China’s cash-strapped real estate developers are raising record amounts of cash overseas, and Goldman Sachs says you should stay away.
In a report released this week the US investment bank said that debt issued by Chinese real estate developers are the highest risk notes on Asia’s bond market.
During the last 12 months Chinese property companies have raised record amounts of debt financing offshore, as slower sales have hit their cashflows and local banks have restricted lending to the increasingly risky sector.
In its report Goldman indicated that, “We maintain our negative view on China property credits although we prefer better quality names and shorter duration exposure.” Goldman’s comments were reported in an account by Bloomberg.
During September Goldman had downgraded the entire Chinese real estate sector from neutral to negative citing deteriorating balance sheets for many developers, as well as ballooning inventories of unwanted new housing.
By the middle of 2014 China’s real estate developers had accumulated record levels of debt just as the country’s housing market slowdown was strangling their their cashflow.
Much of this debt came from new bond issues during the first six months of 2014, when developers borrowed $5.9 billion, up 39 percent from the same period last year. By June 30th, debt was equal to 128 percent of equity among China’s listed developers – the highest level since 2005.