China Property Cooling Prompts Revival of Builder Bonds

Residential Development Model in China

China’s government is authorizing developer debt sales for the first time in five years in a bid to avoid bankruptcies as the property market cools.

Jiangsu Future Land Co., a builder of homes in eastern China, sold 2 billion yuan ($323 million) of five-year AA rated bonds last week to yield 8.9 percent. That’s less than the average 9.73 percent on trust products that many developers relied on for financing after authorities stopped approving onshore note issuance in 2009.

The China Securities Regulatory Commission reversed course in April when it granted four real estate companies the right to sell the securities, after the collapse of a builder south of Shanghai the previous month underscored financing strains. The government allowed the first mortgage-backed debt sale since 2007 last week, in the latest step to ease restrictions on the industry as new home prices drop in a record number of cities.

“The issuances are obviously an easing signal,” said Xu Hanfei, a bond analyst in Shanghai at Guotai Junan Securities Co., the nation’s third-biggest brokerage. “The CSRC will probably approve more note sales as long as developers have fund-raising demand. It would be helpful because bond costs are lower than trusts.”

Issuance Returns

The first builder to sell debentures onshore after the regulator began granting approvals again this year was Tianjin Realty Development Group Co. The residential and commercial developer issued 1.2 billion yuan of AA rated seven-year bonds in April. That was the first sale of property bonds regulated by the CSRC, which regulates stocks and bonds, since an offering by Guangzhou Donghua Enterprise Co. in December 2009.

The securities regulator has also approved bond sales by Wolong Real Estate Group Co., Hubei Fuxing Science & Technology Co., Chongqing Yukaifa Co. and Shanghai Jinqiao Export Processing Zone Development Co. since April.

The pressure on Chinese real estate companies was underscored by the collapse in March of Zhejiang Xingrun Real Estate Co. Developers including China Vanke Co., the nation’s biggest, and Greentown China Holdings Ltd., the largest in the eastern province of Zhejiang, have cut property prices since then to boost sales. The slump comes as economic growth is set to cool to 7.4 percent this year, the slowest in more than two decades, according to the median estimate of economists surveyed by Bloomberg.

‘Huge Debt’

The move to allow Chinese builders to tap the onshore note market, instead of raising funds from so-called shadow-banking products such as trusts or through international bonds, parallels the first regulatory approvals for new-stock sales in about four years. The CSRC said in March that Tianjin Tianbao Infrastructure Co. and Join.In Holding Co. were allowed to sell yuan-denominated A shares in private placements.

Jiangsu Future Land said it will spend the proceeds from its bond sale to repay bank loans and replenish working capital, according to the prospectus. Tianjin Realty Development said it will use the money it raised to invest in a lower-cost housing project and repay borrowings.

“Property companies are facing huge debt burdens,” said Sun Binbin, a bond analyst at China Merchants Securities Co. in Shanghai. “If the regulator hadn’t eased, there probably would have been more defaults.”

Weak Demand

Cooling economic expansion has pushed the yield on China’s benchmark five-year sovereign note down 44 basis points this year to 4.02 percent. The rate on AA rated similar-maturity bonds declined 104 basis points in the same period to 6.55 percent.

Even as overall borrowing costs decline, some developers are still facing a higher premium to sell debt. While the media company Anhui Radio Film & TV Media Industry Group Co. also issued five-year AA rated bonds this month, its 6.44 percent yield was 146 basis points lower than Jiangsu Future Land’s.

“Demand for bonds issued by private property companies is weak,” said China Merchants’ Sun. “Even though the regulators have eased controls on property companies’ financing, investors are still concerned these companies’ credit risks are too high.”

Housing prices fell in 55 of 70 cities last month from May, the most since January 2011 when the government changed the way it compiles the statistics. New mortgages in Shanghai, China’s financial center, declined 2.2 percent in the first half, according to a statement posted on the central bank’s Shanghai head office website.

‘Right Move’

The central bank in May called on the nation’s biggest lenders to accelerate the granting of mortgages to first-home buyers. Some Chinese cities, including the northern city of Hohhot and the eastern city of Jinan, have started to relax property curbs to stimulate the local market.

Allowing bond sales by property companies is part of government easing measures along with the removal of property curbs and the support of mortgage lending, according to Frank Chen, head of China research at CBRE Group Inc., a commercial real-estate services company based in Los Angeles.

“The revival of property bonds is the right move in the long run,” given real estate’s close ties to many industries including cement, steel and even banking, said Chen in Shanghai. “Property is the single most important sector to the Chinese economy.”

— With assistance by Judy Chen

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