Current credit conditions are separating the wheat from the chaff in the Chinese property sector, with larger, better-rated developers enjoying increasingly favourable borrowing conditions and winning business at the expense of smaller ones.
Despite the potential for a slight overall drop in funding costs this year, there is still a highly discriminatory market vibe, according to Moody’s.
“The difference between highly rated developers and low-rated developers is becoming apparent,” Franco Leung, the rating agency's associate managing director, said at a press briefing in Hong Kong on Wednesday. “Developers with good credit quality and scale will benefit from the current credit conditions [while] the lowly-rated developers will continue to see funding pressure.”
In China, bank lending to the property sector has been growing year-on-year at double-digit percentage rates since last September, official Chinese data shows. In March, bank loans to property rose nearly 20% year-on-year to roughly Rmb40 trillion ($5.9 trillion).
Even so, Chinese banks have their preferred real estate developers and will be more inclined to lend to large developers with credible names, Leung said.
As a rule of thumb, Chinese real estate firms with an annual turnover above Rmb100 billion ($14.8 billion) are considered large.
SHARP DIFFERENCES
Higher-rated major Chinese developers have benefited because their coupon rates have come down recently, Moody’s senior vice president Kaven Tsang said.
In contrast, weaker developers are struggling to issue bonds, whether offshore or onshore, because of the high coupon rates required.
For example, although coupon rates generally have declined they remain high for bonds of Fantasia Holdings, a Hong Kong-listed developer with non-investment grade credit rating of B2 and B from Moody’s and S&P Global respectively.
Last December, Fantasia, whose 2018 sales totalled Rmb14 billion, issued a three-year putable $300 million bond at a coupon of 15%, the highest ever for Chinese issuers. In April, Fantasia issued a three-year putable $200 million bond at a lower coupon rate of 11.75%.
By contrast, China Resources Land, an investment grade Hong Kong-listed developer, issued a five-year putable $2 billion bond in February with a 3.65% coupon. This is cheaper than its five-year putable $1.5 billion bond issued last August with a coupon of 4.05%.
China Resources Land's sales reached Rmb297 billion in 2018.
In this way, yields have come down for both investment grade and speculative property firms but the gap between the two remains wide.
Another way the Chinese credit market is being more selective when it comes to the property sector is in the way tenors have shortened.
Five years ago it was common for non-investment grade developers to issue five-year bonds. But more recently some Chinese developers have been issuing 363-day notes, an S&P Global report noted earlier this year.
“The investors’ appetite for developers is for shorter tenor, so that leads to big refinancing [needs],” Moody’s Tsang said.
Including just the 62 Chinese developers that Moody's rates, $32 billion of offshore bonds and $72 billion of onshore bonds are set to mature or are subject to put options in the next 12 to 18 months, Leung said.
MARKET SHARE
Better access to cheaper funding is helping larger and stronger developers gain market share as those developers that cannot compete either downsize or sell assets to the larger companies, the S&P report said.
It will also make it harder for the smaller players to compete in land auctions given rising Chinese land prices, with Leung noting how many already struggle to participate because of the criteria set by local governments including minimum levels of experience and scale.
According to official Chinese data, the top 100 developers increased their share of mainland China’s property market to 53.5% in 2018 from 46.2% in 2017 and 38.3% in 2016.
One example of a smaller developer facing worsening conditions is Guorui Properties, a Hong Kong-listed company whose revenue in 2018 was Rmb21.9 billion. In March, Fitch Ratings downgraded Guorui to B- from B.
Funding conditions for China’s real estate sector could worsen if China-US trade conflict dampens investment sentiment, warned S&P’s January report: “Disruptions to funding conditions could be the tipping point for weaker developers who require substantial refinancing.”
In that respect, recent events could be an ill omen.
On Sunday, US President Donald Trump tweeted that US tariffs of 10% on $200 billion of Chinese goods would rise to 25% on Friday. That prompted a statement from the Chinese government on Wednesday saying it would take "necessary countermeasures if the US puts the tariff measures into effect."
