is a very limited supply of distressed assets in the market given the low holding costs and strong financial fundamentals of many Hong Kong owners, he added.
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Before the coronavirus pandemic, Asia-based institutions, listed vehicles and private-equity funds had US$250 billion in dry powder, ready to be deployed for commercial real-estate assets in the next three years, analysts said.
Private-equity funds alone have raised an estimated US$38 billion in the two years through September last year, according to Knight Frank. The was more than seven times the amount raised in 2007 and 2008 before the global financial crisis.
Not all buyers are ready to pounce. Some investors are focused on managing their own portfolios and protecting their current income streams, said Neil Brookes, head of capital markets for Asia-Pacific in Hong Kong at Knight Frank.
Hong Kong shop owners willing to sell even if it means incurring a loss of HK$6 million
“Feedback from our major regional clients is that acquisitions are firmly on the agenda once they have stabilised their own positions,” he said.
Investment activities are expected to improve as there might be more assets for sale as conditions normalise, particularly from landlords facing a liquidity pinch, according to Henry Chin, head of research for Asia-Pacific at CBRE. Sale and leaseback of assets could materialise, he said.
“Based on what we gathered, Asian institutional investors continue to look for opportunities,” Chin said. “Fund managers are looking for bargains and remain active. They might focus on their domestic market for now since the travel restrictions are still in place.”
One sign pointing to investors on the prowl in the region is a deal involving Blackstone Group. The New York-based real-estate investor is in talks to buy and privatise Hong Kong-listed Chinese developer Soho China for about US$4 billion, Reuters reported last month.
Logistics assets, especially data centres, are likely to be preferred targets, as lockdowns all over the world have underpinned their value with companies directing their employees to work from home as part of business continuity plans.
Li & Fung, the world’s biggest supply chain manager, is being targeted for privatisation by the founding Fung family and Singapore-based logistics group GLP, according to stock exchange filings last month.
“We are seeing a lot of investors indicating that they are willing to look beyond a short time hit in the economy to get into opportunities where they can’t normally get, such as e-commerce and major offices,” Brookes of Knight Frank said. “In general terms, Asia is in a better position than the US and Europe to lead the recovery post coronavirus.”
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