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Chinese property bonds are on shaky ground

China Property (resized 230)
By Addison Gong
03 Nov 2016

Chinese property issuers have stormed the international debt market recently, making a big comeback after months of relying on domestic bond fundraisings. But with the offshore market softening and the outlook around the sector cooling, high yield issuers should be prepared for a bumpy ride.

There has been a surge of issuance from Chinese property names in the last few months, outstripping the volumes in the first half of the year. Offshore dollar bonds sold by Chinese property developers between January and July totalled $1.49bn. By comparison, the volume for August was $1.55bn, rising to $1.9bn in September and posting a robust $1.19bn in October, according to Dealogic data.

And supply is set to further increase. The Shanghai Stock Exchange has started to tighten approvals for domestic corporate bonds and is mainly targeting real estate companies. The Shenzhen Stock Exchange is also understood to have raised the threshold for property developers to sell bonds in the local market, according to media reports.

Against such a market backdrop, it is only natural that more developers will soon start turning offshore.

But there are now signs that high yield property names are facing a challenging time. On Monday, Central China Real Estate had to extend bookbuilding for a new five non call three by one day due to weak demand. Initial price thoughts in the 6% area were considered too ambitious, meaning the bookrunners had to revise guidance to a more generous 6.75%, before pricing the deal at the same level on Tuesday.

Central China’s problems are a reflection of a wider pricing trend offshore.  Although still at a historic low, yields have increased for property issuers since the summer.

For example, Country Garden Holdings sold its $650m 4.75% seven non call four at 98.539 to yield 5% in late September. It had a bid price of 96.75, or a yield of 5.318% on Tuesday. More recently, Modern Land China Co’s $350m 6.875% three year green bond was priced at 99.667 to yield 7%, while its bid yield on Tuesday had gone up to 7.835%.

The rise has been across the board. According to the Chinese Offshore Bond Index’s (COBI) HY property index, yields on Chinese property bonds have risen to 5.53% as of October 31 from 5.02% on August 1.

There are a number reasons behind the hefty rise in yield, including the recent overflow of supply and rising concerns of a property bubble in China. As part of those concerns, Chinese regulators launched a new round of measures to rein in property prices in more than 20 cities in mid-September, attempting to cool the market. This has only fuelled concerns about companies’ ability to repay their offshore debt, impacting sentiment around the sector.

As a result, investors are growing more cautious on Chinese property. Of course, in tough markets investors will prefer investment grade credits, but with Beijing Capital Development Holdings (Group) Co he only high grade Chinese property issuer from China so far this year, investors will be forced to look at high yield.

For property bonds in the pipeline, fundamentals and valuation will become more important than ever.  Issuers wanting to find a home with international investors will have to offer a strong credit story and be realistic about pricing expectations.

By Addison Gong
03 Nov 2016