Onshore Real Estate Bonds Return as Government Props Up Ailing Developers

Sales of property developer bonds returned to China’s domestic market recently in a sign that the Xi government is not yet quite ready to real estate companies to go under. At least in most cases.

Just last week, Shanghai-listed Jiangsu Future Land Co (900950.SS) sold RMB 2 billion ($323 million) in five-year bonds, making the company the second real estate firm this year to be granted permission from the central government to sell corporate debt.

The Future Land bonds offer investors a yield of 8.9 percent – which is still far well below the double-digit returns that trust products in China’s shadow-banking sector have been offering buyers over the last few years. (A sample three-year real estate-driven trust offered recently through a major Chinese insurance company offered buyers returns of 12 percent on the first year, 15 percent on the second year, and 17 percent on the third year).

According to a story in Bloomberg, Jiangsu Future Land’s bonds went on sale just three months after Tianjin Realty Development Co in April offered China’s first corporate real estate bonds since December 2009.

In addition to the debt sale by the Jiangsu company, the China Securities Regulatory Commission (CSRC) has also approved bond sales by four more real estate firms – Wolong Real Estate Group Co. (600173), Hubei Fuxing Science & Technology Co. (000926), Chongqing Yukaifa Co. (000514) and Shanghai Jinqiao Export Processing Zone Development Co. (600039) – since Tianjin Realty received the green light three months ago.

Signs of Government Support for Real Estate

By approving the sales of developer bonds in China, the government is signalling that it will not allow wholesale disruption of the real estate market. Since the Xi administration pulled back on credit to the frothy property sector last year, home prices have rapidly slowed, with 55 out of China’s 70 largest cities reporting falling home prices in June.

While many of the country’s largest developers have been able to turn to offshore bond markets through offshore listed vehicles, some smaller developers have already gone bust as housing sales have slowed rapidly this year.

In March this year, a Ningbo real estate developer famously collapsed after running up RMB 3.5 billion in debts, and this catastrophe was followed in June by the arrest of a Hangzhou developer for fraud, and the freezing of a Shanghai project after the owner failed to pay creditors.

Mini-Stimulus for Favored Companies and Niches

Despite these recent failures, as the real estate correction has spread across the nation, China’s central government has moved rapidly to prevent a hard landing.

Already in the last few months the authorities have let local governments know that, especially in second and third tier cities where there is a glut of onsold housing, city authorities can begin relaxing home purchase restrictions. These housing sales regulations were put in place since 2010 in an attempt to rein in runaway home prices.

Now, by approving domestic bond sales for developers, the government is allowing additional credit to flow to the real estate sector.

Help Also Available for Retail Borrowers

In addition to the newfound support for commercial borrowers, China’s banking authorities have also moved to expand credit to individual homebuyers.

Just last week the Agricultural Bank of China’s Shanghai branch announced that it would begin offering discounts on home loans starting on August 2nd. The move to offer lower-priced mortgages for first-time buyers, seems in line with the Xi government’s concern for ensuring that ordinary citizens retain access to basic necessities such as housing.

The decision by the government to support developers by allowing sales of property bonds is more clearly a sign that the authorities are determined to prevent any risk of powerful disruptions in the real estate market.

So for those investors hoping to pick up distressed projects or companies this year at bargain prices, this latest decision may show that China is not yet fully prepared to allow bankruptcies or allow freer play to market forces.