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Friday, Jun 02, 2023

Hong Kong’s latest billion-dollar white elephant shows up developer distress

Hong Kong’s latest billion-dollar white elephant shows up developer distress

The Corniche was supposed to generate HK$30 billion (US$3.8 billion) in sales after the developers bought the land overlooking the South China Sea for a record price. Six years later, the project sits between a sewage treatment facility and a driving school, bearing little resemblance to the French Riviera its name evokes.
The nearby shopping mall — converted from an industrial building — sells discounted clothes and furniture.

The property mirrors the fate of its developers Logan Group Co. and KWG Group Holdings Ltd., once among the largest in the country. Instead of throwing a lifeline to the duo facing at least US$10 billion in offshore debt, The Corniche is a reminder of their rapid fall from grace.

Now creditors are homing in, demanding the two Chinese developers repay after defaulting. In a worst-case scenario, they could lose The Corniche if banks demand immediate loan repayment for the project.

Out of the 295 units, only three have been sold as of May 22, according to Centaline Property Agency Ltd.

“All the developers at the time were betting on a different economic policy environment in China,” said Monica Hsiao, founder and chief investment officer of Triada Capital Ltd. “Being able to monetize an offshore project is likely just one small piece for them to deal with in a long restructuring.”

Despite its steely frame and floor-to-ceiling windows, The Corniche’s location is proving a harder sell. Its curved silhouette stands in contrast with the rest of Ap Lei Chau, once a fishing island that’s now become a middle-class neighborhood adjacent to public housing projects.

When the developers paid a record HK$16.9 billion for the land, it epitomized the extravagance of Chinese developers. They joined a wave of peers snapping up land at prices that awed local peers.

Logan and KWG envisioned the 1,340-square-foot to 9,633-square-foot units capturing the property boom, underpinned by the influx of wealthy Chinese who preferred such designs.

Then the tides turned. Chinese regulators clamped down on excessive borrowing, exacerbating liquidity shortages for developers already on shaky financial ground. Coupled with Covid-lockdowns and an economic trough, it triggered more than 100 Chinese property dollar bonds to default.

In Hong Kong, the real estate market also froze due to population outflows brought on by protests, political tightening and travel restrictions.

Suddenly, The Corniche was looking very pricey. Since sales began in January, the three units sold at a price range between HK$164 million to HK$185 million.

That translates to about HK$50,000 per square foot, nearly 79 percent more expensive than Hong Kong’s benchmark luxury residence Bel-Air.

Logan and KWG each own 50 percent of The Corniche. Both have creditors and banks lining up. Tension is brewing as the different parties tussle over a best solution.

Some of the biggest banks operating in Hong Kong provided HK$10.2 billion in loans to finance the project construction. Among those include HSBC Holdings Plc, Standard Chartered Plc and Industrial and Commercial Bank of China (Asia) Ltd.

The companies held a call with lenders last week to discuss the loan. A spokesperson for Standard Chartered declined to comment. The other lenders and two companies didn’t respond to Bloomberg requests for comment.

Logan has more than US$6 billion in offshore borrowings that it’s trying to restructure. KWG has US$4 billion of offshore bonds outstanding, according to data compiled by Bloomberg.

The Corniche could become a prime target for seizure. The banks would get first dibs, but other bondholders could also try to salvage money from it.

It’s easier to get hold of developers’ assets in Hong Kong than on the mainland, said Ronald Thompson, managing director at advisory and restructuring firm Alvarez & Marsal.

That’s just what many have done. Banks seized the Hong Kong commercial property of Chinese property company Cheung Kei Group earlier this year. The founder’s US$271 million home was also taken away by creditors in March. China Evergrande Group’s Hui Ka Yan lost his Hong Kong mansion and an office building to receivers.

“Investors dealing with these companies need to seize offshore assets or companies through legal process, and the longer you wait, the more you don’t know what they may be doing,” said Hsiao, who manages her own hedge fund and has invested in China developer bonds since 2010.

In general, mainland developers have struggled more than local Hong Kong developers to sell apartments in the city, partly due to concerns about their financial health. Some homebuyers of Evergrande’s apartments in Hong Kong ran into trouble last year, after the new owner of the project halted financing for some mortgages.

The Corniche saw few buyers on a recent Thursday afternoon. It was quiet but for an occasional cargo truck whizzing by, and driving students in a dozen white Toyotas inching along the road.
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