For decades, Hong Kong’s “big four” property dynasties have been viewed as cash-rich bastions of stability. A crisis of confidence at New World Development is now putting that notion to the test.
In the span of a week, New World proposed pledging US$15 billion of prized properties for loans, fended off debt restructuring concerns and saw its bond prices go into freefall. The developer has changed its chief executive officer twice in two months, including the surprise sidelining of a family scion.
While New World has said its operations are normal, the company’s debt securities are trading at deeply distressed levels reminiscent of mainland Chinese real estate firms that eventually plunged into default. That’s despite the considerable resources of New World’s controlling Cheng clan, whose fortune is estimated at US$21.6 billion by the Bloomberg Billionaires Index.
For now, New World appears to be an isolated case among Hong Kong’s big four real estate families. But it’s a reminder of the risks facing the other tycoons as they navigate succession challenges amid an unprecedented property downturn.
“New World’s situation is the worst for any major developer in Hong Kong since the Asian financial crisis,” said Patrick Wong, an analyst with Bloomberg Intelligence.
Some of its dollar bonds dropped to record lows on Wednesday (Jan 22), while its market value hovered at levels seen in 2003. The company is trading at 0.06 times price-to-book.
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New World was more vulnerable to the slowdown in the world’s second-largest economy, due to a combination of heavy reliance on China and a debt-fuelled expansion just before interest rates spiked. Its power transition to third generation heir Adrian Cheng in 2020, also gave the keys of the empire to a younger talent with less experience of the full swings of an economic cycle.
The company’s ratio of net debt to equity rose to 92 per cent as at June, compared with 83 per cent at the end of 2023, making it the most indebted big developer in Hong Kong, according to data from Bloomberg Intelligence. The company’s total debt stood at HK$192.8 billion (S$33.3 billion) as at June 2024, BI added.
New World’s effort to sell its landmark K11 Art Mall is in gridlock due to disagreement on pricing with the potential buyer, CR Longdation, a subsidiary of China Resources Holdings, according to people familiar with the matter. While New World is seeking to sell the asset for HK$9 billion, CR was only willing to offer about HK$6 billion, the people said. China Resources didn’t respond to a request for comment.
On Thursday, New World said in an exchange filing that the company has refinanced nearly HK$17.8 billion of its bank loans since July last year. It didn’t respond to a request for further comment.
Investors are closely monitoring signs of stress at other property developers. Parkview Group, another prominent company in Hong Kong, is offering its iconic commercial complex in Beijing, locally known as Fang Cao Di, people familiar said about a month ago.
“They too are having to sell flagship properties in order to make ends meet,” said Richard Harris, founder and CEO of Port Shelter Investment Management. “Clearly there is a lot of stress not only for the Chinese property companies, but also for the Hong Kong-based companies, which is obviously quite serious.”
Parkview also has to refinance its residential complex in Hong Kong’s southern district through private credit funding of at least HK$2.8 billion. Nanyang Commercial Bank was unwilling to roll over a loan, pushing Parkview to seek private credit, which charges higher interest rates, the people said at the time.
Other local companies under creditor scrutiny include Kowloon Development with a gearing ratio of 114.5 per cent, Far East Consortium International at 237.7 per cent, Wang On Properties at 89.7 per cent and Lai Sun Development at 79.9 per cent, according to Bloomberg Intelligence. Lai Sun has considered a stake sale for an office tower in London, people familiar have said. The companies didn’t respond to requests for comment.
Even though there’s no full-blown rise in credit risk, the challenges “can affect Hong Kong’s economic growth, investment and jobs”, said Gary Ng, senior economist at Natixis.
Big ambitions
When China’s developers plunged into turmoil four years ago, investors expected bigger Hong Kong builders to be shielded due to the families’ war chests and the belief that the companies were better managed.
New World’s higher level of debt was a red flag, but even as recently as 2023, Cheng appeared ready to take his family’s legacy to new heights through his interpretation of culture. The high-profile executive, whose name was synonymous with the company, was known for his creation of exclusive clubs, exploring non-fungible tokens in the art world, and sparing no expenses – down to the aromas – for his signature shopping mall K11 MUSEA as part of the US$2.6 billion Victoria Dockside commercial complex.
Cheng was also bullish on the China Greater Bay Area, comprising Hong Kong and Guangdong province. When Beijing introduced the so-called “three red lines” to cut mainland developers’ borrowing, he said in 2022 it was an opportunity for New World to “acquire very cheap land” to create “a quick win”.
New World’s property development revenue from mainland China accounted for 85 per cent of that category for the 12 months through June 2024. By contrast, billionaire Li Ka-shing’s CK Asset Holdings had 38 per cent of its property sales from the same region in the first six months last year.
The tides turned quickly. Cheng’s big bets on mega projects – including a shopping mall near the Hong Kong airport – pinched liquidity amid a downturn in tourism and soaring borrowing costs.
New World Development sold its subsidiary NWS Holdings to the Cheng family’s investment holding company in October 2023, in what was regarded as a bailout from the clan. The company is cutting HK$13 billion of non-core assets to trim debt in the current financial year.
Growing troubles
After the firm posted its first loss in 20 years, Cheng stepped down as CEO in September in a surprise move. Just two months later, the company replaced his successor.
Last week, New World clarified it was not in talks to holistically restructure its debt. It offered assets valued at US$15 billion as collateral for loan refinancing, people familiar said. It’s the largest amount to be pledged by any of Hong Kong’s top billionaire families for such a refinancing, according to Bloomberg-compiled data.
The move “screams ‘distressed’”, said David Blennerhassett, an analyst at Quiddity Advisors.
Financial firms are trying to contain risks. UBS Group stopped accepting some bonds and shares of New World as collateral for margin loans, joining other global lenders in suspending such financing for rich clients, other people familiar said this week.
The recent news shows “a continuation of its worsening balance sheet”, said Jeff Zhang, an analyst at Morningstar. “Things have not improved by much given what we have observed so far.”
It’s not helping that Hong Kong’s residential prices are still hovering at an eight-year low, while office towers are reeling from overcapacity. At least HK$2.1 trillion has been erased from real estate values in the city between 2019 and the middle of last year, according to an analysis by Bloomberg Intelligence.
New World is a reminder to other developers of the importance of risk management, said Sam Wong, an equity analyst at Jefferies.
“New World had the assumption at the time that China and Hong Kong’s economies could have high growth perpetually,” said Wong. “When the market turns, this high leverage strategy naturally becomes very risky.” BLOOMBERG
