China Real Estate Stocks Dive After Bond Default

A broad range of China’s publicly traded real estate stocks were punished on stock exchanges in Shanghai, Shenzhen and Hong Kong today as investors reacted to the country’s first corporate bond default on Friday.

The Hang Seng Properties Index of Hong Kong-listed real estate stocks was down 1.69 percent on the day, while the whole Shanghai composite index was off by 2.86 percent and the Shenzhen composite fell by 3.47 percent.

The country’s leading developers also suffered on an individual basis as China Vanke was down by 1.24 percent on the Shenzhen Exchange, Gemdale was off 2.49 percent and Poly Real Estate skidded by 4.92 percent, both in Shanghai. In Hong Kong, Evergrande Real Estate declined by 0.93 percent, while China Overseas Land slid 2.19 percent.

Today’s results only continued a trend that started on Friday when a gauge of property developers in Shanghai slid 1.3 percent, the most among five industry groups on the exchange.

Real Estate Bonds Already Stumbling

The bad news for China’s real estate stocks came on the first full business day following Friday’s default on a corporate bond by Shanghai-based Chaori Solar Energy Science and Technology. The alternative energy firm was only able to make interest payments of RMB 4 million towards a RMB 89.8 million interest payment to bondholders.

The failure by Chaori has triggered concerns that there may be further defaults, especially among China’s heavily leveraged real estate developers. Prior to last week’s failure by the solar energy firm, the country’s government or state-run banks had always stepped in to bail out insolvent corporate borrowers.

Even before the Chaori event, China property bonds were beginning to be looked at skeptically by potential investors with a bond sale by Hong Kong-listed China Properties late last month failing to price.

A Bank of America Merrill Lynch index shows that real estate companies in the world’s second largest economy already accounted for six of the ten worst performers in Asia’s high-yield dollar debt market in the past month.

Equity Slides Could Pile More Stress on Developers

While market leaders such as Vanke and Evergrande may have strong enough balance sheets to weather downturns in equity values, developers that are already under strain could be at risk should the market downturn continue.

As housing price growth dipped back into the single digits in most Chinese cities in recent months, land acquisition costs have been rising much more quickly, particularly in the major markets where several new land price records have been set recently.

The squeeze on developer margins had already led to reports by credit ratings firms Standard & Poor’s and Moody’s pointing to risks for specific developers.

Moody’s indicated that Hopson Development could be at risk of default, and the Guangzhou-based real estate company slid another 3.28 percent today. Troubled developer Glorious Property Holdings was also singled out for concern by the ratings agencies last week, and its stock was down 0.88 percent today.

With many China developers reliant on high-yield domestically issued corporate bonds such as the type that Chaori Solar defaulted on last week, there is cause for concern over whether there will soon be some real estate companies featuring in the financial headlines along the same path that Chaori has already established.