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PROPERTY players in China and South-east Asia are feeling the squeeze as higher interest rates raise their costs of borrowing and reduce buyer demand.
The bonds of several Chinese property companies are trading at deeply discounted levels, and market watchers expect to see more players come under pressure. Old-economy industries, particularly those without green credentials, may face stresses too.
Despite risky macroeconomic conditions, however, industry observers see sufficient appetite for distressed assets from private equity funds, family offices and high net worth investors. Distressed debt funds in the United States and Europe, as well as companies with strong balance sheets, are also among the bargain hunters.
Stefanie Yuen Thio, joint managing partner at TSMP Law, said distressed asset sales in the region could be spurred on not only by rising interest rates but also by the termination of Covid-19 aid packages, geopolitical volatility and China doubling down on its zero-Covid policy.
Highly leveraged companies or those that rely heavily on debt to fund their operations could be in danger, said Yuen Thio. Those with bonds issued in &ldquo interest rate-friendly times&rdquo and nearing payment could also struggle.
Also at risk would be companies in old-economy industries or industries that are less conducive to environmental, social and governance metrics.
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Tan Wei Cheong, financial advisory executive director at Deloitte Singapore, flagged risks in local real estate, manufacturing, and the export-driven industries.
In Singapore, at least, property prices have stood up to recent cooling measures. And commercial and residential rental rates are likely to remain strong in the near term due to the surge in demand following the opening of borders and a return to the office, he said.
&ldquo Unless there is a sharp correction to property prices and rental rates, the increase in interest rate is unlikely to cause a spike in distressed property sales in the near term,&rdquo said Tan.
But the smaller local private property developers may not be as lucky. Developers with &ldquo limited financing options&rdquo could suffer as lenders become more cautious about financing property developments.
There could also be expectations of &ldquo weaker retail demands&rdquo for new projects, given higher borrowing costs, said Tan.
Tensions between the US and China, meanwhile, are causing &ldquo further stress&rdquo to the manufacturing and export-driven sectors.
&rdquo Whether this will lead to more distress in this sector is still uncertain, as it very much depends on whether the economies of (Singapore&rsquo s) major trading partners can improve over the next few quarters with potential government interventions,&rdquo he said.
The upshot is a booming market for distressed assets in all forms: debt, equity and physical assets.
Companies that struggle to stay afloat will find ready buyers for distressed assets among &ldquo cash-rich companies&rdquo on the hunt for complementary businesses, said TSMP&rsquo s Yuen Thio.
She noted that there are also a number of private equity (PE) deals being closed and news of fresh PE funds being raised.
Deloitte&rsquo s Tan said family offices and high net worth individuals are on the lookout for &ldquo opportunistic purchases&rdquo in traditional asset classes such as property. Such investors usually require limited external financing, and rising interest rates tend not to be a deterrent.
International distress funds, too, are actively looking at &ldquo distress M& A opportunities&rdquo , Tan said.
StoneX, a financial services group whose offerings include fixed income trading for institutional clients, has noticed a &ldquo steady uptick&rdquo in the purchase of Asian distressed debt by US and European funds over the past 18 months.
Robert Hong, head of fixed income credit for Asia, said there has been forced selling by institutional investors due to credit defaults, particularly in the China property sector where the government has clamped down on leverage and speculation.
&ldquo This has had ripple effects on the larger Chinese economy causing defaults on industrials, education and tech sectors to name a few,&rdquo said Hong.
South-east Asia, he said, has not been spared, as many credits in the region are also experiencing defaults or &ldquo stressed situations&rdquo .
Hong said there has also been &ldquo active de-risking&rdquo in the market, due to worries that some companies may struggle to refinance their debt. The buyers at the other end of the trade have been opportunistic hedge funds and distressed funds.
He expects to see an increase in distressed debt transactions in the near term given continuing uncertainty over the US Federal Reserve&rsquo s monetary policy, the budget situation in the United Kingdom and the Russia-Ukraine war.
