Private credit grows faster in Hong Kong's real estate market
Gaw Capital, Blue Mountains raising new funds
Analysts say
HONG KONG, May 7 (Reuters) – With the fall in valuation and the impact of banks, some private credit companies are stepping in to invest in large commercial properties and developers in Hong Kong and plan to offer new fund launch plans to 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 funding for the Asia-Pacific region, including Hong Kong, despite the increased market volatility caused by U.S. President Donald Trump's trade war.
Especially in Hong Kong, with increasing anxiety about many developers, their service capabilities for many developers have become increasingly rapid as demand and prices are falling, thus gaining opportunities for private credit.
Despite the city's steady stability over the real estate crisis in mainland China, the financial situation of some developers is worrying due to economic and sector headwinds.
Private credit funds are professional lenders for financial companies and projects, thriving $2 trillion worldwide, attracting large investors as well as wealthy people with higher yields.
Additionally, some private credit investors can also make a profit by default if they manage to sell collateral at a price higher than market conditions.
Chief Investment Officer Raymond Chan said Blue Mountain Bridge, a Hong Kong-based private credit company, raised $250 million in the market in its first fund with the goal of earning $150 million by the end of 2025.
“This is the best time to become a private credit investor in Hong Kong,” he said.
In January, Chen Fund concluded a $33.4 million year-on-year senior loan obtained by a new converted office property in Hong Kong, which has an annual coupon of 15% and a loan-to-value ratio of 63%.
In December, Blue Mountain withdrew from its $64.1 million senior year loan. Chan said loans refinancing to developers received internal rate of return (IRR), which is 15% profitability.
According to a report by S&P Global, the earnings are higher than the average net income of the average net income machine for private credit and direct loan funds between 2018 and 2023, which is considered solid performance.
GAW Capital, a Hong Kong-based real estate private equity fund with $34.4 billion in assets, is launching a new fund targeting $2 billion to launch at $2 billion, according to people familiar with the matter.
The fund will invest in private credit and private equity transactions in the Asia-Pacific region, including Hong Kong and 2 cities, he said he declined to be named because the information has not been made public.
Local alternative investment firm Sun Hung Kai&Co is engaged in a new business in November by co-investing the developer’s $100 million residential mortgage portfolio and will close another portfolio soon.
“We have seen so-called distressed developers and high-quality low-gear developers, with us seeking cash flow or optimized balance sheet usage,” said Gigi Wong, managing director of the company.
“There are also Hong Kong banks that are close to us to sell secondary loans or loans in question.”
Private credit interests are due to the liquidity issues of major urban developers New World Development and its smaller peers, raising concerns about the potential domino effect across the sector.
Sliding real estate sales and rents, as well as high vacancies and interest rates, are eroding landlords’ repayment capabilities, Moody’s said in a February report that prompted banks to cut new financing and refinancing to the industry.
Total loans for real estate development and investment have been declining since 2022, down 12.6% year-on-year by the end of 2024, according to data compiled by the DACTO Central Bank of New York City (Hong Kong Monetary Authority).
“When you have loans matured in today's market, it's very difficult,” said Edwin Wong, partner and head of credit at Asia at private credit firm Ares Managemant.
“We can look at the group level and say, hey, this is something we can think about – give them the room to breathe out of the current environment.” The company is looking for all debt opportunities from senior to junior year.
Commercial properties have been most affected in Hong Kong, nearly 20%, hurt by oversupply and severe economic outlook, with prices falling 40% since their peak in 2019, according to CBRE data.
Last year, some distressed commercial properties traded at 60% lower than their peak prices.
CBRE estimates the funding gap driven by changes in capital value due to recustomization and leasing adjustments – the funding gap in Hong Kong is US$720 million between 2025 and 2027.
In addition to asset managers and investment companies, home offices and wealthy enter private credit markets with higher yields than direct investment in the real estate market, said Jasmine Chiu, a law firm JSM partner.
As competition grows, private credit interest rates have dropped to high unit and low digit ranges from 2023 to high school.
However, some companies are not in a hurry to trade because they are wary of valuation expectations and the gaps involving risks, market participants said.
Sky Kwah, an investment consultant at the Raffles Family Office, said investors should be more cautious when building deals to find lower loan-to-value (LTV), closer covenants and more equity cushions.
Otherwise, private credit companies could be hit if the real estate market faces further correction, Quach said.
“Some lenders may be forced to accept looser covenants or lower quality collateral to deploy capital,” he said. “He added that borrowers with weaker fundamentals could pose risks. (Reported by Clare Jim, Kane Wu and Summer Zhen in Hong Kong; Editors of Sumeet Chatterjee and Shri Navaratnam)
