Hong Kong private credit goes where banks fear to tread: loans against property

Hong Kong-based Gaw Capital and Pacific Aegis Capital Management Group (PACM) are building a US$400 million war chest to tap lending opportunities backed by properties in the city as they embrace the unloved real estate sector after it was shunned by banks taking a negative economic view. Private equity firm Gaw Capital has started raising a US$100 million credit fund that will make loans against Hong Kong property, on the heels of real estate private credit firm PACM’s plan for a US$300 million special situation fund. “Banks in Hong Kong have reduced exposure to the real estate sector for reputational reasons or because of their views on the macro economy, which created opportunities for us private credit lenders to take over what we think are high-quality assets for good borrowers who temporarily have some liquidity issues,” said Goodwin Gaw, founder and managing principal of the eponymous company. Earlier this month, PACM, a real estate investment company, received a HK$112 million (US$14 million) commitment from Hong Kong-listed Oi Wah Pawnshop Credit Holdings in its special situation fund, which has a target size of US$300 million. While Hong Kong’s property sector has suffered a severe drop in valuations, sluggish home sales and record-high office vacancy rates, some nonbank lenders view this as an investment opportunity. Many borrowers are from mainland China and have been able to generate liquidity from their assets in Hong Kong, thanks to the city’s sound legal system, Gaw added. Private credit funds lure family offices, wealthy individuals as returns sizzle PACM has been able to originate and execute new deals while managing market risks “during the period of price adjustment in the property market”, said Francis Ng, its managing director and chief investment officer. “We embrace both the opportunities and challenges presented by the current real estate market,” he said while announcing his firm’s partnership with Oi Wah. In a note to investors this month, US private equity giant KKR said the sell-off triggered by a wave of defaults among Chinese real estate developers created “attractive entry points for investors” and that the private credit market presents “a rare opportunity”. Macroeconomic headwinds such as high interest rates and economic uncertainties globally saw Hong Kong-based fundraising in private debt capital markets drop 30 per cent to US$3.13 billion in 2023 from a year ago but private credit fundraising “held up in difficult conditions as LPs [limited partners] remained supportive of the asset class”, data provider Preqin said in its 2023 global report on private debt. The funds closed last year include the US$2.4 billion SSG Capital Partners VI, the sixth flagship Asia special situation fund by US alternative investment manager Ares Management via its Hong Kong-based team. Oi Wah became a limited partner of PACM OW Global Special Situation Fund II this month, following its announcement last June to develop the real estate private credit business with PACM. Last month, Hong Kong’s monetary authority relaxed the city’s decade-old lending curbs, and following this easing, Oi Wah’s chairman and CEO Edward Chan said the company is “optimistic about the long-term prospects of the mortgage business”. Homes worth less than HK$30 million will now be entitled to 70 per cent mortgage financing, compared with the previous 60 per cent credit, and residential properties that are valued at more than HK$35 million, considered luxury homes in Hong Kong, will be entitled to 60 per cent mortgage, up from the earlier limit of 50 per cent. PACM’s latest special situation fund will aim to achieve long-term returns through asset-backed direct lending, non-performing debt acquisition, acquisition financing and other strategies in Hong Kong and other such developed markets with a common law jurisdiction legal framework. PACM is also planning another US$500 million private credit fundraising later this year. Gaw Capital has deployed nearly US$1 billion in private credit since 2020, mainly in Hong Kong and backed by real estate. “We exited all outstanding loans successfully by the maturity dates,” said Gaw.