The year 2012 started off slowly for the China property sector. Only quality issuers like COLI, Agile, KWG property, and Shui-On could tap the offshore bond markets; they issued USD 750mn, 700mn and 400mn 5-year notes and USD 875mn 3-year notes respectively. Not surprising given that the overall market sentiment was negative, especially China property was beleaguered by continuous rating downgrades and corporate bonds trading at very low prices.
Since the last six months, the picture started improving with a resilient show by the sector. Developers sensibly slashed prices and pushed sales volumes; they have been disciplined in land acquisition and strived to conserve cash. With companies posting stable 1H2012 results, rating agencies affirmed the ratings and took a more optimistic view of the sector. With the macro backdrop also improving, fuelled by the affirmative and supportive actions of ECB, US Fed and PBOC, the market sentiments have swung in favour of China real estate names. The yields on the sector bonds have declined drastically since the beginning of the year; from 10-12% on BB credits to 6-8% and from 15-25% on credits in B rating bucket to 9-15%. The sector has capitalised on the favourable yields and we have seen a flood of issuances since September this year.
The issuances total to USD 7.6bn year to date (USD 1.75bn by COLI, an investment grade credit and the rest by high yield credits), issued by Shui-On, Guangzhou R&F, Road King, Kaisa, Fantasia, China South City, Sunac China, Longfor, Yuzhou, SOHO China, China SCE Property and COLI. Shui-On re-tapped its 2015 notes while Guangzhou R&F re-tapped its 2016 notes. Three more deals are in the pipeline; Gemdale, Lai Sun and China Aoyuan Property. The market has opened up to first-time issuers and lower quality names. Sunac China, SOHO, Gemdale are first time issuers while China South City and China SCE Property are credits with relatively low credit quality. The investor demand has been great with bonds being issued at 50-75 bps lower than the initial guidance. Names with stronger credit quality have issued longer duration notes. COLI recently issued USD 700mn 10 year and USD 300mn 30-year notes, while SOHO and Longfor have been able to issue notes with maturities of 10 and 7 years respectively. The only Chinese issuers to have bonds outstanding with maturities greater than 25 years are sovereign-owned strong credits such as CNOOC, CNPC, and Sinochem.
The recent bond issues have improved the liquidity and extended the debt maturity profiles of companies. Investors have preferred property over China industrials as the former is domestic demand driven while the latter continues to be affected by soft trade data and slowing growth in China's key trade partners US and Euro Zone. We hope the property sector has learnt its lessons from the tough operating environment it faced since mid 2011 and makes a prudent investment of the cash raised. The government's restrictive policies aimed at curbing speculative home purchases and price increases are here to stay in the near to medium term. Meanwhile, there is a party out there and few other issuers may join. Retail investors ought to be careful and choosy in their investments in this crowded space.
About Author / Additional Info:
Chirag Sharma is Digital Marketing Consultant in SJ Seymour group headquartered in Hong Kong. SJS Markets provides research, advisory, execution services and private Wealth Management Solutions. http://www.sjs-group.com