China property

China’s largest rental property securitisation valued at 20 billion yuan gets the go-ahead

No issue date revealed for asset-backed notes for which China Construction Bank will be lead underwriter

PUBLISHED : Wednesday, 13 December, 2017, 5:16pm
UPDATED : Wednesday, 13 December, 2017, 10:38pm

China will issue its largest bonds backed by rental housing projects, reflecting a pickup in momentum of rented property securitisation as a new funding channel for developers to tap.

China Merchants Group, a state-owned conglomerate, said this week it had teamed up with the Beijing-based China Construction Bank to gain a go-ahead to issue asset-backed notes worth 20 billion yuan (US$3.02 billion) in the country’s interbank market, in what would be China’s largest rental housing securitisation.

China launched a pilot programme this year to build rental housing projects in 13 major cities, including Beijing and Shanghai. The rental market was endorsed by the Chinese government as an alternative to home ownership, and it offers incentives such as education and other benefits to give renters the same rights as homeowners.

“We are expecting to see more rental property securitisation coming into the pipeline,” said Li Tong, an analyst at Shenwan Hongyuan Securities.

“Rental securitisation comes as a good answer to solving the long-term but slow returns from rental projects, giving developers an option to secure funds in a more swift way and ramp up their investment interest and confidence in rental projects,” he said.

The bonds can help developers to better handle the long payback period of rental projects, which can last decades. China is drumming up support for the rental segment with a spate of incentives, in hopes that a growing preference for rented homes can help alleviate the pressure on housing inflation.

In Shanghai, the most populated city in mainland China, the government grants a 30 per cent discount on land supply designated for rental development.

The notes to be issued by China Merchants Group are bonds that allow companies to use securitisation to raise funds from institutional investors through private placement in the interbank market. These bonds will also become the first interbank rental property securitisation in China.

The underlying assets are returns from two rental flat projects in Shekou, Shenzhen in southern China, developed by the Shenzhen-listed China Merchants Shekou Industrial Zone Holdings.

China Construction Bank will act as the lead underwriter of the notes, but no issuance date has been disclosed yet. The first batch of bonds will be worth 4 billion yuan and have a maturity of 15 years.

Rental property securitisation could top 1.7 trillion yuan by 2020 in China, said Shenwan Hongyuan Securities’ Li, providing an estimate based on the current rental housing land supply and financing needs.

Developers including Poly Real Estate Group, China Vanke, Merchants Shekou and Longfor Properties are expected to benefit from a new tide of securitisation as front runners in the rental segment, said Li.

Merchants Shekou has already started the development of rental projects in Shenzhen, Beijing, Tianjin and Chongqing. It is also looking for opportunities in Shanghai and Guangzhou, with a focus on major cities.

On December 1, the developer said it had gained approval to sell a maximum of 6 billion yuan worth of commercial mortgage-backed securities, another type of securitisation where the underlying assets are rental projects, on the Shenzhen Stock Exchange.