How bad is sentiment in the Hong Kong property market? Bad enough that one residential buyer has just walked away from a house purchase and lost a $4.6 million deposit.
And bad enough that troubled Chinese conglomerate HNA Group is getting sued for back rent on a $20 million-a-year lease for space it leased through 2027 -- and never occupied.
In the residential deal, an as-yet-unidentified buyer inked a HK$722 million ($92.1 million) agreement on Dec. 31 to buy House No. 16 at the Mount Nicholson development high on Victoria Peak.
The houses, developed by Wheelock & Co. (HK:0020) (WHLKY) and privately held Nan Fung, have commanding views overlooking the city from "the Peak," Hong Kong's most prestigious address.
No. 16, a massive house by Hong Kong standards at 7,978 square feet, was already selling at a 7% discount off the price paid last April for No. 17 next door. Most people in Hong Kong live in boxy apartments of less than 600 square feet.
Two weeks after beating two competitors to the door, the buyer -- all we know is that he or she has a Hong Kong identification card -- abandoned the contract, forfeiting the 5% deposit, or HK$36 million ($4.6 million).
By standard practice, a buyer pays 5% down on setting the price with the seller and agreeing to buy a property. The buyer then pays another 5% within 2 weeks, before completing the deal within another month.
Wheelock said financing could well be the problem behind the failed purchase. Then again, it may be that the prospective purchaser believes the home has already lost more than $4.6 million in total value, and is only set to lose him or her even more should she/he take possession.
Mount Nicholson has set records as the priciest space ever bought in Asia. It has set lump-sum records for Hong Kong, the world's most-expensive, least-affordable residential market.
In November 2017, another buyer paid HK$1.16 billion ($149 million) for two houses, on the same day. One of the units equated to HK$132,000 ($16,800) per square foot, setting the Asian high-water mark.
Cai Kui, the ex-husband of Wu Yajun, chairwoman of mainland property developer Longfor Properties (HK:0960) (LGFRY) , bought House No. 2 at Mount Nicholson for HK$1.39 billion ($180 million), the highest single price paid for a house there. Not counting No. 16, 13 out of 19 of the homes have sold.
In the office deal, we know the identity of the financially troubled party.
HNA Group is being sued by Hongkong Land (SG:H78) (HNGKY) , the venerable landlord that owns basically all the high-end real estate in Central.
Hongkong Land claims in High Court documents that the Chinese conglomerate owes a HK$3.65 million payment due on Dec. 1, 2018, and another HK$4.65 million due on Jan. 1.
HNA says "the relevant money has been paid in full," but acknowledges a delay due to a "liquidity problem."
HNA last year gave up five of the eight floors it agreed to occupy at Three Exchange Square, the same development that houses the Hong Kong stock exchange. The space, part of it never occupied, has been occupied by China Merchants Bank (HK:3968) (CIHKY) , property agents say.
Hongkong Land and HNA agreed to a deal for the early termination of the lease. But the reneging party must pay related brokerage and legal fees, as well as the cost of reinstating the office to its original condition. That may be the root cause of the lawsuit.
HNA, parent of Hainan Airlines, embarked on a $50 billion buying spree of overseas real estate and subsidiaries. It has been ditching $10 billion worth of assets at fire-sale prices after the Beijing authorities began investigating the source of funds of China's most-aggressive companies in terms of international expansion.
It has company at its headquarters in Haikou, the main city on Hainan Island, the "Chinese Hawaii." China Development Bank, China's largest policy bank, is leading a work group operating within HNA's home office to supervise its sale of assets, Reuters reports.
HNA has reportedly been chased by China's aviation authority for missed payments for fuel and airport-landing fees in China. Reuters says it finally settled more than 3 billion yuan ($443 million) in past-due jet fuel bills.
HNA last week confirmed it has sold its 90% stake in the 850 Third Avenue office building in Manhattan for $422 million. It bought that asset two-and-a-half years ago for $463 million.
After a six-month suspension, shares in Hainan Airlines (SH:600221), the group's flagship listing, resumed trading in Shanghai last July. Analysts say investors should beware any of its listed subsidiaries.
HNA Investment (SZ:000616), for instance, is still trading on the Shenzhen exchange. Bohai Leasing (SZ:000415) and HNA-Caissa Travel Group (SZ:000796) have been suspended in the past, but have renewed trading in Shenzhen.