China Housing Frenzy Makes Property Bonds Fund Manager Darlings

  • Returns of 2% in 2016 third best on Merrill yuan bond index
  • First State Cinda likes real estate bonds on official support

The home-buying frenzy in Shanghai and Shenzhen is spurring China’s fund managers to load up on property bonds.

Yuan-denominated real estate notes returned 2 percent this year, third only to electric and oil service companies among Chinese corporate securities, according to Bloomberg analysis of a Bank of America Merrill Lynch index. In a sign of confidence, Poly Real Estate Group Co. sold five-year notes at 2.96 percent on Feb. 23, eight basis points lower than the rate for debt issued by China Development Bank Corp., the nation’s biggest policy lender.

Home prices in Shenzhen, China’s southern business hub, have jumped 52 percent over the past year, while those in Shanghai surged 18 percent, prompting the official Xinhua News Agency to warn against “panic” buying. The rally is cutting developers’ borrowing costs after the central bank lowered interest rates six times since November 2014. Chinese developers are also replacing dollar debentures with cheaper yuan financing, boosting demand for their offshore notes.

Midnight’s Homebuyers

“We favor property bonds because the government will continue to boost the industry,” said Qiu Xinhong, a bond fund manager at First State Cinda Fund Management Co., which oversees 10.7 billion yuan ($1.6 billion) of assets. “The improving balance sheets, the falling borrowing costs and the increasing sale prices will help reduce developers’ credit risks.”

The government’s monetary stimulus and loosening of property curbs last month have spurred buying mania in some first and second-tier cities. Lines of prospective buyers outside property agents’ offices in a Shanghai suburb clogged roads and forced police to curb traffic to maintain order, Caixin reported on Feb. 29. Some buyers even waited in line from midnight to buy homes in second-tier city Nanjing, capital of the eastern province of Jiangsu, government-owned website reported on Feb. 28.

The excitement allowed developers to sell 79.39 billion yuan of bonds in the first two months of this year in the onshore market, up fourfold from the 18.35 billion yuan a year earlier, data compiled by Bloomberg show. Dalian Wanda Commercial Properties Co.’s 2020 bond returned 12 percent in the past three months, while Wuhan Langold Real Estate Co.’s 2018 notes returned 10 percent.

Christopher Yip, an analyst in Hong Kong at Standard & Poor’s, said excessive price increases in top-tier cities bring more uncertainties than benefits to developers and could spur targeted government restrictions. Shanghai’s most-senior official said on March 6 the city’s property market has “overheated” and should be more tightly controlled.

“The divergence of pricing between top-tier and lower-tier cities isn’t healthy," said Yip.

Terence Cheng, a fund manager who helps manage a fund targeting foreign-currency bonds for HuaAn Fund Management Co. in Hong Kong, says finances of property companies are improving. A total of 47 Chinese listed developers have total debt larger than equity as of the end of the third quarter of 2015, compared with 50 a year ago, according to data compiled by Bloomberg.

Policy Support

“Property developers’ fundamentals are getting better and better,” said Cheng. “The government won’t tighten the market since only some first-tier cities are seeing price gains while increases are not big in second or third-tier cities.”

In south China, for example, Guangdong Governor Zhu Xiaodan said his province is drafting a plan to allow some large state-owned enterprises to purchase homes to help reduce inventory.

Chinese dollar-denominated property bonds have also been rising, with the yield
on Future Land Development Holdings Ltd.’s 2017 note falling 42 basis points this month to 6.81 percent and that on Evergrande Real Estate Group Ltd.’s 8.75 percent 2018 notes dropping 36 basis points to 9.15 percent. .

Gordon Ip, a Hong Kong-based senior fund manager at Value Partners Group Ltd., said there is still room for dollar property bonds to gain because of the industry’s importance to the whole economy.

“We believe the Chinese government will continue with supportive measures because they need to support the growth of gross domestic product and property is quite a big component of that,” Ip said.

— With assistance by Lianting Tu, and Judy Chen

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