Property companies in China cannot get a break. Since the Chinese government started to tackle the issue of high leverage last year in a number of industries, including real estate, property developers have struggled to raise funds from the onshore market. It was only natural then for them to turn to offshore bonds to fulfil their funding requirements.
But what could the developers do when the government made even that avenue harder to access in June, by only allowing real estate credits to sell bonds internationally if the proceeds were for refinancing? The loan market proved the saviour.
So far this year, 21 property developers have announced or closed offshore loans worth a sizeable $15.5bn, according to Dealogic. In comparison, during the same time last year, 23 deals worth a smaller $10.9bn were issued, while in the 2016 year-to-date, the numbers stood at 23 deals worth $9.8bn.
The appeal of loans is easy to see. The bank lending market in Asia is deep, with lenders willing to put their money to work. Notably, Chinese banks have rarely shied away from supporting their country’s borrowers, as reflected in some of the numbers. Of the 21 property loans so far this year, 10 of the deals were lead by Mainland banks, or featured Chinese banks heavily among the mandated lead arrangers in case of a club-style deal.
But borrowers should be prepared for a reality check. International and Taiwanese banks have been stepping away slowly from property deals as they are cautious about the impact of the deleveraging policy on the industry. Many of the banks are increasingly selective, for example, by only lending to the top five companies by assets, or state-owned enterprises only.
Chinese banks too are coming under pressure. The pick-up in deal flow from property issuers this year means many of the lenders are now close to hitting their limits on lending to the industry.
Chinese banks that still have room to offer loans are also taking a more cautious approach.
They are doing this in a few ways — by being selective and lending only to stronger credits, by narrowing their list of eligible borrowers to the top 20 firms from the top 50 companies before, and by demanding juicer pricing. For example, one Hong Kong-based banker from a Chinese lender said his firm will need 90bp to 120bp in margin from a triple-B rated borrower seeking a three year facility — a rise from their previous expectations.
Needless to say, times are tougher for China’s property companies. They should be prepared for a bumpy ride.