The worldwide slump triggered by borrowing-cost hikes has already wiped more than $1 trillion off office property values alone, Starwood Capital Group Chairman Barry Sternlicht said last week. But the total damage is still unknown because so few assets have been sold, leaving appraisers with little recent data to go on. Completed commercial property deals globally sank to the lowest level in a decade last year, with owners unwilling to sell buildings at steep discounts.

Regulators and the market are nervous that this logjam could be concealing large, unrealized losses, spelling trouble both for banks, who pushed further into bricks and mortar lending during the cheap money era, and asset owners. 

New York Community Bancorp touched a 27-year low on Tuesday after slashing its dividend and stockpiling reserves in part because of troubled real estate credit. The European Central Bank is concerned that banks in the region have been too slow to mark down the value of loans and the UK’s Financial Conduct Authority is to review valuations in private markets, including real estate. 

Now, a new batch of overseas assets acquired in a decade-long Chinese expansion spree are starting to hit the market as landlords and developers decide they want cash now to shore up domestic operations and pay off debts — even if that means taking a financial hit. Beijing’s crackdown on excessive borrowing has left few developers unscathed, even those once considered major players. A unit of Guangzhou-based China Aoyuan Group Ltd., for example, which is in the middle of a $6 billion debt restructuring plan, sold a plot in Toronto at about a 45% discount to the 2021 purchase price late last year, according to data provider Altus Group.

“With motivated sellers, the market freeze could thaw, improving transparency and price discovery,” said Tolu Alamutu, a credit analyst at Bloomberg Intelligence. “Portfolio valuations may have further to fall.”

Starting to Move

With every transaction, the market gets more clarity about the capitalization rate — a measure of the return an investor is willing to do a deal at. That data will then be used by appraisers to value other assets, which could trigger wider impairments. As a consequence, landlords may have to inject more money to cure any loan-to-value breaches or risk having the properties seized by lenders.

While so far there has only been a trickle of Chinese-owned sales in Europe — last year a London office building linked to Shimao Group Holdings Ltd. Chairman Wing Mau Hui sold for about a 15% discount to an earlier sale agreed in 2022 that did not close, according to a person with knowledge of the matter — the volume is starting to grow again. 

Just this week, distressed developer Guangzhou R&F Properties Co. agreed to sell its stake in a £1.34 billion ($1.69 billion) property project in London’s Nine Elms district in return for some of its dollar bonds and 10 pence, while an office block in Canary Wharf is selling for 60% less than it sold for in 2017 after it was seized by lenders from a Chinese investor. The sales are part of a rebound in disposals after some developers paused for breath last year while working on restructuring plans.

“Price discovery will improve throughout the year,” Carol Hodgson, head of real estate research for Europe at JPMorgan Asset Management, wrote last month. That’s in part due to “a pick-up in distressed assets coming to market,” she added.  

Earlier this month, a luxury development in the heart of Mayfair, an upscale area in west London, collapsed into administration after defaulting on its loans. It’s majority owned by two Chinese investment firms, Citic Capital and Cindat, and the homes will continue to be marketed to potential buyers through the administrators.

Further east in the UK capital, a person with knowledge of the matter sees a housing project planned by distressed Chinese developer Country Garden Holdings Co. drawing bids of less than £100 million. The subsidiary took an impairment charge of £10.3 million in 2022, according to a December filing. A unit of Shanghai-based real estate firm Greenland Holdings Corp., meanwhile, extended a loan for a skyscraper project in east London that technically defaulted last year, a filing shows. 

Sales are picking-up outside Europe too, including in Australia. Only a few years ago, ambitious Chinese developers were major players in the local market. Now most have largely stopped buying and have pivoted instead to offloading projects. Notable recent disposals include the sale by Country Garden’s Risland unit of a site on the outskirts of Melbourne for A$250 million ($163 million), according to local media. The company has also recently divested a Sydney development asset for about A$240 million, according to another local media report. “Selling of these partial remaining parcels of land is part of Risland’s approach to portfolio optimization,” Guotao Hu, CEO of Risland Australia said in a statement to Bloomberg, without confirming details of the sales or prices.

Representatives for Shimao, Country Garden, R&F, Greenland and Cindat didn’t immediately offer a comment, while calls to Aoyuan’s headquarters went unanswered. Citic referred all questions to the administrator.Play Video

To be sure, China is by no means the only source of potential distress in the commercial real estate market. South Korean investors timed a huge bet on offices badly, and higher interest rates have already caused German and Nordic landlords to sell off properties at large discounts. A wave of loans maturing in the US are also expected to lead to foreclosures by regional banks and sales of the underlying assets. But China is the market where perhaps vendors have the most incentive to sell quickly. 

The wider impact of such disposals will be determined by just how seriously the market takes the results, said Peter Papadakos, a real estate analyst at Green Street.

“It is debatable whether valuers will take them fully into account given the sellers are ‘motivated,’” said Papadakos. “In my opinion, they should.”