Offshore bond issuance from China’s property sector evaporates

The debt woes of private Chinese developers have reverberated across their Hong Kong-listed counterparts in the past two years. Last month, HKEX-listed developer, Times China Holdings, announced its default on US dollar senior notes due 2023 and 2024, joining the fate of peers, China Evergrande Group and Kaisa, who suffered back in 2021.

Among those Chinese property developers active in the sector so far this year, only Dalian Wanda Commercial Management has issued two tranches of offshore US dollar bonds totalling $700 million. But it is worth noting that the firm is focussed is on the management of retail premises rather than property construction and development, Iris Chen, a Nomura credit analyst, told FinanceAsia.

In 2022, just $1.05 billion of issuance in offshore US dollar bonds from Chinese property developers, compared to $39 billion in 2021, Chen said.

“We think the risk appetite for US dollar bonds issued by Chinese property developers has not yet recovered… Recovery in offshore bond issuance – if any – will depend largely on the recovery of property presales (in China) this year,” she explained.

Andrew Collier, managing director of Orient Capital Research, a Hong Kong financial research firm, agreed: “China’s property industry is in a structural decline so there has to be a significant shakeout within the industry.”

He opined that only once the shakeout process – which will necessitate many defaults – is complete, will there be a sufficient list of companies for investors to consider participating alongside.

"Although there is a general improvement in sentiment with the relaxation of Covid-19 measures in China, we expect the property sector to remain challenged as a number of issuers continue to pursue restructuring and refinancing options. We have been working on a number of these and expect to continue to do so this year," Jini Lee, a Hong Kong-based partner of international law firm, Ashurst, told FA.

Offering an example of ongoing negotiations, Lee shared the firm’s work advising Adrian Cheng’s multi-sector conglomerate, New World Development and the Hong Kong-listed Far East Consortium – whose work spans much of Asia, Australasia, Europe and the UK – on their joint acquisition of Rich Fast International from Kaisa Group.

Rich Fast International owns the multi-residential plot under redevelopment at the location of former Hong Kong airport, Kai Tak.

In terms of issuance activity, Lee explained that Ashurst is busy working on varied bond raisings in China as well as elsewhere in Asia and is not reliant on any one particular sector.

Collapsing issuance of dollar bonds by private developers

In 2021, privately owned enterprise (POE) developers issued US$37 billion of offshore bonds, almost all of which was speculative grade, a S&P Global report published in 4Q22 detailed. In the first half of 2022, this figure dropped to just US$2 billion, excluding bond-exchange exercises.

“With the decline of the POE developer, China's property market is getting much smaller…Today, Chinese developers' contribution would be negligible.”

China-based private developers previously generated about 40 percent of Asia's dollar speculative-grade issuance, and over 70 percent of such issuance out of Greater China, the S&P report explained.

“The ranks of China's privately owned property developers are thinning out, and they are taking a large part of Asia's speculative-grade market with them. This class of firm was once a highly dynamic part of the region's new-issuance flow. Their growth was stellar, and they utilised an aggressive build-and-churn model that was built on debt. No longer.”

The report emphasised that in their wake, are “slower-moving, state-owned developers that are taking over a much-reduced market.”

The ratings agency estimates that the rated sales of state-owned enterprise (SOE) developers and quasi-state-owned developers dropped by 25 percent in the first 10 months of 2022 – better than the 58 percent sales decline for the rated (or previously rated) private Chinese developers in the same period.

China’s top 100 property developers reported in January 2023 a 32.5 percent year-on-year (YoY) decline in contracted sales, according to Chinese real estate consultancy firm, CRIC.

As of November 2022, state-owned developers obtained a combined funding in domestic bond markets of RMB438 billion ($65 billion), while private developers only raised RMB33 billion in these markets, the firm highlighted.

“For all these reasons, the state-owned firms are eclipsing the private ones…The rise of state-owned developers in China will transform this sector,” explained the S&P report.

According to the firm’s forecasts, S&P believes property development will become less financially innovative, and will be much less engaged with offshore bond markets, particularly given recent rate hikes.

This sentiment is echoed by research conducted by Nomura, as detailed in a report published on January 3.

“The outperformance of SOE developers will continue in 2023 and even in 2024, in our view, given POE developers’ sharp contraction in land bank activities in 2022 and their declining confidence to operate, with severely damaged property development sector fundamentals,” noted the Nomura research.

Only two private developers were included in the list of top 20 property developers of 2022 by sales value, namely Country Garden and Longfor Properties, the report detailed. The percentage of private developers decreased to 30 percent from 50 percent in 2021, and 60 percent, in 2020.

“China property's fast-churn business model is dying, and perhaps so is the industry's reliance on presales,” said the S&P research.

“This is surely for the better. Preselling homes was often just another form of leverage, adding risk to already aggressive borrowing practices. The market also won't likely miss private developers' heavy use of financial engineering. The hidden debt nested within minority interests and joint ventures contributed the recent rounds of defaults.”

Property-related sectors contributed to less than 24 percent of China's GDP in 2022, down from nearly 30 percent in 2018, owing to the recent sharp declines in sales values and investment, estimated a Moody’s report.

“Our outlook on China’s property sector outlook remains negative, although we expect a narrower decline in year-over-year residential property sales in 2023 because of a low base effect and as policy support slowly takes effect,” it added.