China's property trusts face rising default risks

PUBLISHED : Tuesday, 04 March, 2014, 6:50am
UPDATED : Tuesday, 04 March, 2014, 7:15am

The mainland's property trusts face rising default risks as a former central bank adviser dubs real estate the biggest threat to the economy.

The trust funds must repay 634 billion yuan (HK$802 billion) of debt this year, up 50 per cent from 2013, estimates from Haitong Securities showed. The yield on the 2014 notes of Wuhan-based Myhome Real Estate Development jumped 185 basis points in the past year to 7.78 per cent. That compares with 3.13 per cent on property bonds globally, according to Bank of America Merrill Lynch indices.

The real estate market was "the root of all risks" as falling prices eroded local governments' ability to raise funds for spending that helped the economy, said Li Daokui, former People's Bank of China adviser.

Property shares slid to a 16-month low last week after Industrial Bank suspended a riskier form of financing for developers.

"The second wave of defaults may be in property trust products, following the first wave in the coal-mining sector," said David Cui, China strategist at Bank of America Merrill Lynch.

At least 10 mainland cities, many of them provincial capitals, have tightened local property policies since November, with Shenzhen, Shanghai and Guangzhou raising the minimum down payments for second homes to 70 per cent from 60 per cent.

"The probability of a default in third or fourth-tier cities' property trust products is high," said Li Ning, an analyst at Haitong. "Some property companies may see short-term cash-flow disruption because of the sluggish sales and the high debt repayment burden."

A total of 452 property collective trust products would be redeemed this year, totalling 131.6 billion yuan, Hwabao Securities estimated in a January report.