Chinese property bonds are going through a rough period. Concerns around a toughened policy stance from regulators, the overwhelming year-to-date primary supply and broader market sentiment shifts have caused some investors to distance themselves from the sector.
As a result, dollar bonds from China Evergrande Group, Fantasia Holdings Group, Golden Wheel Tiandi Holdings, Modern Land China Co and Xinyuan Real Estate are trading around the low 90s or even well into the 80s in the secondary market. Even lower beta names with investment grade ratings, such as China Jinmao Holdings Group and Sino Ocean Land, have widened by 30bp-50bp in recent weeks.
The sector is also seeing more divergence. The spread differential between single-B and double-B rated names widened to 240bp by the end of September, according to JP Morgan.
In new issues, a shift from a seller’s market to a buyer’s market has forced Beijing Hongkun Weiye Real Estate Development Co, Fujian Yango Group, Helenbergh China Holdings and Zensun Group to offer yields of between 12.5% and 14.75% for relatively short-dated bonds.
The worries and the fatigue are justifiable. Cracks in the Chinese property market are showing amid a moderation in the country’s economic growth. This is as regulators, including the National Development and Reform Commission (NDRC), tighten the financing environment for the sector both on and offshore, putting refinancing risk back in the spotlight.
Issuers have raced to raise debt this year in a market that is already oversupplied. Chinese developers collectively printed a record $60bn of dollar bonds during the first nine months of 2019, almost 40% higher than the full-year 2018 issuance from the sector.
Naturally, that excess supply has put investors in dire need of diversification away from property names and, to some extent, Chinese bonds.
But the property bond market is far from broken. Among international deals from the country, real estate is still the most understood — and arguably, the most predictable — sector, and it comes with attractive yields. While the historical spread premium for Asian bonds has compressed over the years, Chinese high yield property bonds that were included in the JP Morgan Asia Credit Index were still trading at least 386bp wide of similarly rated US comparables as of late September, according to the bank’s research desk.
More importantly, a slowdown in the pace of new issues from this quarter is foreseeable. Deal flow has already started to become more disciplined since the NDRC’s move in July to limit the use of proceeds from property bonds to strictly offshore refinancing, triggering a likely rebalance between supply and demand.
Adding to the equation are two other things. Cheap onshore funding conditions this year have kept international issuance from state-owned enterprises and financial institutions largely at bay, while high yield industrial credits and bonds from non-Chinese borrowers have continued to be sporadic.
That, coupled with a similar issuance restriction on local government financing vehicles — another important segment of the dollar bond market in Asia — means investors will likely be willing to take whatever bonds come their way, especially if it’s from a quality name.
As distinctions between the good and the weak credits continue to become clearer, defaults may be inevitable. But investors will also find more buying opportunities — so long as they don’t write off property bonds just yet.