Via Wolf Street

Another 34% markdown. The haste with which creditors want to execute the sale adds to the gloom.

By Nick Corbishley, for WOLF STREET:

On Monday, the cash-strapped Hong Kong-based billionaire Pan Sutong suffered the ultimate ignominy. The jewel of his real estate empire, the 28-storey Financial Global Centre, which houses his real estate development firm, Goldin Financial Holdings, was put on the market by his creditors, who, seeking repayment of $495 million of debt, took claim of it in July. The sale, under tender, has been entrusted to Knight Frank, which estimates that it should fetch somewhere in the region of HK$12 billion. That would represent a 34% markdown on the HK$18.3 billion at which Goldin had valued the property in December 2019.

The haste with which the creditors want to execute the sale adds to the gloom pervading Hong Kong’s commercial real estate sector.

Just over a month ago, another liquidity-challenged Hong Kong property baron, Chan Ping-chi, was forced to accept a 35% discount for his stake of the 42nd floor of the Center office. Chan was part of a consortium of property-flipping local entrepreneurs who sought to capitalize on Hong Kong’s ever-rising property prices. To that end, they bought 75% of the 70-storey building off Hong Kong’s richest man, Li Ka-Shing, in 2018 for the sum of $5.2 billion, making it the world’s most expensive skyscraper.

“There’s a saying in Hong Kong property circles that if the city’s richest man, Li Ka-Shing, is selling, you don’t want to be the buyer,” the Japan Times points out.

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To begin with, the consortium’s short-term property flipping was hugely lucrative. In the first year, they offloaded more than eight floors and a dozen office suites for about $1.3 billion, generating hundreds of millions of dollars in profit. But this year, Chan’s heavily discounted sale is the only transaction thus far recorded, according to property-data provider Real Capital Analytics. Almost one-fifth of the building stands empty and rents are down around 20% from a year ago.

Both Chan and Pan took on huge volumes of fresh debt to fuel their respective property binges. In the case of Chan and his cohorts, they reportedly financed their purchase of the Center with bonds paying interest rates of over 15%. But last year, prices stopped rising, and then began falling, as a confluence of factors pummeled the city’s economy.

Beijing imposed capital controls on money flowing out of China, depriving the Hong Kong property market of much of its life blood. Trade tensions between the U.S and China began escalating, leaving Hong Kong slap bang in the middle. And the city was rocked by student protests, which recently met the immovable force of the Chinese Communist Party. And now, there’s the virus crisis.

The Hong Kong economy is now in the throes of its deepest ever recession on record. Office rents are slumping, vacancy rates are rising and the value of some of the world’s most expensive commercial real estate is plunging.

Values of class-A office buildings in the city fell last year by 7%, the first fall since 2008, according to Jones Lang LaSalle Inc. With Covid-19 thrown into the mixer this year, they could fall an additional 20%, the commercial real estate services company warned. With office vacancies at a 15-year high of 6% in Central, Hong Kong’s priciest office district, after rising for 13-straight months, rents are also heading down. In August alone, rates for offices fell by 2.5% compared to the previous month.

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Today is not the best time to be a Hong Kong property tycoon, especially if your property empire was quickly assembled at the dizzying zenith of the city’s multi-decade boom and paid for with bucket loads of debt you can no longer service without selling off, at discount prices, many of your most valuable assets. Few are quite as leveraged as Sutong.

“Coronavirus has nothing to do with it. He is overleveraged,” a person familiar with the situation told The Financial Times. “My assessment is he is over-geared in a huge way.”

By December 31, 2019 Goldin Financial Holdings had HK$18.5 billion ($2.3 billion) in total liabilities, of which HK$11.9 billion ($1.5 billion) was due within a year, according to an interim report released in March. To service that debt, the company had total cash on hand of just HK$2.4 billion.

To try to keep at bay its main creditors — Industrial and Commercial Bank of China, Industrial Bank, Shanghai Commercial Bank and HSBC — Goldin has been offloading assets as quickly as it can. In April, Pan even remortgaged his own home in Hong Kong’s Deep Water Bay area. In July, Goldin sold an undeveloped parcel of land on the one-time runway of Hong Kong’s former Kai Tak airport for $450 million, 21% less than it had paid for it just two years earlier.

Last month, the sale of Goldin’s factoring division raised an additional $260 million. Pan even requested a bailout from Li Ka-shing. Even though the bailout is supposed to have gone through, it hasn’t stopped creditors from beginning the process of liquidating his most valuable assets.

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On Friday, Goldin announced that it expects to post a loss of HK$6.1 billion ($790 million) for the financial year ending June 2020. In response, Goldin’s shares fell to HK$1.01 (US$0.13) before being suspended. The shares have lost more than two-thirds of their value in the last year and are down 97% from around HK$15 five years ago. By Nick Corbishley, for WOLF STREET.

UK office workers are again told to work from home, retailers don’t pay rents, and UK commercial property owners sink deeper into the mire. Read… Commercial Real-Estate Fallout Even Douses the Queen of England

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