Chinese property companies look set to increase dollar bond issuance next year from a record in 2017 as domestic restrictions hamper debt offerings at home, while raising risks for investors.
Real estate companies more than tripled dollar bonds sales to a record $46bn this year, exceeding onshore issuance for the first time, according to data compiled by Bloomberg. Sales at home slumped 67% after China late last year stepped up scrutiny of developers’ exchange-traded notes amid efforts to tame house price gains. Total developer bond issuance fell for the first time in a decade.
Fundraising curbs increase credit risks for builders facing a record $31bn of onshore and offshore bond redemptions next year, which may balloon to $70bn, if put options are exercised, Bloomberg data show.
Still, a surge in contracted sales and a recovery in profitability for large developers should shield them from higher funding costs in 2018, according to Christopher Yip, a real estate analyst at S&P Global Ratings. “I’d expect the regulators to maintain moderate tightening guidance on their onshore borrowings next year,” said Jason Wang, China head of debt capital markets at UBS Group AG in Hong Kong. “Property developers in China are likely to maintain robust offshore dollar funding demands in 2018.”
Single B rated China Evergrande Group led dollar bond sales from the sector this year with more than $9bn of issuance, while Kaisa Group Holdings, which defaulted on notes in 2015, sold in excess of $5bn of bonds, according to data compiled by Bloomberg. Some 50 real estate-related issuers sold dollar notes from China in 2017, the data show.
A surge this year in domestic corporate bond yields also makes dollar issuance more attractive for developers. The yield on five-year top-rated local corporate notes jumped about 140 basis points since the end of last year as the government pushed ahead with deleveraging measures, data compiled by clearing house ChinaBond show.
Refinancing is the biggest challenge faced by developers, especially those not armed with diversified financing channels, according to S&P’s Yip. While China’s deleveraging plans are positive long term, Standard Life Aberdeen Plc has been cutting holdings of Chinese property bonds in 2017 on concerns the measures will “feed through into Chinese property spreads.”
New home price gains accelerated in November after slowing in September, pointing to persistent price pressures as the government tries to control a frothy housing market without triggering dangerous corrections.
Investor demand for yield and a stable outlook for the sector should keep default rates low in 2018, according to Alaa Bushehri, a portfolio manager for emerging market debt at BNP Paribas Asset Management.
A woman crosses a footbridge in front of towers at Kaisa Plaza, developed by Kaisa Group Holdings (left) in Beijing. Kaisa Group, which defaulted on notes in 2015, sold in excess of $5bn of bonds, according to data compiled by Bloomberg.
