Property cash crunch worsens as trusts pull funds: China Credit

[SHANGHAI] China's investment trusts are pulling financing for the real estate industry as Kaisa Group Holdings Ltd.'s missed payments heighten default concerns.

Issuance of property-related products, which channel money from wealthy individual investors, tumbled 62 per cent from a year earlier to 38.5 billion yuan (S$8.35 billion) in the fourth quarter, data compiled by research firm Use Trust show. Builders must repay 241 billion yuan of trusts in 2015, up from 178 billion yuan last year. Kaisa, which missed a bond coupon payment this month, failed to repay a 2.5 billion yuan trust last week, people familiar with the matter said.

"The record amount of trust products due is adding to the agony of property developers as they face a withering funding lifeline," said Shuai Guorang, an analyst based in the southeastern city of Nanchang at Use Trust. "Investor demand for property trusts has declined as they are concerned about developers' cash supply."

While Premier Li Keqiang's relaxation of property curbs has helped underpin a rebound in home sales, investors are speculating more developers may be caught up in an anti- corruption drive. Kaisa, Agile Property Holdings Ltd. and Hydoo International Holding Ltd., which builds large-scale trade centers, have been linked to probes. Local authorities in Handan, southwest of Beijing, sent work teams into 13 developers after failure to repay funds, Xinhua News Agency reported.

Crunch Risk "A big portion of shadow bank funding, including trust financing, is borrowed by property developers," said David Cui, China strategist at Bank of America Corp. "If there is a sharp rise of defaults by the developers, it may cause a shock to investor confidence in shadow banking, which will raise risks of a credit crunch." The number of publicly traded real estate firms with debt exceeding equity has increased to 135 out of 336 from 57 in 2007, according to data compiled by Bloomberg.

"Chinese companies' leverage ratio is too high," said BOA's Cui. "The probability of a credit crunch at some point is high." Costs Surge Yields on Chinese speculative-grade debt denominated in dollars climbed to 12.39 per cent on Jan 19, the highest since June 2012, a Bank of America Merrill Lynch index shows. The junk notes have lost 5 per cent in 2015, the worst start to a year on record. The Shanghai Stock Exchange Property Index has dropped 5.4 per cent in January, set to end a four-month rally.

China's economy grew 7.4 per cent in 2014, and expansion will slow to 7 per cent this year, according to the median estimate in a Bloomberg survey. The yield premium on AA rated corporate notes due in 10 years over similar-maturity government bonds has risen to 301 basis points from as low as 255 last year.

"We are bearish on the property industry," said Cheng Peng, head of investments at Beijing-based Genial Flow Asset Management Co.

"Many third-tier or fourth-tier property developers may run into trouble this year." Recent data have showed some signs of recovery in China's property market.

New home sales surged 41 per cent to 938.4 billion yuan in December from the previous month and were 4.2 per cent higher than a year earlier, data released by the National Bureau of Statistics on Jan. 20 showed. That made December the first year-on-year increase in 12 months.

Default risks at developers may continue to rise this year given the huge amount of property trust products coming due, according to Yao Wei, a Paris-based China economist at Societe Generale SA. Smaller developers may be the most vulnerable due to higher debt loads and limited funding channels, she added.

"Even though there is a slight recovery in home sales, consolidation in the property market isn't over yet and property developers may continue to have a hard time," Ms Yao said. "Banks are still cautious about lending to developers and trust companies may have also become worried about risks in the property industry after Kaisa's non-payment."

Kaisa, a builder based in the southern city of Shenzhen, failed to make a US$23 million coupon payment on its US$500 million of dollar-denominated bonds earlier this month. The developer is being investigated by the government for dealings with official Jiang Zunyu, who's been under a probe since October, people familiar with the matter said Jan 13. Jiang had served as party chief of Shenzhen's Longgang district, where some approval procedures for Kaisa projects were suspended.

Chinese property developers have sold only 6.5 billion yuan of bonds in onshore and offshore market so far this month, set to make it the slowest January since 2010, according to data compiled by Bloomberg.

"After Kaisa's trouble, it will become more and more difficult for property companies to get refinancing," said Li Ning, a bond analyst in Shanghai at Haitong Securities Co., the nation's second-biggest brokerage.

BLOOMBERG