Another two bonds make China real estate a hot topic

Specialists and analysts have all predicted that China property will be, again, a hot sector for the Asian bond markets this year. And the forecast is certainly panning out this quarter. Over the past week, Country Garden, Agile Property Holdings and Kaisa Group have all priced deals in the high-yield market. And, on April 14, Evergrande Real Estate (B1/BB) executed a $600 million private placement.

Left in the immediate pipeline is Glorious Property Holdings (provisional B1/B+), which went on the road at the beginning of this week, and Yanlord Land Group (Ba2/BB), which is expected to come to market this month. China Aoyuan Property Group is also expected to issue a high-yield bond this quarter.

The driving force behind these firms pricing high-yield deals is a combination of tighter regulations in the domestic market and a change in market fundamentals that are pushing these companies to sell debt offshore.

The case for high yield can be explained simply. "Investors feel that the Chinese property development sector is risky because of the volatility in the domestic market compared to other sectors," said Kaven Tsang, an analyst with Moody's Investors Service. As a result, there is demand for a risk premium compared to other local infrastructure sectors, which is typically factored into price.

And because of the strong supply in the market, there is competition. "If a developer wants funding from investors, they should expect to pay a certain premium to affect demand," said Tsang. Under these conditions it would therefore be difficult to attain a lower funding cost in comparison to the other more stable sectors.

Timing

Fergus Edwards, head of syndicate at UBS, said the surge of property names coming to market was very independent to the issue of future interest rate hikes and expected increases in inflation. "This is not a question of relative government yields and interest rate projections making offshore borrowing marginally more desirable than onshore," said Edwards. "This is a high-yield market that was closed at ratings just below investment grade for many months and is now reopening at a higher yield."