Hong Kong’s commercial real estate sector is witnessing an unexpected shift as private credit firms emerge as key financiers amid tightening bank lending and falling valuations. With traditional lenders scaling back exposure, alternative investment players like Gaw Capital Partners and Blue Mountain Bridge Capital are seizing opportunities, launching new funds to inject liquidity into distressed developers and properties. This trend highlights a growing appetite for high-yield private credit investments despite broader economic uncertainties.
The appeal of private credit lies in its ability to offer short-term relief to cash-strapped developers while delivering attractive returns for investors. Blue Mountain Bridge, for instance, recently closed a $33.4 million senior loan on a Hong Kong office conversion, yielding a 15% annual return. Similarly, Gaw Capital is reportedly raising a $2 billion fund targeting both private credit and equity deals across Asia-Pacific. These moves come as developers struggle with refinancing challenges, with total property loans in Hong Kong declining by 12.6% year-on-year by the end of 2024.
Market conditions remain precarious, with commercial property vacancies nearing 20% and prices down 40% from their 2019 peak. Yet, private credit investors see potential in distressed assets, betting on eventual market stabilization. Firms like Sun Hung Kai & Co. are actively acquiring residential mortgage portfolios, while others negotiate secondary loan purchases from banks. However, risks loom large—valuation gaps, borrower defaults, and further market corrections could erode returns, prompting calls for stricter loan covenants and lower leverage ratios.
Despite the risks, the private credit boom shows no signs of slowing, with family offices and wealthy individuals joining institutional investors in pursuit of higher yields. Yet, as competition intensifies, interest rates have dipped from mid-teens to single or low double digits, squeezing margins. Analysts warn that lenders must remain disciplined to avoid overexposure to weak borrowers. For now, private credit offers a lifeline to Hong Kong’s embattled property sector—but whether it can sustain long-term stability remains uncertain.