As valuations turn increasingly tempting, however, Deloitte&rsquo s Tan warns potential buyers to consider factors such as fair value, lack of warranty, the cause of distress, as well as potential challenges to the sale, before plunging in.
PROPERTY players in China and South-east Asia are feeling the squeeze as higher interest rates raise their costs of borrowing and reduce buyer demand.
The bonds of several Chinese property companies are trading at deeply discounted levels, and market watchers expect to see more players come under pressure. Old-economy industries, particularly those without green credentials, may face stresses too.
Despite risky macroeconomic conditions, however, industry observers see sufficient appetite for distressed assets from private equity funds, family offices and high net worth investors. Distressed debt funds in the United States and Europe, as well as companies with strong balance sheets, are also among the bargain hunters.
Highly leveraged companies or those that rely heavily on debt to fund their operations could be in danger, said Yuen Thio. Those with bonds issued in &ldquo interest rate-friendly times&rdquo and nearing payment could also struggle.
Also at risk would be companies in old-economy industries or industries that are less conducive to environmental, social and governance metrics.
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Tan Wei Cheong, financial advisory executive director at Deloitte Singapore, flagged risks in local real estate, manufacturing, and the export-driven industries.
In Singapore, at least, property prices have stood up to recent cooling measures. And commercial and residential rental rates are likely to remain strong in the near term due to the surge in demand following the opening of borders and a return to the office, he said.
&ldquo Unless there is a sharp correction to property prices and rental rates, the increase in interest rate is unlikely to cause a spike in distressed property sales in the near term,&rdquo said Tan.
But the smaller local private property developers may not be as lucky. Developers with &ldquo limited financing options&rdquo could suffer as lenders become more cautious about financing property developments.
There could also be expectations of &ldquo weaker retail demands&rdquo for new projects, given higher borrowing costs, said Tan.
Tensions between the US and China, meanwhile, are causing &ldquo further stress&rdquo to the manufacturing and export-driven sectors.
&rdquo Whether this will lead to more distress in this sector is still uncertain, as it very much depends on whether the economies of (Singapore&rsquo s) major trading partners can improve over the next few quarters with potential government interventions,&rdquo he said.
The upshot is a booming market for distressed assets in all forms: debt, equity and physical assets.
Companies that struggle to stay afloat will find ready buyers for distressed assets among &ldquo cash-rich companies&rdquo on the hunt for complementary businesses, said TSMP&rsquo s Yuen Thio.
She noted that there are also a number of private equity (PE) deals being closed and news of fresh PE funds being raised.
Deloitte&rsquo s Tan said family offices and high net worth individuals are on the lookout for &ldquo opportunistic purchases&rdquo in traditional asset classes such as property. Such investors usually require limited external financing, and rising interest rates tend not to be a deterrent.
International distress funds, too, are actively looking at &ldquo distress M& A opportunities&rdquo , Tan said.
StoneX, a financial services group whose offerings include fixed income trading for institutional clients, has noticed a &ldquo steady uptick&rdquo in the purchase of Asian distressed debt by US and European funds over the past 18 months.
Robert Hong, head of fixed income credit for Asia, said there has been forced selling by institutional investors due to credit defaults, particularly in the China property sector where the government has clamped down on leverage and speculation.
&ldquo This has had ripple effects on the larger Chinese economy causing defaults on industrials, education and tech sectors to name a few,&rdquo said Hong.
South-east Asia, he said, has not been spared, as many credits in the region are also experiencing defaults or &ldquo stressed situations&rdquo .
Hong said there has also been &ldquo active de-risking&rdquo in the market, due to worries that some companies may struggle to refinance their debt. The buyers at the other end of the trade have been opportunistic hedge funds and distressed funds.
He expects to see an increase in distressed debt transactions in the near term given continuing uncertainty over the US Federal Reserve&rsquo s monetary policy, the budget situation in the United Kingdom and the Russia-Ukraine war.
As valuations turn increasingly tempting, however, Deloitte&rsquo s Tan warns potential buyers to consider factors such as fair value, lack of warranty, the cause of distress, as well as potential challenges to the sale, before plunging in.