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China property firms' debt issuance jumps, more to come

[HONG KONG] China's real estate companies have sharply increased the amount of funds raised from debt so far this year compared with 2014 as borrowing costs hit historical lows, and they are planning to borrow more.

Property developers have raised 495 billion yuan (S$107.9 billion) from domestic Chinese bonds, almost double 2014 levels, Barclays Capital estimates.

Goldman Sachs suggests property companies have issued more than 400 billion yuan in domestic bonds, over seven times total issuance in 2014. It uses a different set of companies as the basis of its estimate. "Conditions are great for these developers who should take this opportunity to strengthen their balance sheets and deleverage in a disciplined manner, rather than leverage up,"said Dhiraj Bajaj, a fund manager at asset and wealth manager Lombard Odier Singapore.

After tightening regulations in recent years to dampen a hot property market, regulators have moved this year to make it easier for developers to raise debt in the hope a lift for the real estate market will boost the wider economy.

The property sector drives about 15 per cent of gross domestic product and could help support an economy that many analysts predict will grow this year at its slowest pace in more than two decades.

Historically low interest rates are helping to fuel the rush. The central bank has cut its benchmark interest rates six times since November by 1.65 per centage points and reduced banks' reserve requirements three times this year.

The average coupon of the domestic bond of rated developers was around 5.14 per cent, almost 3 percentage points lower than comparable offshore senior notes.

About a dozen Hong Kong-listed Chinese developers, including Evergrande Real Estate Group, Country Garden , Dalian Wanda Commercial Properties and Shimao Property Holdings have added fuel to the fund raising. Since late May, they have sold bonds worth around 150 billion yuan, thanks to the re-opening of the medium-term note market to Hong Kong real estate issuers.

Under Chinese regulations, domestic developers can issue bonds equivalent to 80 per cent of the company's book value. Major developers including Evergrande, Sunac China Holdings , Greentown China Holdings and Country Garden have almost used up their quotas for this year.

Evergrande, which has raised more than US$7 billion this year, is expected to come to the market again soon to support an aggressive land acquisition strategy, analysts said. Evergrande declined to comment.

An offshore unit of Country Garden might issue a so-called panda bond - a yuan-denominated bond issued by a non-Chinese entity - the company said.

The companies that use up their domestic quotas for issuing bonds may well move their fund raising efforts offshore next year where borrowing rates are relatively low as well. Equally, Chinese banks are likely to be more relaxed about lending to property firms as restrictions on the sector relax, analysts said.

Improved funding conditions are expected to speed up the pace of construction and limit refinancing risks that had resulted in distressed sales for many companies. "They have been allowing property developers and local governments to refinance their debt. That provides a cushion to the economy and prevents a hard landing. That's the reason they are allowing bond issuances to surge," said Francis Cheung, CLSA China strategist.