Bloomberg News

JPMorgan Buys Larger Developers as Bubble Deflates: China Credit

June 22, 2014

China's Property Market Is Cooling

Residential buildings stand under construction in Haikou, Hainan Province. Home prices declined in 35 of China’s 70 cities last month from April, the most since May 2012, official data showed June 18. Photographer: Brent Lewin/Bloomberg

JPMorgan Asset Management and Invesco Asset Management say China’s cooling property market is an opportunity to boost dollar bond holdings as the government’s targeted stimulus benefits the largest developers.

Chinese real-estate companies accounted for six of the 10 best-performing Asian notes in the past three months, according to a Bank of America Merrill Lynch index. The yield on 2018 debt of China Overseas Land & Investments Ltd., the nation’s largest developer by market value, dropped to 3.35 percent last week, from a record 4.31 percent on Feb. 5, while that on similar-maturity bonds of China Vanke Co. fell to 3.95 percent, from an all-time high of 5.07 percent on March 20.

“We will pick the winners from these trends,” said Stephen Chang, head of Asian fixed income at JPMorgan Asset, which oversees $39 billion in emerging-market debt. “Although sales and prices are falling along with margins, we have identified the larger developers are gaining market share and executing well.”

Premier Li Keqiang has pledged to safeguard this year’s growth target of 7.5 percent, fueling bets the government will encourage increased lending to selected projects and relax restrictions in the real-estate market. Larger developers may benefit from industry consolidation as smaller builders face a funding squeeze with a record amount of property trusts maturing next year and prices falling in the most cities in two years.

Softening Prices

Home prices declined in 35 of China’s 70 cities last month from April, the most since May 2012, official data showed June 18. In the financial center of Shanghai, prices decreased 0.3 percent, the first drop in two years, while they fell 0.2 percent in the southern business hub of Shenzhen.

“Softening prices are good because they imply there isn’t a bubble anymore,” said Ken Hu, Hong Kong-based chief investment officer of fixed income for Asia Pacific at Invesco, which manages $787 billion globally. “We pick developers with high turnover and those who tend to build smaller-sized flats. Profit margin isn’t that key to bondholders like us. Our approach is to buy on dips.”

Developers including Vanke that cut prices by 10 percent to 15 percent achieved good sales volume, Deutsche Bank AG analysts led by Hong Kong-based Tony Tsang wrote in a June 13 report. Vanke, headquartered in Shenzhen, recorded a 16.2 percent increase in sales value in the first five months of 2014 from a year earlier, it said in a June 3 statement to the Shenzhen stock exchange.

Taking Advantage

Larger industry players are able to tap overseas capital markets for funds. Sales of dollar bonds by Chinese companies totaled $91 billion in 2014, compared with $89 billion in the previous year, according to data compiled by Bloomberg.

Smaller builders, which rely on property trusts for financing, have to repay 203.5 billion yuan ($32.7 billion) in 2015, according to research firm Use Trust. That’s almost double the 109 billion yuan due this year. China’s banking regulator said on June 6 it will monitor developer finances, a sign of concern defaults may spread after the March collapse of Zhejiang Xingrun Real Estate Co., a builder south of Shanghai.

“It won’t be surprising to have a few defaults in the sector in an economic slowdown, given you have thousands of developers and many of them are small ones,” BOCI’s Wang said. “The bigger ones, especially those listed, can take advantage to lower their funding costs as the industry consolidates.”

China South City Holdings Ltd. (1668), which runs logistics parks for industrial materials, sold 1 billion yuan of five-year bonds at a coupon of 7.5 percent in the interbank market on May 9. It plans to use the proceeds to repay short-term bank loans. Greenland Holding Group has hired banks to arrange investor meetings from today for a potential dollar bond offering, according to a person familiar with the matter.

Borrowing Costs

Vanke’s bond borrowing costs dropped to 3.45 percent on a weighted average last week, compared with 5.5 percent in the first quarter of 2011, according to data compiled by Bloomberg. It also managed to extend the average maturity of its notes to 3.95 years, from 2.43 years in 2011.

Slowing growth is causing declines in the yuan and onshore interest rates. The Chinese currency has fallen 2.8 percent against the dollar this year, the worst performance in Asia. The yield on the benchmark 10-year government bond has dropped 52 basis points to 4.04 percent in the same period as investors sought safe havens. Gross domestic product will probably expand 7.3 percent this year, the slowest pace since 1990, according to a Bloomberg survey.

Prolonged Downturn

The downturn in the property market will be more prolonged this time than in previous corrections, Tom Byrne, senior vice president at Moody’s, said at a June 19 conference in Shanghai. Broad price cuts are likely to come in late August or in September when more new projects are set to be introduced, UBS AG Hong Kong-based analyst Eva Lee wrote in a report last week.

Moody’s revised its credit outlook for Chinese developers to negative from stable on May 21. The Shanghai Stock Exchange Property Index, which tracks 24 real-estate companies listed in the city, has slumped 6.3 percent this year, exceeding the 4.2 percent decline for the benchmark Shanghai Composite Index.

“Overall, the housing market is cooling in some parts, like in third- or fourth-tier cities,” said Chang at JPMorgan Asset. “But we do see a silver lining. There’s actually a healthy pickup in transactions at specific locations after some discounting.”

’Minor Stimulus’

The nation has introduced measures to help the real-estate industry, which JPMorgan Chase & Co. says poses the biggest near-term risk to growth in the world’s second-largest economy. The People’s Bank of China told 15 banks in May to improve efficiency of service, give timely approval and distribution of mortgages to qualified buyers. The southeastern city of Fuzhou has removed home-purchase limits for buyers who make one-time payments, the Securities Times reported on June 18, citing sales people from two developers.

The government may announce additional “minor stimulus measures” after Premier Li said in London last week that the nation will maintain a minimum growth rate of 7.5 percent, according to a China Securities Journal commentary on June 20. The PBOC may release more targeted steps to prevent expansion from falling short of the goal, it added.

“Policy makers are actually putting out more measures to support this sector,” said Arthur Lau, Hong Kong-based head of Asia ex-Japan fixed income at PineBridge Investments, which oversees about $71 billion. “I think, volume-wise, it could catch up a little bit in the second half, especially those who are not aggressively buying land. There is still a wide selection, even within this sector.”

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net; Sandy Hendry at shendry@bloomberg.net Robin Ganguly, Sandy Hendry


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