China’s property developers are looking at various options to raise funds as traditional mainland sources dry up.
The central government – treading a fine line between reining in rising property prices and addressing off-balance sheet problems – has stepped in with measures to clamp down on the availability of bank lending.
However, mainland regulators on March 19 allowed two Chinese developers – Tianjin Tianbao Infrastructure and Join In Holding – to issue new A-share stock sales in the form of private placements, opening up a fundraising avenue that has been closed for almost four years.
Although this is viewed by analysts as a positive step as it opens up an alternative route for the sector, Daiwa’s China property analyst Felix Lam believes that the Chinese Securities Regulatory Commission will be very selective in extending stock sale approvals.
“CSRC will need to filter out those developers that really need the money for developments and those that would use to the money to do something else,” he said.
“There are some guidelines that these developers need to fulfill because investors are still very [dependent on strong results], and are less sophisticated than developed market investors.”
Alternatively, some developers have been forced to access offshore equity markets by performing spinoffs. Mainland real estate developer Franshion Properties will be the first company to do a spinoff this year.
Announced early-March, the fundraising plan is seen as an effort to swiftly raise cash and tame concerns over its debt levels and cash flow following the acquisition of a prime Shanghai site for Rmb10 billion ($1.62 billion) in January.
However, Nomura’s China property analyst Jeffrey Gao says that the majority of Chinese property companies have refrained from tapping equity markets because real estate shares have troughed since 2009. “Developers don’t want to dilute their stakes at the current level,” he said, adding that debt financing is still very much preferred.
The China property sector currently trades at only 5.3 times price-to-earnings ratio for the financial year of 2014 compared to a historical average of 9.8 times whereas the net asset value discount on average is more than 55% compared to a historical average of 32%, Gao notes.
Bonds still hot
Although alternative financing options in the equity markets have emerged of late, Asia’s debt capital markets still remain the preferred funding source based on the fact that it’s quicker to execute, cheaper and less volatile compared to equity markets.
“Share prices do not currently reflect the true intrinsic value of the company…it’s too discounted,” said a Hong Kong-based CFO at a Chinese real estate company that operates primarily in Tier 2 and 3 cities.
“Bond financing it is much preferred as is cheaper, and it’s able to provide adequate size and tenor.” As such, Chinese developers have seized the opportunity to lengthen tenors by issuing perpetual notes, with the latest being Greentown China.
The real estate company raised a $500 million perpetual bond in January at a coupon of 9%, and is the fifth ever Chinese developer to do so, according to Dealogic data.
But real estate borrowers will be taking a more cautious or ‘watch-and-see’ approach to issuing on the back of an increasingly volatile backdrop thanks to current industry headwinds, as well as ongoing Fed tapering concerns and rising tensions between Russia and Ukraine, say debt bankers.
“A lot of issuers are thinking about it more opportunistically,” Luke Garner, co-head of high yield capital markets for emerging Asia at JPMorgan told FinanceAsia.
“For some of the larger players that have demonstrated stable growth and continue to have access to offshore markets, the market is still pretty much open.”
Apart from straight bonds, other fixed income-type structures including commercial mortgage-backed securities have resurfaced in Asia.
Property fund MWREF, managed by Australian investment back Macquarie, issued the first cross-border offering since 2006 earlier this month, according to a Moody’s note on March 3.
The notes were backed by rental income from nine MWREF shopping centres in China and were structured to give offshore investors higher creditor status than is normally the case with foreign investors.
For smaller real estate companies, not only do they need to be big brand names that involve both US and European investors, they would have to issue bonds at hefty premiums, highlight some other debt bankers.
“There is a bit of a realisation period to what the new norm is for issuers because we are up against a rising rate environment,” said Garner. “That being said, for a lot of these companies, what I would still consider as attractive financing is still available.”