Hong Kong’s real estate sector continues to face challenges
Recent months have seen mixed performance across different segments of the Hong Kong economy. While equity financing (IPOs primarily driven by listings of Mainland Chinese corporates) has rebounded from the lows of recent years, Hong Kong’s real estate sector continues to face challenges. The gradual lowering of interest rates and stimulus measures introduced from 2024—which have mainly been directed at Hong Kong’s residential property market—have sparked an uptick in sentiment, but investment activity remains below pre-Covid-19 levels.
We have seen a recent rise in transaction volume involving residential housing assets, but this has primarily been driven by (a) a stock market rally; and (b) a drop in Hong Kong Interbank Offer Rates (HIBOR, which impact residential mortgages). Over the past year, (i) rising unsold inventory in completed projects; and (ii) the delay of new construction start dates, suggest developers have been struggling to offload properties and commence new projects.
According to reports, market prices of grade A office buildings have fallen 60% from their peak in December 2018. Amid falling rental rates and a substantial pipeline of new supply, property developers continue to struggle with high vacancy levels. However, cheaper valuations have created an opportunity for some purchasers, including the Alibaba Group which has bought several floors in One Causeway Bay from Mandarin Oriental.
Meanwhile, hotel sector investment and occupancy rates remain muted, despite increasing numbers of visitors. Here there is a continuing trend to convert hotels into student accommodation, driven by rising demand in the Hong Kong education sector, driven primarily by students from mainland China.
Because of the commercial property market slump, throughout 2025 a number of Hong Kong developers offloaded assets to repay debts, while banks continue to refinance and grant standstills to support these developers to manage their liabilities.
Balance sheet deleveraging drives restructurings of mainland Chinese real estate developers
The deleveraging of the balance sheets of mainland Chinese real estate developers continues to have a significant impact on the market. Fuelled by abundant cheap liquidity over the past decade—sourced in particular through improved access to the international credit markets, where firms have raised significant offshore bonds and bank loans—mainland developers have incurred high levels of debt.
We have seen a string of defaults following a slowdown in the mainland China economy, which in turn has led to a wave of Hong Kong-based holistic offshore restructurings designed to deleverage balance sheets. These have used schemes of arrangement to impose deep haircuts; such exercises are often run in parallel with “closed door” onshore liability management exercises (LMEs) to address onshore indebtedness.
In 2025, a number of holistic offshore debt restructurings were sanctioned by the courts, notably the restructurings of Sino-Ocean, Shimao and Country Garden (on which A&O Shearman advised). These deals utilized innovative features given the nature and mix of the offshore debts involved, some of which are explored in more detail below.
Despite this, defaults among mainland developers continued. Successfully sanctioned scheme debts of some mainland developers (for example, Sunac) have defaulted again, causing creditors to re-engage on further restructurings. These deals suggest that the mainland China credit default cycle may persist over the near term.
The outlook for 2026: more schemes of arrangement or LMEs?
LMEs are becoming more popular in Hong Kong and mainland China. Against the backdrop outlined above, the viability of LMEs (which are best characterized as “out-of-court” scenarios) by debtors in Hong Kong or mainland China to restructure their debts will be dictated by a number of factors, including the constituency of the different (and often competing) creditor groups, the corporate and financing structures of debtor groups, and the documentation of the underlying credit agreements.
While the debt in question will often be in the form of bank loans and bonds, the suitability of LMEs for restructurings has so far been different between Hong Kong and mainland China.
In mainland Chinese debtor restructurings, we are seeing more in-court processes, although LMEs are also on the rise.
Schemes of arrangement are commonly used for “first round restructurings” as a non-consensual restructuring tool. A scheme primarily permits the debtor group to impose (a) an internal class cram-down on minority creditors; and (b) a haircut to the debts owed by the debtor group to creditors.
The use of schemes is often inevitable for mainland developers for the following reasons:
- Debt profile and creditor constituency—with improved access to the international capital markets over recent decades, mainland developers have raised their offshore debts primarily through offshore bond issuance and bank loans. The mix of such debts and creditor groups, including their differing governing laws, makes a scheme an attractive option for debtors to restructure their debts. As long as enough creditors agree with the restructuring proposal of the debtor group, minority creditors can be crammed down to accept a compromise on their debts. While a traditional scheme (as in Hong Kong) permits the cram-down of creditors within a single class, the English Restructuring Plan permits “cross-classes” to be crammed down, and can be an attractive tool for debtors looking to cram uncooperative creditors.
- Recovery values—like any group financing, mainland developers often raise debt financings at different levels of the group and/or grant credit enhancements in order to secure financing. Credit enhancement is often provided in the context of high-yield bond issuances (in contrast to Hong Kong issuers, which often issue on unsecured “investment grade” terms), or loans provided by offshore banks. Together with intercreditor arrangements, certain creditors often find themselves with recourse to multiple obligors and/or underlying assets. As such, debtor groups can employ structures which permit these creditors to either (i) recover from multiple parts of the group through, for instance, the use of dual schemes permitting creditors to claim at different layers of the debtor group; or (ii) be paid a compensation for giving up their recourse against certain obligors and underlying assets, in exchange for their overall support to the restructuring process.
