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Chinese property: Getting to grips with the unexpected

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By Rev Hui
26 Jan 2016

The Chinese property sector has once again found itself in the headlines for the wrong reasons with Future Land Development Holdings saying on Friday that its chairman was being investigated by the authorities. While there was the inevitable bout of panic selling, the short time it took for things to stabilise shows a maturing market that is fast getting used to the complexities of the industry.

The latest saga in China’s property market has started and revolves around Future Land chairman Wang Zhenhua, who is being investigated by the Commission on Discipline Inspection of Wujin of Changzhou, an anti-corruption arm of the local government. Future Land disclosed little in a filing to the Hong Kong Stock Exchange, saying only that Wang is being investigated for personal reasons.

The speculation is that the investigation is part of China’s anti-graft campaign and Wang is being probed because of his ties with Ling Guangyao — the former deputy party head of the Wujin district. Wujin was where Future Land first started its operations in 1993. A China-based spokesperson for Future Land declined to comment on Tuesday about the nature of the investigation.

Asking property developers to “co-operate” with investigations has become a frequent occurrence in in recent years, with the chairman of Agile Property Holdings going through something similar in late 2014.

A yet more dramatic example is that of Kaisa Group Holdings, whose chairman Kwok Ying Shing was also investigated by Chinese authorities. He resigned in December 2014 and the authorities subsequently implemented a sales ban on several of Kaisa’s projects — eventually leading to the first offshore debt default in the Chinese property sector. Kwok returned as Kaisa’s chairman in April 2015 and the bans have since been lifted.

While the circumstances were different for both Agile and Kaisa, the damage was substantial. Both the companies’ bonds and stocks crashed and the aftershock soon hit the wider property sector as well.

It took Agile months to recover and for other property developers to dip their toes once again into the offshore bond market. Kaisa, meanwhile, is still in the midst of a major debt restructuring programme.

Future Land’s announcement too was followed by the inevitable bout of panic selling, which took place on Monday morning. Its stock tanked by as much as 14% while its $350m 10.25% 2019s went from the mid-100s to as low as 88/89.

But it was a pleasant surprise to see that they didn’t stay down very long, with both the stock and bonds recovering strongly in the afternoon. Future Land’s shares ended the day just 5% down, while the bonds were quoted around 98/99 — not bad at all considering their performance in the morning.

What is even more heartening is the fact that the market has so far taken this as a company-specific event rather than an industry-wide problem. Chinese property bonds, for example, were mostly unchanged or just 0.5 cash points down on both Monday and Tuesday.

This reflects a maturing investor base that seems to have got used to the unpredictable nature of the asset class — and of the wider turbulence brought about by the crackdown on corruption, which in the past few months has seen numerous high-profile heads of various businesses come under investigation.

Returns of 14% for Chinese property high yield bonds in 2015 — one of the best performing globally despite the many setbacks — certainly makes it easier for investors to come to terms with any new volatility-inducing events. And with the asset class poised to benefit from more monetary loosening policies this year, investors are slowly showing that they are willing to ride the waves and take a longer term view on the sector.

This is a big step forward and it’s worth noting that it’s not just the buyside that has come out favourably. Future Land too was quick to run some damage control, setting up numerous investor calls on Monday to soothe nerves.

If this is indeed a sign of things to come with regards to how investors and companies react to negative news from the property sector, it lays a strong foundation for the rest of the year. 

By Rev Hui
26 Jan 2016