Property developers sell bonds to fund projects, spurn shadow banking

Singapore

CHINA'S builders are selling more bonds and spurning shadow banking, boosting transparency in an industry flagged by regulators as the No 1 risk to the economy.

Property companies have raised a record US$40 billion through international and domestic notes this year, up 31 per cent from 2013, data compiled by Bloomberg show.

Funding of real estate projects by trusts, a less-regulated type of financing targeting wealthy individuals, dropped 33 per cent to 197.4 billion yuan (S$41.85 billion), data from researcher Use Trust show.

Premier Li Keqiang is seeking to expand official fund channels after shadow lending surged more than 30 per cent last year, the most among major economies, and bond fund manager Bill Gross called China the "mystery meat" of emerging markets. The authorities allowed onshore developer debt sales in April for the first time in five years and cut interest rates last week to help shore up the industry, as about 90 per cent of listed builders are on track to miss sales targets this year.

"More financings through capital markets will help improve the transparency of property developers' financial records," said Xue Zheng, a bond fund manager in Shanghai at AXA SPDB Investment Managers, which oversees 16.3 billion yuan of assets. "After switching from shadow banking to capital markets, issuers will pay more attention to their leverage ratios."

The number of publicly traded property firms with liabilities exceeding equity has increased to 136 out of 334 from 57 in 2007, according to data compiled by Bloomberg.

As Mr Li shifts China towards slower growth focused on consumption rather than smokestack industries, he's taking steps to ease financial stress in key sectors including real estate. The industry is the main risk for the economy, Ma Jun, chief economist at the People's Bank of China, said last month, according to a report by the official Xinhua News Agency.

Bond sales are better documented than the US$6 trillion of shadow funds provided by lenders including pawn shops and microcredit agencies, after non-payments flagged risks in the unofficial liabilities.

The authorities in the northern city of Handan sent teams into 13 developers after a failure to repay funds raised illegally from the public sparked panic, according to official Xinhua News Agency and China National Radio reports in September. Closely held developer Zhejiang Xingrun Real Estate Co, based near Shanghai, collapsed in March under 3.5 billion yuan of debt.

Bond issuance instead of shadow banking "is a more formal form of financing and represents a step forward for the Chinese market", said Kalai Pillay, senior analyst at Fitch Ratings.

Regulators gave four real estate firms the right to sell exchange-traded notes in April for the first time since 2009. In July, they allowed the first mortgage-backed offering since 2007. The authorities further broadened funding channels in September, saying listed builders rated AA or higher will be allowed to sell debt in the larger interbank market for the first time, China Investment Securities reported on Oct 13.

The onshore fundraising has added to what is nearing another record year for international note offerings from Chinese developers. They have raised US$18.1 billion in dollar-denominated bonds this year, compared with the all-time high of US$18.5 billion for 2013, data compiled by Bloomberg show.

"The biggest concern is the significant increase we have seen in leverage over the years," said Benjamin Cryer, a Singapore-based Asia credit analyst in the fixed-income group at Franklin Templeton Investments. While government measures should help stabilise the industry, builder debt isn't particularly attractive given weak fundamentals and credit profiles, he said.

The central bank reduced its benchmark lending rate to 5.6 per cent from 6 per cent last week in its first cut since 2012. That came after expansion in gross domestic product cooled to 7.3 per cent in the July-September period, the least since 2009, and after new home prices dropped in all but one city tracked by the government last month.

The yield on AA rated securities due in 10 years has dropped 150 basis points this year to 6.13 per cent. The rate on similar-maturity government notes is 3.52 per cent, leaving the spread down at 261 basis points. That compares with the 9.72 per cent average on real estate trusts, Use Trust data show.

The benefits of cheaper bond funding will go to bigger developers, while smaller ones unable to attract note investors will be squeezed by slowing trust financing, according to Liu Dongliang, an analyst in Shanghai at China Merchants Bank Co.

That may stymie growth of smaller real estate firms even as it leads to better asset quality in the trust industry, said Jacphanie Cheung, a Hong Kong-based analyst at Deutsche Bank AG.

Bond prices underscore the view that bigger developers are set to weather slumping sales and benefit from easier financing. The yield on the 2018 dollar notes from China Vanke Co, the nation's largest developer by sales, has dropped 99 basis points to 3.42 per cent since Dec 31. The yield on the 2018 securities of Poly Real Estate Group Co fell 89 basis points to 3.96 per cent.

China's issuers are overcoming the impression they "lack transparency", said Adeline Ng, Singapore-based head of Asian fixed income at BNP Paribas Investment Partners, which oversees the equivalent of US$618 billion. "We don't think the Chinese government can afford to let the property sector burst." BLOOMBERG