Real Estate

Katrina Nicholas is a Bloomberg Gadfly editor. She previously oversaw corporate finance for Bloomberg News in Asia, where she has also been a reporter and editor. She has worked for the Australian Financial Review, Sydney Morning Herald and Nine Network.

For investors in Chinese developers' debt, there's something to be said for staying the course. This time last year, almost to the day, the Shenzhen-based property company Kaisa was teetering on the brink of default and noteholders had begun to engage advisers and law firms. BlackRock warned that the entire Chinese corporate sector was at risk, and real-estate stocks plunged.

On the Mend
Shanghai new-home prices increased 1.9% from November, the fastest pace in six months
Source: National Bureau of Statistics of China

Now those investors are looking more astute than audacious. Figures today from the National Bureau of Statistics that show new-home prices climbed in 39 cities, compared with 33 in November, are an indication that the authorities' easing measures are working. Ensuring the stability of the nation's property sector, which accounts for about one-third of the economy and feeds into many other industries -- house buyers are likely to seek washing machines, fridges, soft furnishings -- is high on the list of the Communist Party's priorities, and as Xinhua reported last month, will be key for 2016.

Streets Ahead
Chinese developer bonds were a standout in 2015
Source: Bank of America Merrill Lynch

 

Already this year, Chinese real-estate bonds have advanced 0.6 percent, a Bank of America Merrill Lynch index shows. That's near the top of the Chinese junk-bond return pile and a whole lot better than notes of oil companies, which not surprisingly are down as much as 18.7 percent. But it's last year's returns that really stand out.

In 2015, Chinese developer bonds increased an impressive 15.2 percent, beating 20 other industries tracked by the U.S. investment bank's index. If you'd purchased notes of, say, Agile Property 12 months ago, you'd be sitting on a 17.3 percent gain. Agile's Hong Kong-listed shares slipped 20 percent in the same period.

Nice for Some
Agile Property's 2017 dollar bonds are trading at 100.6 cents on the dollar from a low of 59 cents in 2011
Source: Bloomberg data

To put that in some more context, all Asian dollar bonds clocked a 2.8 percent increase last year, while high-yield debt globally tumbled 2.1 percent.

Nobody expects Chinese real estate to be smooth sailing from here on in. Weaning the economy off smokestack industries and toward consumer-focused growth is still a work in progress. Expansion last year was probably 6.9 percent, the slowest in more than a quarter century, according to a Bloomberg survey of economists late Friday, and fourth-quarter and full-year GDP numbers due Tuesday will be closely watched.

Developers with exposure to offshore debt markets will come under added stress if the weakness in the yuan is prolonged. Standard & Poor's says most issuers can withstand another 10 percent depreciation from the Chinese currency's level at the end of 2015 before ratings become vulnerable. However, there's greater risk for those with foreign-currency liabilities denominated in U.S. dollars or Hong Kong dollars, which are pegged to the greenback. Those developers don't have a natural hedge, and hedging costs are quite prohibitive in the offshore market, because the yuan isn't freely traded.

Lucky, then, that Chinese developers have found a welcome funding avenue over the past 12 months in the nation's domestic bond market. Offerings totaled 459.7 billion yuan ($69.9 billion) in 2015, compared with 141.1 billion yuan in 2014, according to data compiled by Bloomberg. That additional capital, which also comes at a lower cost, will provide something of a cushion and should give dollar bondholders added comfort that their obligations will be serviced and repaid.

Whether 2016 emerges as another stellar year for Chinese developer bonds remains to be seen, but considering the headlines this time last year, it's off to a good start.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Katrina Nicholas in Singapore at knicholas2@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net