Private credit firms eye new funds for HK property
AS valuations fall and banks pare exposure, some private credit firms are stepping in to invest in large commercial properties and developers in Hong Kong with plans for new fund launches for one of the world's most expensive real estate markets.
Gaw Capital Partners and Blue Mountain Bridge Capital are among those looking to launch new funds for the Asia-Pacific region, including Hong Kong, despite the heightened market volatility induced by US President Donald Trump's trade wars.
In Hong Kong, in particular, access to private credit would be a major, though short-term, relief for many of the developers as anxiety grows about their ability to service debt at a time when both demand and prices have been on a downward trajectory.
While the city has remained unscathed by a destabilising property crisis in mainland China, concerns have swirled about the financial health of a few developers amid rising economic and sector headwinds.
Private credit funds, specialised lenders that finance companies and projects, have boomed into a US$2 trillion industry globally, luring big-time investors as well as wealthy individuals targeting higher yields.
Moreover, some private credit investors could also potentially profit in a default scenario if they manage to sell the collateral at a price higher than their lending, subject to market conditions.
Blue Mountain Bridge, a Hong Kong-based private credit firm, is in the market to raise US$250mil in its first fund with the aim of securing US$150mil by the end of 2025, chief investment officer Raymond Chan said.
'This is the best time to be a private credit investor in Hong Kong,' he said.
In January, Chan's fund closed a US$33.4mil one-year senior loan secured by a newly converted office property in Hong Kong, which pays an annual coupon of 15% and has a loan-to-value ratio of 63%.
In December, Blue Mountain exited a US$64.1mil senior one-year loan. That loan to a developer for refinancing reaped an internal rate of return (IRR), a key gauge of profitability, of 15%, Chan said.
The pay-off is higher than the average net IRR of 11.9% recorded by private credit and direct lending funds over the 2018 to 2023 years, considered a solid performance, according to a S&P Global report last year.
Gaw Capital, a Hong Kong-based real estate private equity fund with US$34.4bil assets under management, is launching a new fund targeting commitment of US$2bil, according to a person with knowledge of the matter.
The fund will invest in both private credit and private equity deals in tier-one and two cities in Asia-Pacific, including Hong Kong, said the person, who declined to be named because the information is not yet public.
Gaw declined to comment.
Sun Hung Kai & Co, a local alternative investment company, launched a new business by co-investing in a US$100mil residential mortgage portfolio from developers in November, and it will close another portfolio soon.
'We've seen both so-called distressed developers and high-quality, low-geared developers approaching us for cashflow or to optimise the usage of balance sheet,' said Gigi Wong, the firm's managing director.
'And there are Hong Kong banks approaching us to sell their secondary loan or problematic loan.'
Liquidity problems
The private credit interest comes against the backdrop of liquidity problems in major city developer New World Development and its smaller peers, triggering concerns of a potential domino effect across the entire sector.
Sliding property sales and rentals as well as high vacancies and interest rates are eroding landlords' ability to service debt, Moody's said in a report in February, prompting banks to scale back both new financing and refinancing to the sector.
Total loans for property development and investment have been declining since 2022, and are down 12.6% year-on-year at the end of 2024, according to the data compiled by the city's de-facto central bank, the Hong Kong Monetary Authority.
'When you have a loan coming due, in today's market, it's very, very hard to get that refinancing done,' said Edwin Wong, partner and head of Asia Credit at Ares Management, a private credit firm.
Breathing room
'We may look at the group level and say, hey, this is something we can think about – to give them that breathing room to ride out the current environment.' The firm is looking at all debt opportunities, from senior to junior.
Commercial property has been the worst affected in Hong Kong with record vacancy rates of close to 20%, hurt by an oversupply and grim economic outlook, and prices have dropped 40% since the 2019 peak, according to CBRE data. Some distressed commercial properties were transacted last year at 60% lower than peak prices.
CBRE estimated the funding gap – driven by changes in capital values due to repricing and rental adjustments – in Hong Kong between 2025 and 2027 to be US$720mil across the office, industrial and retail sectors.
Besides asset managers and investment firms, family offices and wealthy individuals are entering the private credit market, attracted by higher yields compared with direct investment in the real estate market, law firm JSM partner Jasmine Chiu said.
Due to growing competition, interest rates for private credit have come down to the high single and low double digit ranges, from mid-high teens in 2023.
However, some firms are not rushing into deals, said market participants, as they are wary of gaps in valuation expectations and the risks involved.
Exercise caution
Raffles Family Office's head of investment advisory Sky Kwah said investors should exercise more caution when they structure deals, to look for lower loan-to-values, tighter covenants and more equity cushion.
Otherwise, Kwah said, the private credit firms could take a hit if the property market faces further corrections.
Because of the growing competition among private credit funds, 'some lenders may be forced to accept looser covenants or lower quality collateral to deploy the capital,' he said, adding borrowers with weaker fundamentals may pose risks. —Reuters
Clare Jim and Kane Wu write for Reuters. The views expressed here are the writer's own.
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