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Asia’s answer to green bond push lies in China property

By cult\morgan.davis
08 Sep 2020

Green dollar bonds from Chinese high yield real estate developers are rare, but property companies have the potential to push the green market in the region to the next level — and see some pricing benefits in the process.

Only five high yield Chinese property companies have sold green dollar bonds, with four of those coming to the market this year, according to Dealogic. Three of the 2020 deals were debut sales from Cifi Holdings (Group) Co, Yuzhou Group Holdings Co and Zhenro Properties Group.  

This slow growth from the sector is telling. China is known for leading the world in green bonds, and last year was second only to the US for green deals, according to the Climate Bonds Initiative. But Chinese green bonds are largely issued in the domestic market, while the international deals tend to be blockbuster-sized trades from the country’s big banks.

This is well and good for the establishment of a new market, but the green market is no longer that. It has become a mainstream part of banks’ debt business in recent years, while borrowers are also increasingly starting to look at their operations from a wider environmental, social and governance (ESG) angle.

Then who better to lead China’s charge in the international green market than its property borrowers?

These issuers, which generally stick to more modestly sized deals, dominate offshore bond supply in Asia. So much so, that it’s a rare week when a developer is not tapping bond investors for funding. But if they start selling green deals as part of their repertoire, the green market will truly blossom — bringing not just more volume but also new names and diversity for ESG-focused investors.

Green bonds should come naturally for many property companies. Those that are established in the upper tier cities likely already have to deal with local regulations regarding environmental standards of new buildings.

As Zhenro’s chief financial officer, Kenny Chan, told GlobalCapital Asia after its maiden green bond last week, his company had established ESG practices for years; it had just never formalised its fundraising as “green”.

This would likely be the case for a number of other Chinese real estate credits too. Investors are increasingly demanding more transparency around companies’ practices, and firms that are listed on the Hong Kong Stock Exchange now face mandatory ESG disclosures. The Covid-19 pandemic has also thrown some fresh light on the need for better standards and market practices amid a rush of social and sustainability linked bonds globally.

Borrowers that choose to follow in Zhenro’s footsteps will undoubtedly be rewarded.

As Zhenro found, investor orders are bigger when a green label is used. Large asset managers that have both conventional and sustainability-dedicated funds may double up, placing bids from both funds. Investors with explicit ESG mandates will also be able to invest when they could not before. And, because most green transactions in Asia come from sovereign, investment grade and financial issuers, being a high yield property company is even more appealing. ESG investors will be keen on the yield that these borrowers can offer, and the diversification they bring to their portfolios.

Zhenro, for instance, was able to sell its $350m 2025 notes about 15bp-20bp tighter than it would have sold a conventional deal. The borrower’s 7.35% coupon was its lowest ever — in large part thanks to additional demand from green funds — and it was one of the first cases where a borrower in Asia found real pricing benefits with a green deal. 

Of course, not every Chinese real estate company will be able to replicate Zhenro’s success.

Zhenro is a frequent borrower with well-established relationships with global investors. The firm also benefitted from a strong market backdrop last week, and the momentum of Modern Land (China) Co having tapped its green bonds just a few days before.

But Zhenro’s trade did show that pricing advantages are possible with green bonds — and that selling such deals is the natural next step for China’s property credits. The firm has laid the groundwork. Now, other property companies should take the green market further. 

By cult\morgan.davis
08 Sep 2020