The Hong Kong Tower That Symbolizes China’s Credit Bubble Bust

When The Center skyscraper was sold in Hong Kong in 2017, the record $5.2 billion price tag was so high that investors had to form a consortium to take a majority stake and divvy up the floors. That decision is rapidly becoming a millstone.

Cash-strapped owners, many of them Chinese homebuilders, are now competing with one another to secure revenue from tenants or buyers at the 73-story tower after housing sales in the mainland collapsed. Values have been dragged down as a result, with some space now offered at almost 50% less than the purchase price. That compares with a wider drop of about 30% for offices in the Central district since June 2018, according to data compiled by broker Knight Frank.

On a visit by Bloomberg News reporters in April, ceiling panels were missing in places, with long electric wires hanging from the gaps on some floors. Back then, there were notices plastered over the entrance of one vacant office that suggested its previous occupant had not been paying rent. On the same level, withered leaves littered the floor beneath a Chinese money tree, the symbol of good luck and prosperity.

The woes at the building symbolize a broader credit bust that hit the city after the Chinese government’s crackdown on excessive leverage ended a property frenzy. As defaults rose, international investors soured on homebuilders’ debt, leading many developers to swap their boom-time bond road shows for court hearings to avoid liquidation.

“To some extent, the capital market fueled the Chinese property bubble. It was a time when developers were eager to borrow while there were also deep-pocketed investors ready to pour in money,” said Patrick Liu, chief executive officer at Admiralty Harbour Capital and a former investment banker. “Everyone just kept leveraging and bet that property is the pillar industry of the Chinese economy and it won’t collapse.”

Developer Defaults

Parties related to Kwok Ying Lan, chairwoman of defaulted developer Yuzhou Group Holdings, recently cut their asking price of the 21st floor of the building to HK$430 million. That’s a drop of about 14% from when they first put the space on the market last November, according to brokers with knowledge of the property, and the equivalent of about a 46% decline from when the tower last sold.

Yuzhou is just one of a slew of Chinese companies, mostly developers, who have missed payments on $127.4 billion of dollar bonds since the credit crunch began in 2021. Other defaulters who invested in the tower include Hui Wing Mau, the billionaire founder of Shimao Group Holdings Ltd, who acquired nine floors of the property with his family.

Read more: Chinese Developer Shimao’s Liquidation Hearing Adjourned to July

Hui used six floors he owns in the building to back a HK$2.78 billion ($356 million) loan provided by DBS Bank Ltd. in January 2024, land records show. As the office market sours, he has offered two floors of The Center for sale for more than 40% below the peak.

Even with such large discounts, finding a buyer can prove a challenge. Over a six month period, broker James Mak at Midland Commercial brought about 30 potential bidders to visit one floor at the skyscraper. Only a handful were willing to make an offer and each came in well below expectations, he said.

Office buyers are “looking at distressed situations at deep discounts,” said Thomas Chak, a senior executive director at Colliers International. There were 11 distressed commercial real estate sales in HK this year through the middle of June, Colliers data show, compared with last year’s total of 18.

Private Credit

Some mainland owners of floors at The Center have been trying to secure refinancing from direct lenders, said Gigi Wong, head of business development, real estate and private credit at Sun Hung Kai & Co.

“We did not proceed with any of the inquiries” because the “opportunities we’ve observed are leveraged beyond a sustainable interest-coverage ratio given the current interest rate environment,” Wong said.

One investor has already sold up. Developer Kaisa Group Holdings Ltd. turned to Shandong Hi-Speed Holdings Group for a $125 million loan in 2019 with the aim of acquiring more land on the mainland, according to a person with knowledge of the transaction and exchange filings.

The company put up the 38th floor of the building as collateral for the debt in a bid to show good faith, the person added, asking for anonymity as the matter is private. They never imagined they would have to sell the property, which is now owned by the lender, the person said.

A representative for Shimao did not share any comment. Yuzhou Group said it’s not in the position to comment on the matter as the listed company is not the owner of the 21st floor of The Center. The company did not respond to requests to ask the chairwoman for comment. Kaisa’s representative did not respond to Wechat messages seeking comment.

Vacant Space

Finding tenants has also been a challenge for the landlords. More than a quarter of the tower’s office space is empty, double the vacancy rate in the Central district, Colliers data show.

New office buildings being completed will add to the competition, with tenants currently focused on new buildings with better amenities, according to broker Knight Frank. For now, Mak at Midland describes leasing and sales at The Center as “eerily quiet.”

“The property boom high that the mainland brought to Hong Kong financial entities and workers is clearly now over,” said George Magnus, a research associate at Oxford University’s China Center. China’s property bust “will have enduring deleterious consequences for HK as a financial center.”