A record issuance of US$6.2 billion of corporate bonds by Hong Kong property companies reflects the contraction in the availability of bank debt and the rising cost of bank loans. Developers are expected to continue tapping the bond market in search for cheaper funds as a result of weak syndicated loan market.
“We think there could be more supply from the property space; developers are likely to continue to tap the bond markets,” said Agnes Wong, a Hong Kong-based credit strategist at Nomura to Asiamoney PLUS in a telephone interview Wednesday (February 15). “They may actively look for new land supply in the future.”
“In the past, we normally see investor fatigue after a few deals but even after two weeks of seven to eight issues, we haven’t seen that yet,” said Gina Tang, a Hong Kong-based head of debt capital market at HSBC to Asiamoney PLUS in a telephone interview on February 10. “We are fairly optimistic and see a bit of a pipeline going into the quarter.”
The Kwok family's Sun Hung Kai Properties and billionaire Peter Woo's Wharf Holdings led seven Hong Kong real estate companies selling US$6.18 billion of bonds in 2012, the busiest quarter on record, according to data compiled by Bloomberg. Loans to the city's developers slumped in the second half of 2011 to the lowest level in two years.
Loans to Hong Kong developers plunged 90% to US$541 million in the second half of 2011, down from US$5.6 billion in the first six months of last year, said Bloomberg.
Nomura noted that Swire is the only sizable player left in the Hong Kong property market that has not issued and also highlighted some China property names to keep a look out for – those with the tightest yields are most likely to issue such as Country Garden and Agile Property Holdings.
According to a research report released by Barclays Capital yesterday, property developers have been issuing five-year at yields between 3.54%-5.16%.
Given the Federal Reserves’ commitment to low rates until 2014, corporate lending spreads over Hibor are in the region of 321-483 basis points (bp), which is a marked increase over the Hibor+37bp achieved by developers in 2007, said the report.
“This highlights the continued tight liquidity in the banking system, the withdrawal of continental European banks and concentration risk among liquid lenders,” said Andrew Lawrence, a Hong Kong-based director of property research at Barclays in a statement. “Developers sudden rush into the bond market is not to diversify funding sources, but a search for available funding.”
As a result of limited availability and higher borrowing cost of corporate debt, Barclays believes that developers will partially deleverage. Real estate developers have started selling non-core property assets and are speeding up their primary property sales.
Developers with the highest gearing levels and heaviest reliance on the syndicate loan market like Sun Hung Kai Properties and Henderson Land, and those with heavy capital expenditure plans, including Wharf and Kerry Properties, have been the most active bond issuers.
“The reason for the massive supply is due to the very slow syndicated loan market last year. Loan to deposit ratio stands high,” added Wong. “The interest rate for these syndicated loans has increased significantly; the effect was opportunistic given that the bond market window has been open.”