Flat treasuries spur return to China property

What a difference a year can make.

In May-June last year the Asian high-yield market shut down thanks to loose talk by then Fed chairman Ben Bernanke of an end to quantitative easing. Investors pulled out of emerging markets and piled into treasuries. This year they are returning to Asian high yield to escape the flat yields of US treasuries.

"There is a search for yield, we have seen that in the high-yield market globally and also in Asia," said Hital Desai, a director at Bank of America Merrill Lynch's debt capital markets syndicate.

"We see more global interest in China real estate, including from some European and US investors who previously shunned the sector and who are now starting to come back."

The head of an Asian debt capital market said: "Last June, people said treasuries would be at 314 basis points. Today, 10-year treasuries are at 250-270 basis points, and when rates stay low, you need returns, you need to buy high yield."

This is creating some momentum for the problematic sector of Chinese high-yield property issuers. Shui On did a US$550 million bond in June, Country Garden issued US$250 million the same month, which followed a US$396 million fixed-rate issue from Kaisa Group in May.

Times Property, a high-yield issuer, was in the market yesterday with a dim sum bond of "benchmark" size. This would be the fourth offshore capital raising this year for the issuer, rated B1/B-plus by Moody's and Standard & Poor's. Times Property issued a US$223 bond in March, a US$80 million tap of the same bond in April and a HK$388 million convertible bond this month.

A number of high-yield bonds from the sector that were trading below par in the dark days after March following the implosion of Chaori Solar Energy Science & Technology, China's first domestic default, have recently started to trade above par.

Some question whether this constitutes a turnaround. Issuance from high-yield mainland property firms dropped by a third in the second quarter, compared with the first, according to Thomson Reuters.

This drop gutted Asian high-yield, with Asian volumes for the region falling by nearly half in the first half, according to Desai.

Raymond Gui, head of yuan strategy at Income Partners, is buying China property bonds, but selectively. Some issuers are posting strong sales, and getting the attention. "The outperformers are rallying but it's a rally on a selective basis," he said.

Investors remain sceptical of Chinese property issues over concerns about declining margins amid oversupply and greater risks following years of heavy issuance from the sector.

But even if the slightest bit of appetite comes back for the asset, the expectation is that China property firms will return en masse. "There is nothing like China property. When the window is open, developers will just issue," said David Yim, head of North Asia DCM for RBS.