Some of these mainland developers, despite having successfully completed and implemented “first round restructurings” using schemes of arrangement, have defaulted again and have to engage in the “second round restructuring”. We may see more LMEs for such “second round restructurings”. Traditionally, amendment thresholds under bank loans require unanimous consent for amendments to “sacred rights” (with 66 and 2/3 support for other amendments). This is different to bonds, which often require a lower threshold to amend similar economic terms. However, newly issued bonds and loans under restructurings of mainland developers are increasingly sharing common amendment terms, paving the way for debtors to engage with creditors out of court via LMEs.
Hong Kong debtor restructurings—bespoke and private LMEs
In addition to managing their exposure to mainland developers, banks are increasingly turning their attention to their significant exposures to Hong Kong conglomerates, particularly borrowers for whom Hong Kong real estate assets have been a primary source of collateral and cashflow. Unlike mainland developers, the debt profile of Hong Kong conglomerates is different in that:
- borrowings are based on long-term relationships with banks;
- a much lower level of bond debt indicates a commonality of interest in the market to minimize disruption and maintain stability. As a result, enforcements will likely be discrete, and restructurings will, wherever possible, be consensual and executed with minimum publicity; and
- Hong Kong has, historically, a well-developed non-statutory rescue culture based on common interest and supported by the Hong Kong Monetary Authority (HKMA) and Hong Kong Association of Banks (HKAB). This is endorsed by the Hong Kong Approach to Corporate Difficulties guidelines.
Where bank debt is concerned, given the complexity of the capital stacks and corporate and financing structures of HK conglomerates, it will not be easy for such debtors to implement non-consensual liability management exercises. Furthermore, and perhaps owing to the systemic risks posed to the wider Hong Kong economy by a default of such conglomerates’ debts, the HKMA has also been playing a guiding role in consensual LMEs run by Hong Kong debtors. As a result, LMEs in the region often afford the debtor group greater flexibility and forbearance (given the bespoke nature of discussions), and can:
- permit the restructuring of all relevant bank facilities under common terms, while preserving the priority and seniority under each separate facility; and/or
- provide a standstill period to enable debtors to obtain rescue financing and/or dispose of existing assets in a consensual and orderly manner.
Where the bond debt of Hong Kong (investment grade) issuers is concerned, while amendment thresholds are typically between 66% to 75% to amend “sacred rights”:
- the incurrence of (senior) debt is typically not regulated under investment grade terms in the Hong Kong market; and
- further, negative pledge clauses often only restrict the issuing group from creating security/providing guarantees on “relevant indebtedness” (which is often defined as debts listed on the public markets, i.e., it does not cover private loans).
As such, where debtors engage in a bilateral LME with their bank lenders offering credit enhancement in exchange for their support, that can often be done without the consent of the noteholders.
How does this impact restructuring activity?
Disagreement among creditor groups is often unavoidable and can lead to creditor-on-creditor violence.
That being said, debtors are realistic about the impact such dissenting creditor groups may have on their overall restructuring efforts—and creditors are equally aware of their rights and the options available. This may have been why, in the case of New World Development, in response to the effective management of its bank loan liabilities, the group completed an exchange offer of its existing perpetual securities. The improved terms included restrictions on the group from increasing first-ranking Victoria Dockside-debt, a breach of which would constitute a default under the amended perpetuals.
In other words, even if documentation provides for flexibility and/or solutions to debtors to deal with a distress or crisis without the need to resort to a court process, they will still need to engage with different stakeholder groups and manage them in a timely manner to make an LME work. The threat of a winding-up petition by bondholders (which typically comprise funds and are not subject to HKMA and the HKAB’s best practices), for example, can derail restructuring discussions between the debtor group and banks. Where a company cannot manage each constituency in time, a holistic restructuring involving a court process will become inevitable.
As between the debtor and the creditors, where newly issued bonds and loans under restructurings of mainland developers are increasingly sharing common amendment terms, this may provide debtors to effectively “cram down” dissenting creditors (without the need to resort to court processes).
Without a ready forum for minority creditors to challenge a debtor’s LME (as opposed to a scheme whereby the courts must consider the “fairness” of the overall restructuring proposal), recourse or potential challenges will be limited. For example:
- Breach of contract—any challenge in respect of a debtor’s alleged breach of contractual terms will ultimately be highly fact-specific and often will require the claimant creditor to show that the breach led to damages. Such challenges will often result in lengthy litigation, as has been the case in a number of U.S. cases concerning LMEs (notably the Serta non-pro-rata uptiers, and J Crew drop-down transactions).
- Breach of directors’ duties—as a matter of Hong Kong law, directors owe statutory and fiduciary duties to the company. Whilst the Companies Ordinance (sections 728-729) permits members and creditors to apply for certain court remedies (for example, an injunction) to restrain breaches of fiduciary duties by the director, creditors are not owed any such duties unless the company is insolvent.
As such, it will be crucial to ensure that: (a) contractual terms within credit documents are not overlooked or underestimated during the negotiation process; and (b) robust advice from counsel is obtained.
Looking ahead to 2026, the mainland Chinese and Hong Kong markets will continue to experience distress in the near term. Despite certain sanctioned restructurings of mainland developers’ debts, the risk of default remains, with potential for further “second time” defaults. Hong Kong conglomerates and property developers will likely continue to engage in LMEs with creditor groups on a bespoke and private basis, under the oversight of the Hong Kong Monetary Authority.
