Even seasoned bankers and real estate investors, honed by past financial markets and health crises, are no match for the calamity brought by the US-China trade war and the coronavirus pandemic.
Phoenix Property Investors, a US$7.7 billion real estate fund, has six months to save itself from potential cascading defaults in two commercial property bets in China after the market cracked, banks trimmed lending and co-investors balked at a restructuring proposal.
Two funds managed by Phoenix and outsider co-investors could lose as much as 74 per cent of the equity they pooled to part finance the down payments for Tower A and B at One Financial Street in Shanghai, an office and retail development situated strategically near the Shanghai railway station.
The transactions, worth almost 4 billion yuan (US$562 million), hinge on repaying two offshore bridging loans maturing in November used to pay for part of the costs, according to a document seen by the South China Morning Post. "We cannot refinance," it warned.
Unable to close the transactions, Phoenix considered cutting its losses or finding new buyers for the assets in a proposal last month. Investors balked at the prospect of sinking more capital or offloading the assets at depressed prices, at least according to one stock exchange filing.
"This is just a short-term crisis," Samuel Chu Wai-tak, managing partner and chief investment officer at Phoenix, said in an interview on June 17. "It's a worst-case scenario. We are looking at various options in the hope of preventing our investors from suffering any losses."
The rare distress offers a cautionary tale of how the US-China trade war and the coronavirus outbreak spread the pain around the world's biggest money management firms, as China's much-vaunted economy shrank for the first time since 1992.
Samuel Chu, managing partner and chief investment officer at Phoenix Property Investors. Photo: SCMP alt=Samuel Chu, managing partner and chief investment officer at Phoenix Property Investors. Photo: SCMP
In the mainland's US$2.3 trillion real estate market, it could be a reminder for investors like Brookfield Asset Management and Blackstone Group. Or the likes of GIC Real Estate and Oaktree Capital Management, who have a war chest to buy the dips.
It was not supposed to turn out like this when Phoenix first invested in Tower B and sold the plan to outside investors in October 2017, according to Chu, a former Deutsche Bank executive who co-founded the firm with ex-Morgan Stanley bond trader Benjamin Lee Kai-yiu in 2002.
Phoenix has made money for its clients over an 18-year span, since the first Phoenix Asia Real Estate Fund came into being, according to Chu's past media interviews. They burnished its track record over about 100 properties.
From redeveloping prime land in Mid-Levels to churning pre-war colonial shophouses in Singapore and gleaming office blocks in Jakarta, Seoul and Osaka, they have bought and sold US$4.1 billion of them.
Like its earlier forays in mainland China, the deals for One Financial Street in October 2017 and January 2018 went like clockwork at the outset.
Not many, however, could have foreseen the events that followed next. The United States and China quarrelled over trade, anti-government protests in Hong Kong gained momentum and a novel coronavirus emerged, jolting markets and crashing the value of financial and real assets.
At Phoenix, the stresses soon snowballed. Tenancy offers were 20 per cent to 30 per cent below underwriting levels and banks tightened margin loans. Chu and his team have had to offer longer rent concessions to fill up floors.
All told, the towers were substantially lagging behind their budgeted targets by the time Phoenix rang the alarm bell.
"China's commercial real estate sector entered a bear market, both in terms of capital value and rental," Phoenix said in the restructuring proposal in late May. "We are therefore walking towards a purchase default situation."
An artist's impression of One Financial Street, an office and retail development near the Shanghai railway station. Photo: Handout alt=An artist's impression of One Financial Street, an office and retail development near the Shanghai railway station. Photo: Handout
"The Covid-19 pandemic dragged down what was already a weak office market in China," said Wang Feng, chairman of Shanghai-based real estate investor Ye Lang Capital, which is not involved in the Phoenix projects. "It has deterred investors from going into projects with low occupancy rates."
There were two options in Phoenix's rescue proposal. Either abandon the two transactions and negotiate for lower penalties, or find new buyers for one or two of the towers to help pay off the maturing bridging loans, whose lenders were not disclosed.
It is not known if Phoenix had obtained unanimous consent from both sets of tower investors by the June 3 deadline. Chu declined to disclose the status of current negotiations.
Hong Kong-listed ship chartering group Jinhui Holdings, which had committed US$10 million for one of the office towers, was not immediately impressed after receiving the update from Phoenix on May 26.
In a May 28 stock exchange filing, the shipping firm said it was still considering the financial and commercial impact of the options, and had not decided on consenting. It has not filed new updates as promised since the deadline passed.
"This is just like what Warren Buffett once famously said, 'you only find out who is swimming naked when the tide goes out'," said a person close to some investors in Phoenix funds, who declined to be named. "The manager is probably too optimistic and expects prices to go up and up. There may be more fund managers in the same boat."
Chu remained upbeat despite the looming deadlines for the bridging loans. One Financial Street is a good project, in a very good location, he said in the interview. The market should bounce back in the next two years, he added.
"Since Phoenix's inception in 2002, we have invested in a total of 99 properties," he added. "We have been able to generate profit on 96.8 per cent of all equity invested and allocated. I believe our co-investors will not abandon us."
With additional reporting by Daniel Ren in Shanghai
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.
Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.