Chinese developers are cautiously watching the market
2022.12.01 00:43
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Chinese developers are cautiously watching the market
Budrigannews.com – After a flurry of funding support measures following a brutal slide, some offshore bondholders are looking for bargains in China’s cash-strapped property sector; however, the uncertain outlook for a recovery in home demand will keep others from participating.
In recent weeks, Beijing has increased its assistance to alleviate a liquidity crunch that has stifled the industry, which contributes a quarter of the world’s second-largest economy and has been a key growth engine.
After many developers defaulted on debt obligations over the past year as a result of Beijing’s aggressive crackdown on debt-fueled expansion, the return of foreign investors to the sector is shaping up as a key test of sentiment.
In a wager that the market sell-off was overdone, Minority Asset Management’s Hong Kong general manager and co-founder Mark Dong stated that his fund had been bargain hunting Chinese property dollar bonds since September.
Dong, whose company holds such bonds with a face value of approximately $400 million, stated, “The equity refinancing policy has made clear that most listed developers will get government support.”
“Uncertainty has significantly diminished.”
This week, securities regulators lifted a years-old ban on equity offerings by listed property companies seeking to raise funds, which led to the comment. Three developers then unveiled fundraising strategies as a result.
Even though an index that tracks high-yield dollar bonds issued by Chinese developers has increased by more than 70% since its low on November 3, it is still approximately 70% below its peak in May 2021.
China property bonds and shares Dong said, “It’s not too late to buy,” despite the recent price increase because the market has not fully recovered.
After defaulting on payments, a growing number of Chinese developers have entered debt restructuring talks with offshore bondholders or are preparing to do so.
For instance, China Evergrande Group, which is at the heart of the real estate crisis, wants creditors to approve a plan to restructure $22.7 billion in offshore debt by the end of February.
Offshore bondholders face a significant cut due to the gloomy outlook for the sector, which includes lower home sales and fewer opportunities to raise new funding for projects.
Max Wolman, senior portfolio manager at abrdn, which owns such bonds but is underweight on the sector, stated, “We have turned slightly less negative, but believe only a handful of private Chinese real estate firms will survive without having to restructure.” Abrdn owns such bonds and is underweight on the sector.
This year, as the industry went through a series of crises, asset managers’ performance was severely impacted, and fund managers have been reducing their holdings in Chinese property bonds by as much as half.
According to data from Refinitiv, 211 of the 241 bonds that Chinese property companies issued in dollars are currently trading at or below 50 cents on the dollar, indicating that they are in trouble.
However, investors have experienced some respite thanks to the recent rally in developers’ bonds and shares due to funding support measures. The Mainland Properties Index in Hong Kong experienced a monthly gain record of 70% in November.
However, there are questions about how long the rally will last and whether investors will return to the debt market in the absence of a rebound in home demand. In October, property sales measured by floor area experienced their 15th consecutive monthly decline.
Li Gen, chief executive of Beijing-based BG Capital Management Ltd., a credit investment firm, stated, “There is a remarkable turn of property policies, but companies cannot get back onto their feet without bringing back sales.”
After nationwide protests against the world’s toughest COVID-19 restrictions, some investors are betting that China will see a revival in home sales.
According to Justin Ong of Columbia Threadneedle, who holds China property bonds, “a recovery in property sales would be firmer in a re-opening scenario” due to the clearer timeline for reopening.
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