Chinese developers look for alternative fundraising strategies

[HONG KONG] Chinese property developers are on the hunt for onshore or offshore funding alternatives in anticipation of further government measures to rein in soaring house prices.

"We don't expect any policy loosening this year. The operating environment will become more challenging, especially for small players. Only those with financial strength can survive the downturn," said Derek Zen, an executive director at property developer Road King Infrastructure.

The latest drive to tame the property market began last September. Since then, more than 45 cities have introduced home-purchase restrictions in the form of larger down-payment requirements and higher mortgage rates, as well as restrictions on non-local and second-home buyers.

Authorities have also tightened requirements for bond issues and barred access to the banking system for developers buying land.

The effective closure since last October of the stock-exchange bond markets in Shanghai and Shenzhen is forcing many developers to raise funds offshore in the form of US dollar bonds or syndicated loans.

Some developers are even diversifying into Hong Kong property projects. For instance, Road King has re-entered the Hong Kong market after several years of absence, in part because of the restrictions in China.

Other Chinese companies, including HNA Group, KWG Property Holding and Logan Property Holdings, have recently won bids for high-profile residential projects in Hong Kong.

"We want to have more balanced businesses between mainland China and Hong Kong," said Mr Zen.

Road King, which is in the process of spinning off its expressway segment, also issued two US dollar bonds totalling US$950 million in the second half of 2016 and US$300 million perpetual notes in February.

ONSHORE ALTERNATIVES

While some developers are looking offshore, others are seeking onshore alternatives, such as asset-backed notes and medium-term notes issued on the interbank bond market.

Shimao Property Holdings announced on April 26 that mainland subsidiary Shanghai Shimao International Plaza had received a quota to issue within two years ABNs of up to 6.5 billion yuan (S$1.32 billion) in the interbank bond market. The securities will be backed against income of the subsidiary's commercial properties.

The proposed ABN public offering, if it comes to fruition, will be the first ABN backed against commercial properties in the interbank bond market, according to Eva Lau, an investor relations manager at Shimao.

Developers, especially those listed in Hong Kong, have taken full advantage of the onshore bond market since the exchange market relaxed regulations on corporate bond issues in 2015. Country Garden and Agile Group Holdings also sold asset-backed securities last year, but those were issued in the exchanges market via private placement.

With the exchange market effectively closed, developers are now forced to look elsewhere. "We need to explore new funding alternatives after the closures of the domestic exchanges bond market," said Ms Lau. "Our business model, with both residential development and commercial properties, gives us advantages to issue ABNs as we have recurring income from commercial properties."

Shimao is also applying to issue Panda MTNs in the interbank bond market, after recent successful issues from peers Sino-Ocean Group Holding and China Jinmao Holdings Group.

In the offshore market, Shimao is in talk with banks to raise a new US$500-US$800 million four-year syndicated loan, and could sign a formal agreement in June, according to Ms Lau.

Despite repeated efforts to cool down the housing market, average new home prices in China's 70 major cities rose 0.6 per cent in March from February, faster than the previous month's reading of 0.3 per cent, according to Reuters calculations based on data from the National Bureau of Statistics.

Ross Lee, an analyst at Bank of China (Hong Kong), expects the policy tightening to continue. "We view the current policy tightening to be city-focused, targeting the ASP (average selling price) growth instead of a nationwide tightening," said Mr Lee. The analyst believes destocking in lower-tier cities will be supported, while more policy tightening will take place in tier-one, high tier-two and satellite cities where prices are high.

Franco Leung, a Moody's senior credit officer, expects liquidity for developers will likely tighten gradually, reflecting slowing sales and the dramatic slowdown seen in onshore bond issuance in recent months.

Nevertheless, many Moody's-rated developers continued to target high sales growth in 2017 to capture additional market share, meaning that competition would intensify, Mr Leung said.

Moody's also noted that developers' refinancing needs for onshore bonds would increase significantly next year, because many of these bonds would become puttable or due in 2018.

Still, the refinancing risk for most developers it rated "should be manageable", given their robust liquidity buffers, the rating agency said.

REUTERS