Tight availability of funds drives Chinese developers abroad to raise cash
Langi Chiang and Ray Chan
Fundraising is quickly getting tougher and more costly for mainland homebuilders amid domestic and global monetary tightening, industry players and analysts said.
This was despite signs of a reopening of the mainland stock markets to developers after a four-year suspension, they said.
Driven by concern about the availability of funds, more than 12 developers, including China Overseas Land & Investment, Dalian Wanda, Guangzhou R&F Properties and Greenland, raised more than 50 billion yuan (HK$64 billion) offshore in the first month of the year.
"You don't know when the window will close," said Simon Fung, the chief financial officer of Greentown China.
"But US tapering will drive up funding costs and global investors' interest in Chinese developers could disappear suddenly."
Greentown issued subordinated perpetual capital securities of US$500 million last month, its fourth bond issuance since May last year, to repay perpetual subordinated convertible callable securities issued to Wharf in 2012 when the Hong Kong developer came to the rescue after Greentown was caught in a cash crunch.
Although mainland developers are now better off than in the last trough of 2011, some small players would face increasing challenges in the next six to 12 months, said Kaven Tsang, a senior analyst with Moody's Investors Service's corporate finance group.
"There is a trend that funding costs will rise, as Treasury yields have increased because of the QE tapering," Tsang said, referring to the scaling down by the United States Federal Reserve of its monthly bond purchase programme.
"So coupon rates for offshore bonds of the same developers are also rising."
For example, Shimao Property, controlled by Hui Wing-mau, raised US$600 million last month in a seven-year high-yield note that pays 8.125 per cent, compared with the 6.625 per cent for the same tenure offered in its US$800 million bond issuance in January last year, according to Moody's data.
The Fed voted unanimously last week to pare its monthly bond purchases by another US$10 billion this month, after trimming them by US$10 billion last month.
Meanwhile, the mainland narrowly escaped a trust fund default last week. China Credit Trust reached a last-minute agreement to repay investors in a failed 3 billion yuan high-yield fund to avoid the first default in the country's 10 trillion yuan trust industry.
However, by bailing out the investors in this particular product, regulators may have also missed an opportunity to limit moral hazard.
"Despite the reprieve, we expect some high-yielding borrowers to encounter difficulties repaying their debt in the coming two quarters," CCB International said in a report to clients.
The scandal came on the heels of repeated media reports that the mainland will further tighten its rules on shadow banking activities, including those involving trust firms, which will be another heavy blow to small developers.
Analysts at Haitong Securities in Shanghai estimated in a report last month that 633.5 billion yuan worth of property trust products would mature this year, with a peak in May.
Of the 16 trust products formerly or currently exposed to threat of default, 10 involved the property sector, the report said.
Shadow banking is a lifeline for small developers, which are usually denied loans by banks. Official data showed that 76 per cent of private investment in Beijing ended up in the property sector, followed by just 8.9 per cent in the manufacturing industry.
"Policymakers will probably impose a cap on the ratio of trust funds channelled to the property sector this year," said Shuai Guorang, an analyst with User-Trust Studio, a consultancy specialising in the mainland's trust industry.
Shuai said the central government would not allow a real default in the short term for fear that it would trigger a much wider crisis, given that the country needed to clear trillions of yuan in local government debt while pushing ahead a restructuring of the economy.
Meanwhile, mortgage loans have remained tight so far this year, with more banks eliminating discounted rates to buyers of first homes, breaking with past practice in which banks rushed to lend at the beginning of the year, according to a report by Rong360, a private research engine for financial products on the mainland.
Last year, banks extended 2.34 trillion yuan in new loans to the property sector, accounting for 28 per cent of total new lending, central bank data showed, fuelling home price rises of more than 20 per cent in cities including Beijing, Shanghai, Shenzhen and Guangzhou.
However, investors have been so swamped by a slew of negative news that they shrugged off a landmark decision from the China Securities Regulatory Commission allowing Guangdong Highsun, a Shenzhen-listed commercial property developer, to raise 834 million yuan through a private placement, the first of its kind in four years.
The mainland had virtually barred developers from raising funds in the onshore stock markets since late 2009. The authorities started to accept refinancing applications last summer, and about 40 property firms, including China Merchants Property, are now queueing up to raise more than 110 billion yuan.
Property shares on the Shanghai Stock Exchange fell 3.7 per cent last month, after declining 13 per cent last year.
In Hong Kong, the fundraising landscape for cash-strapped private property firms remained "challenging", given that several medium-sized listed developers were trading at a significant discount to their asset value, partly reflecting tight liquidity conditions before the Lunar New Year holiday, according to David Suen, the head of equity capital markets for Asia, excluding Japan, at JP Morgan.
"For listed property firms, investors are definitely demanding higher yields because they expect interest rate rises," Suen said.