Hong Kong’s banking and regulatory circles are showing increasing anxiety about the city’s most severe property downturn since the Asian financial crisis.
Over recent months, Hong Kong’s de facto central bank has stepped up its scrutiny of lenders’ handling of troubled loans. Officials are calling banks more frequently to assess their willingness to renew credit facilities, including for smaller developers. At the same time, bankers are revisiting the high valuations tied to collateral supporting hundreds of billions of dollars in weakened property debt.
These developments — described by more than two dozen bankers and property consultants who spoke anonymously — signal growing strain in a sector that remains crucial to Hong Kong’s economy. The real estate slump continues to weigh on growth, even as the financial hub regains momentum in areas such as IPO activity and bond markets.
“What surprised me is the possibility that protections are now extending even to smaller players,” said Jason Bedford, visiting senior research fellow at the East Asian Institute, National University of Singapore, referencing regulators’ interest in credit lines for minor developers. “That’s a pretty alarming signal. It raises the risk that we may be entering a broader extend-and-pretend phase.”
In response to Bloomberg’s queries, a spokesperson for the Hong Kong Monetary Authority (HKMA) declined to discuss individual firms. “It is the HKMA’s long-standing supervisory requirement that banks must manage credit risk prudently,” the spokesperson said. “In general, banks in Hong Kong have been pragmatic in providing credit support to customers.”
Commercial property loans make up roughly 8% of the HK$10 trillion (RM5.33 trillion) in lending across Hong Kong’s banking system, according to S&P Global Ratings. Government data shows local office prices have fallen about 50% from their 2018 peak.
More HKMA Calls to Banks
Despite reassuring the public that the banking system is well-capitalised, the HKMA has become markedly more hands-on with lenders’ decisions.
Since May, multiple banks have received at least three HKMA calls probing their reasons for not joining certain refinancing deals, people familiar with the matter said. Previously, such calls occurred once or twice a year and focused mainly on basic transaction checks.
A notable example is Lai Sun Development Co., which began refinancing a HK$3.6 billion loan in January. After six months of negotiations, only half of the 20 lenders were willing to extend the facility. In the weeks before the loan’s Oct 6 maturity, at least five banks received calls from HKMA officials seeking feedback on concerns about lending to Lai Sun. The regulator communicated its general expectation for lenders to show some sympathy toward distressed borrowers.
The calls were widely viewed as a signal that regulators wanted Lai Sun to receive support. Shortly after, the developer secured a HK$3.46 billion refinancing package.
The HKMA has taken a similar approach in other cases, including deals involving New World Development Co, Emperor International Holdings Ltd, Gaw Capital Partners, and Spring Real Estate Investment Trust.
Spring REIT said it completed refinancing for a Beijing project as part of its normal business cycle. Gaw declined to comment, while Lai Sun and Emperor did not respond.
Tightening Attention on Valuations
Another growing concern: bankers are increasingly questioning what they see as overly optimistic property valuations used to secure commercial loans.
Although commercial real estate prices have plunged, some valuation reports still reflect inflated figures, according to people familiar with the matter.
One case involved the YF Life Tower, located outside Hong Kong’s central business district. The building was refinanced in late 2023 based on a HK$6.24 billion valuation by CBRE Group Inc — nearly unchanged from 2018 levels. Lenders were sceptical because the comparison property used in the assessment was in a far more prime location with a harbour view. Banks subsequently reduced the loan-to-value ratio and cut the loan amount to HK$2.5 billion from HK$3.1 billion.
Jones Lang LaSalle Inc. later produced a similar valuation of HK$6.21 billion.
Another example is Worfu Mall, collateral for a HK$1.5 billion loan that defaulted earlier this year. Under receivership since January, interested buyers have reportedly submitted bids well below half the loan’s value.
“Valuation practices in Hong Kong fall short of global standards,” said Leo Lo, founder of CHFT Advisory and Appraisal. “Landlords, not banks, control the process. They shop around for the most optimistic valuations, and surveyors who don’t play along risk losing business.”
With concerns mounting, some lenders have shifted from semi-annual to monthly valuation reviews.
Uncertain Outlook
While experts generally believe Hong Kong’s financial system is strong enough to withstand short-term shocks, deeper risks remain, prime office rents to decline another 7% through 2026.
“I don’t see any evidence of impending market collapse based on the HKMA’s actions, but regulators are always cautious about the risk of multiple players trying to exit simultaneously,” said Arthur Morris, assistant professor at the Hong Kong University of Science and Technology. “Think of the HKMA as air traffic control — they want to prevent everyone from landing at once.”
