China property bond issuances show no sign of slowing down

Chinese real estate firms have more than doubled debt issuances to US$103 billion and are showing no sign of letting up in the face of a booming property market and surging housing prices.

In the first eight months of the year, issuances by Chinese developers outpaced total volume of US$47.23 billion in 2015, data from Dealogic show. By contrast, offshore property financing stood at US$10.6 billion in the period. The total offshore debt stood by developers at US$15.5 billion in 2015. 

More Chinese property companies are boosting their onshore financing to take advantage of record-low interest rates for onshore bonds. The devaluation of the renminbi has also encouraged developers to focus on raising funds onshore.

“The trading volume of the Chinese property market is still increasing and the developers are still looking to supplement their land collection especially in key areas, due to a lower financing cost. We still expect the (onshore) financing demand of those property developers to continue,” says Le Jiadong, analyst of GF Securities.

“The easing monetary policy as well as the lack of investment opportunities attract a lot of low-cost capital from asset management companies into real estate sector,” he adds.  

China has reopened the domestic bond market to developers at the end of 2014, but most developers started only issuing domestic bonds in the second half of 2015.

Strong financial performance acts as a solid foundation for the Chinese real estate developers. "Cumulative contracted sales for the 20 rated developers that we track grew 62.1% year-on-year in January-July 2016 to around RMB1.2 trillion, outpacing the 41.2% increase in national sales over the same period," says Cindy Yang, a Moody's Analyst. "We expect their strong execution, reputable brands, and solid financial and liquidity profiles will strongly position them to benefit from the industry's ongoing consolidation," adds Yang.

Moody's liquidity index for Chinese property developers also improved slightly to 24% in July 2016. In total, 12 developers – mostly rated B2 or below – demonstrated weak liquidity. The improvement was due to one developer's strengthened liquidity following its disposal of various assets.

According a recent report from Moody’s, the property price growth in first-tier cities, while still strong -- moderated to 29.2% in July from 30.7% in June on a year-on-year basis. The property price of second tier cities, however, increased dramatically in the past few months. Xiamen, Nanjing and Hefei have seen inflation rate in real estate at 40%, 34.9 and 34%, data from National Bureau of Statistics shows.

Chinese property developers used to be active in offshore fundraising. In 2015, China Overseas Land & Investment issued a 600 million euro (US$670 million) bond with a coupon rate of 1.75%, a third of the interest rate to borrowers in China at that time. 

Until China has successfully transitioned to a consumption driven economy, robust fundraising in the property sector will continue, says analyst. Real estate still accounted for 6.1% of GDP in 2015, according to Chen Zhenggao, Minister of Ministry of Housing and Urban-rural Development.

Central state-owned enterprises that run property businesses have also contributed to a large portion of the industry’s profit, bolstering consolidation. According to Moody’s, the property business accounted for 95% of the profit of China Poly Group. In the first half 2016, the developer raised a total of 10 billion yuan from the onshore debt market at a borrowing cost of 2.95%-4.19%. In June, the company completed the placement of 1.1 billion non-public A-shares to four investors with net proceeds of around 8.9 billion yuan.