China rental push spurs new breed of property bonds

[HONG KONG] China's push to develop the rental housing sector is offering cash-strapped property developers a way back to the onshore bond market after more than a year of issuance restrictions aimed at cooling down property prices.

Longfor Chongqing Enterprise Development, a domestic subsidiary of Hong Kong-listed Longfor Properties, last week filed a plan with the Shanghai Stock Exchange to issue special rental housing bonds, with proceeds exclusively pledged to rental projects.

The application is the first of this type of bonds since China launched a pilot programme in August to build rental housing projects in 13 major cities, including Beijing and Shanghai.

The government is encouraging migrant workers and young couples to settle in rented accommodation to ease upward pressure on property prices, a goal which challenges the strong preference for property ownership among Chinese people.

"Rental housing is being given priority in terms of policy support and we were told that it would be faster to get regulatory approval for the special bonds than for regular corporate bonds," said a DCM banker familiar with the Longfor Chongqing offering.

The issuer, a AAA credit to China Chengxin, is looking to raise up to 5 billion yuan (S$1.02 billion) from notes at tenors of up to 15 years to fund seven rental housing projects in Shanghai, Nanjing, Chengdu and Wuhan, according to a preliminary offering.

More developers, including China Jinmao Holdings Group, were also looking to tap the special bonds, bankers said.

Developers have been subjected to stringent scrutiny in the domestic bond market since September 2016 against a backdrop of surging land and house prices.

In December 2016, Longfor Chongqing withdrew a Rmb4bn offering of regular corporate bonds in the Shanghai Stock Exchange.

The scrutiny has led to a sharp decline in developers' bond financing this year. In the first 10 months, their onshore bond issuance, excluding asset-backed securities, dropped about 70 per cent from last year to 327.5 billion yuan, according to data provider Wind.

Market participants said the special rental housing bonds were not a sign of regulatory relaxation, as most non-listed privately owned developers remained effectively barred from accessing the bond market.

ABS ALTERNATIVE

Bankers say rental housing bonds may allow developers to match the long payback period for rental projects.

It usually takes 20-30 years for rental housing projects to pay back the initial investment, against only two to three years for commercial residential homes, according to analysts.

Longfor Chongqing is planning to issue at maturities up to 15 years, much longer than a regular senior unsecured offering.

A Chongqing-based DCM banker, who recently talked to developers and regulators about the special bonds, suggested a mix of special bonds and asset-backed securities would best meet the financing for rental housing projects.

"The proceeds from the special bonds can be used for building the houses and, once rents start to trickle in, developers can package rents into ABS, thus easing their financial pressure," said the banker.

Although developers have faced hurdles in accessing unsecured funds, they have been quite active in the privately placed ABS sector.

China Merchants Shekou Industrial Zone Holdings last week obtained approval from the Shenzhen Stock Exchange for a 6 billion yuan ABS private placement, the largest such issue approved for rental housing projects so far. The tenor is 18 years.

According to Pengyuan Credit Rating, Chinese developers issued 55.03 billion yuan of ABS in the first 11 months of 2017, up 24 per cent from a year earlier. The majority of the underlying assets are receivables, commercial mortgages and balances due.

Citic Securities is lead underwriter on Longfor's offering with China Securities as joint lead underwriter.

The plan is subject to approval from the China Securities Regulatory Commission and the Shanghai Stock Exchange.

REUTERS