Private Credit Firms Pivot to Hong Kong Property as Banks Retreat

The Hong Kong property market, once a symbol of financial resilience, now stands at a crossroads. As traditional banks retreat from real estate lending due to plummeting asset values and rising defaults, private credit firms are stepping into the void, offering lifelines to developers and investors. This shift, fueled by high returns and structural opportunities, is reshaping the region’s capital markets.

A Market in Decline, but Opportunities Abound

Hong Kong’s property sector has been in freefall since 2020. Commercial property prices have dropped 40% from their 2019 peak, while office vacancy rates hit 20% in early 2025—a record high. Residential markets are also struggling, with rents and sales volumes contracting amid weak demand. The Hong Kong Monetary Authority (HKMA) reported a 12.6% year-on-year decline in property development loans by late 2024, as banks retrenched from risky exposures.

This retreat has created a funding vacuum. Private credit firms, however, see this as a chance to capitalize. With their flexibility and willingness to accept higher risks, they are offering loans at terms banks cannot match. For instance, Blue Mountain Bridge Capital recently closed a $33.4 million senior loan for a Hong Kong office property at a 15% annual coupon, with a 63% loan-to-value (LTV) ratio—far higher than the 40-50% levels typical for traditional lenders.

The Rise of Private Credit Players

The private credit sector is dominated by established firms like Gaw Capital Partners and Sun Hung Kai & Co., alongside newer entrants such as Blue Mountain Bridge Capital.

• Gaw Capital is raising a $2 billion fund targeting distressed real estate in Hong Kong and other Asian gateway cities. Its focus on senior debt and equity co-investments aims to capitalize on undervalued assets.
• Blue Mountain aims to raise $250 million by year-end, with an interim target of $150 million. Its 15% internal rate of return (IRR) on a 2024 loan—surpassing the sector’s average of 11.9%—demonstrates the high returns possible in this stressed market.
• Sun Hung Kai is expanding into private credit by acquiring residential mortgage portfolios, addressing liquidity needs for both distressed and prime developers.

Regulatory Shifts and Tax Incentives

Hong Kong’s government has proposed tax reforms to further entice private credit firms. In November 2024, it outlined plans to exempt interest income from private credit investments from profits tax under the “unified fund exemption” regime. If enacted, this could attract global capital, though implementation remains uncertain.

Meanwhile, the HKMA has noted that systemic risks in private credit remain “contained” but warns of vulnerabilities tied to real estate. While no specific regulations govern private credit funds, anti-usury laws (capping interest rates at 48% annually) and collateral enforcement rules underpin market stability.

Risks and Competition Intensify

Despite the opportunities, risks are mounting.

1. Valuation Gaps: Lenders and borrowers often disagree on asset values, especially for distressed properties. Deals now trade at up to 60% below peak prices, but buyers risk further declines.
2. Rate Compression: Interest rates have dropped from mid-teens in 2023 to high single to low double digits in 2025, as competition among lenders intensifies. This squeezes margins and may push firms to relax underwriting standards.
3. Geopolitical Uncertainty: Tensions between the U.S. and China, coupled with Hong Kong’s role as a gateway to mainland markets, add volatility.

Firms like Raffles Family Office are responding by demanding tighter covenants, lower LTV ratios, and equity buffers to mitigate defaults.

Data-Driven Insights

This visualization would show the stark decline in asset values and rising vacancies, highlighting the scale of the crisis.

This chart would illustrate the drop in rates, reflecting heightened competition and investor caution.

Conclusion: A High-Reward, High-Risk Gamble

Hong Kong’s property market remains a battleground for private credit firms, offering outsized returns but requiring meticulous risk management. With $720 million in projected funding gaps across commercial sectors by 2027 and banks continuing to retreat, the sector’s survival hinges on these firms’ ability to navigate valuation uncertainties and geopolitical risks.

The data is clear: private credit has become the new lifeline for Hong Kong’s property sector. Yet success demands discipline. As one analyst noted, “This isn’t about chasing yield—it’s about picking the right assets and partners.” For now, the market’s fate rests on whether private capital can stabilize a once-unstoppable real estate machine—or whether it will become its final chapter.