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Commentary: The Fed Is making Hong Kong’s billionaire landlords anxious

HONG KONG: Among those looking forward to the US Federal Reserve’s interest rate cuts, few are as anxious as Hong Kong’s property tycoons who are now dealing with sluggish home sales, empty office buildings, and mutinous tenants demanding lease renegotiations. 
About 60 per cent of listed property companies’ debt is borrowed at floating rates. Banks charge New World Development an average 1.1 to 1.2 per cent over Hong Kong Inter-bank Offered Rate (HIBOR), whose movements track the fed fund rate because of the Hong Kong dollar peg.
A one percentage-point rate cut can save chief executive officer Adrian Cheng, a third-generation heir from a tycoon family, HK$1.1 billion (US$141 million) and improve earnings by a third, according to Morgan Stanley estimates.
New World, one of Hong Kong’s most indebted developers, paid HK$2.5 billion in financing costs in the second-half of 2023, eroding 44 per cent of the firm’s operating profit. 
But more importantly, the Fed’s easing cycle can start to help big landlords make an investment case for the assets they try to sell, or use as collateral for bank loans. Currently, the city’s entire real estate market – from residential to retail to offices – suffers from negative carry, in that the rent an owner can expect to collect is nowhere close to paying for financing costs.
Leasing out Grade-A offices, for instance, yields on average only about 3.2 per cent, not enough to cover the one-month HIBOR’s 3.9 per cent. 
Already, the negative math is giving landlords headaches with creditors. Consider The Center, an office tower in the Central business district that billionaire Li Ka-shing sold for US$5.2 billion in 2017. Mainland builder Hopson Development has been sounding out private credit funds to refinance a HK$1.3 billion loan due this month.
The collateral, consisting of two floors at The Center, could sustain only a HK$700 million deal, Debtwire reported in May. The amount they can borrow may be even lower now. Office vacancy rates have soared to 15 per cent in Central, up from just 2 per cent in 2017, when Li notched the record deal. 
Woes at New World are also snowballing. The developer is writing down as much as HK$9.5 billion on its assets for the 2024 fiscal year, thereby hurting a deleveraging plan and adding urgency to the need for cash.
New World’s latest US$400 million bond, issued in early August at a 8.625 per cent coupon rate, is now trading at about 13 per cent yield. Its stock price has almost halved this year. 
Hong Kong’s property tycoons can’t wait for the Fed to act – in fact, the bigger and the more front-loaded rate cuts are, the better. The question now is whether some can sit tight and avoid painful fire sales while Fed chair Jerome Powell and his colleagues take their time to deliberate the scale and speed of the easing cycle. The landlords’ anxiety is palpable.

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