The affluent have piled in as developers sold a record $26bn in US dollar bonds in the first quarter
25 May 2020 - 17:24 Lulu Yilun Chen and Rebecca Choong Wilkins
The Hong Kong city skyline. Picture: 123RF/SEAN PAVONE
Hong Kong — When China’s largest residential property developer raised money in May, a third of interest came from banks that service the wealthy, a group keeping faith with the nation’s beleaguered builders even as other investors flee.
The affluent in Hong Kong and the mainland have piled in as Chinese developers sold a record $26bn in US dollar bonds in the first quarter and $1bn since, brushing aside concerns that pushed junk-bond yields to an eight-year high in March.
Heightened interest from private bank clients and family offices is an important support as developers look to refinance or repay at least $20bn of debt in a year of uncertain prospects for real estate. Lockdowns across Asia’s largest economy have forced more than 100 builders into bankruptcy and the swelling ranks of the unemployed are a continuing threat for the indebted sector. Still, there’s confidence that Beijing won’t allow a property collapse at a time of slowing economic growth.
“Yields are especially high this year, giving investors good returns as they bet on the long-term health of China’s property market,” said Andy Kowk, first vice-president of wealth management at Guotai Junan Securities Hong Kong. “Wealthy investors from mainland China and Hong Kong are very substantial buyers of Chinese developer US dollar bonds.”
Private banks made up 32% of preliminary orders for a bond offering from home builder Country Garden Holdings last week, a person familiar with the matter said. They accounted for 10% of interest in Zhenro Properties Group’s issuance, which helped reopen the high-yield bond market after a March sell-off made investors wary of junk-rated names.
Kowk has helped distribute bonds from firms including Country Garden, China Evergrande Group and Kaisa Group Holdings. Buyers ranged from those with $1m in investable assets to ultra-high net worth investors, he said.
Private banks have subscribed to $4.9bn of Chinese high-yield bonds so far in 2020, up 36% from the period in 2019, data compiled by Bloomberg from available deal statistics show. Debt issued by developers make up the bulk of China’s junk bond issuance.
The risks of such investments are apparent in the struggles of luxury home developer Tahoe Group, which is shaping up as the sector’s first major casualty of the coronavirus outbreak after saying it faces growing obstacles to repaying debt. It is among builders hobbled by the virus after being weakened by buying restrictions meant to keep homes affordable.
Still, recent data has pointed to a revival in home sales and price growth as the central bank eases credit conditions. Easier and cheaper mortgages, along with reforms to a registration system that had limited home-buying should help prevent a bigger fall in transactions, said UBS chief China economist Wang Tao.
The offshore debt of China’s developers, though typically high-yield, also tends to be safer than local paper. There have been only five defaults on offshore notes by firms with S&P Global Ratings in the past decade.
Even so, developers are paying a premium to raise funds outside China, where markets are more volatile as they lack the liquidity support that’s steadied domestic yields, said Matthew Chow, a Hong Kong-based analyst at S&P.
Hermitage Capital, a family office in Hong Kong with $300m in assets, has 80% of its investments in bonds, most from Chinese builders, said CEO Jin Zi. It has been buying dollar bonds issued by China’s top 50 property developers, he said.
“Government land auction prices continue to increase, but many developers are sitting on significant land banks, which they bought at relative cheap costs years ago,” Jin said. “Onshore lending rates for those developers are much cheaper than their offshore lending rate, so now is a great time to buy their US dollar bonds.”
Yields on the junk-rated dollar bonds of Chinese real estate companies were more than 300 basis points higher on May 22 than a year earlier, according to data compiled by Bloomberg. Their three-to-five-year dollar debt offered a yield premium of about four percentage points over yuan-denominated paper, the data show.
“Chinese developers who are able to get a rating for offshore bonds are generally of better quality compared with those who can only do onshore issuance,” said Chow. “Many issuers have built a capital and refinancing buffer at a crucial time.”
