How many times can one flat be used as collateral to raise money in Hong Kong?
The owners of a super-luxury Hong Kong flat that was recently foreclosed had used another flat on the same floor to use as collateral six times to raise money for more investments even as it stopped paying instalment on the first one.
Aggressive property investors like United Sunrise Properties – whose 2,476 square feet Unit B on the 39th floor of the prestigious 39 Conduit Road luxury development in Mid-Levels was foreclosed and will be auctioned off for HK$37 million less than the price at which it was bought in 2014 – had once bet recklessly on Hong Kong property and are finding themselves out of pocket as once-sizzling home prices lose steam.
When the going was good, these companies repeatedly refinanced their holdings and ploughed the money into even more properties and securities markets. But as the market began to cool since late last year, they – and those who lent to them – are struggling to square their finances.
“They used their properties like ATMs. Some didn’t think twice before remortgaging the properties at interest rates of 20 to 30 per cent,” said veteran property investor Jacinto Tong, who manages a property portfolio of HK$40 billion.
United Sunrise, jointly owned by mainlander businessman Yin Cong and Hong Kong partner Chan Wai-yun, used two luxury flats, including the foreclosed Conduit Road flat, to secure loans of about HK$100 million from more than six finance companies. It also owned four office units, all of which had to be foreclosed and sold off last month at a steep loss.
“Some of these distressed assets are owed to more than 10 creditors,” said Henry Choi, managing director of Century 21 Surveyor, which is the auctioneer for the 39 Conduit Road unit on April 28. The same property would be used as collateral to raise money at steep interest rates from multiple finance companies with poor due diligence. In some cases, he said, all it needed to raise money was a Hong Kong identity card.
Some of the units pledged to these creditors included small units worth HK$2-3 million, he said, adding that this was an important factor driving the surge in demand for small flats up until September.
Selling off foreclosed assets of a failed investor might clean up the books for the main mortgage lender, but not the finance companies with whom the investors pledged the mortgage to raise more money. Choi said that for foreclosed properties successfully auctioned off, only the first creditor gets the top priority when it comes to receiving the sales proceeds.
After the first creditor gets its share of the proceeds, the balance is divided among other creditors. In the worst-case scenario, creditors at the bottom of the pyramid may not get anything at all.
“We have seen more and more finance companies suing defaulters and trying to repossess the properties,” Choi said.
On Thursday, Yin and his partner’s Conduit Road flat Unit B and a car parking space at 39 Conduit Road luxury development will be auctioned with an opening bid of HK$98 million. The firm, according to Land Registry, bought another flat, Unit A, on the 39th floor at 39 Conduit Road for HK$135 million and a parking space for HK$2.8 million the same day it purchased the Unit B in 2014.
Even though the owners stopped paying mortgage for Unit B after the second instalment, it pledged Unit A six times and raised a total loan amount of HK$93 million between July 2014 to January this year. As of January, it still owed Success International Finance and AA Companies Finance HK$21.6 million.
United Sunrise went on to buy a 514 sq ft flat at Grand Austin in Tsim Sha Tsui for HK$10.2 million in July 2014 and managed to secure a HK$10 million loan from a finance company in January this year. Last month, the firm’s four office units at Shun Tak Centre were sold as distressed assets for HK$115 million, HK$5 million less than the purchase price two years ago.
“These are only the tip of the iceberg. Many more such default cases will emerge as property prices fall,” said Tong.
“If the surrendered property is not enough to square the loan, the lenders will sue the property investors and force them to sell their other holdings, or go bankrupt,” said Victor Lai Kin-fai, chief executive of consultancy Centaline Professionals.
Hong Kong Monetary Authority (HKMA) deputy executive Arthur Yuen recently said in an article that 45 banks had offered credit facilities to 59 finance companies as of the end of December 2014. Twenty-nine of these finance companies, including most of the relatively active players in the market, were engaged in property-related lending businesses.
Responding to queries from the South China Morning Post, the HKMA said the total amount of loans at finance firms with property pledged as collateral stood at approximately HK$9.2 billion, from HK$8.6 billion as of June last year, representing around one per cent of the total outstanding residential mortgage loans of the banking sector in Hong Kong.
“This shows that the amount of mortgage loans provided by finance companies will not have implications for the development of the local property market,” HKMA said.
Tong, however, said believes the number of active finance companies is far higher than what HKMA’s figures suggest, saying hundreds of small lenders are into it.
“Many of them started out only last year to tap the growing demand for mortgage financing after the banks tightened the loans. Last year’s frenetic buying of small homes was partly fuelled by the money provided by these finance companies,” he said.
According to the HKMA, finance companies are beyond its ambit of supervision and are governed by the Money Lender Ordinance, which is enforced by the Commissioner of Police. Offering loans at interest rates exceeding 60 per cent per annum is an offence under the ordinance.
Tsang Kit-chun, managing director of AA Property, which also focuses on distressed assets, said there are about 120 foreclosed properties available for auction at the moment, nearly double than a year ago.
“It is the highest we ever seen since the global financial crisis in 2008,” he said. Some 6,000 distressed properties came on the market during the Sars epidemic, he said.
“About 40 to 50 per cent of these distressed assets have come from finance companies in the past 12 months. It used to be banks,” said Tsang.