Market Tires of China Developer Debt as Bond Sale Flops

Even interest rates of 12.75 percent are not necessarily enough to entice financiers to buy debt from Chinese developers, as a high yield bond sale failed to reach its target last week. The unwanted offering by Hong Kong-listed developer China Properties is fueling sentiment that China’s credit hungry real estate industry may have saturated the regional bond market with debt.

The Chongqing-based privately owned developer had earlier in the week abandoned plans to sell yuan-denominated bonds in favour of selling US dollar denominated three-year notes at the higher yield of 12.75 per cent, according to a source familiar with the deal. The potential yuan-denominated debt had been said to offer an 11.5 percent yield.

China Properties bond was said to carry the same credit rating of B- as the overall company, which puts it well into junk bond territory.

Chinese Developers Flooding the Market

The lack of interest in China Properties’ debt comes as the mainland’s real estate companies are turning to the international bond markets at record levels.

According to a recent report in the Wall Street Journal, China’s property developers are selling more debt on international bond markets than the entire North American real estate industry. By the middle of February this year, real estate firms from the world’s No. 2 economy had issued $7.9 billion worth of bonds.

Rising Land Prices and Scarce Loans Drive Bond Sales

The reliance on overseas financing is partly a result of ongoing low interest rates internationally, but is also a response to local conditions within China.

As the real estate industry has recovered from a slowdown in 2012, land prices have boomed across the country, and local governments have started making more plots available as these prices rise. These rising land prices have forced real estate companies to borrow more heavily.

In late January, NYSE-listed Xinyuan Real Estate (XIN) followed the lead of Guangzhou Evergrande in renegotiating some of its existing bonds to allow the companies to take on more leverage to pay for pricier land.

At the same time, Chinese government policies that have restricted domestic lending to the real estate industry in an effort to cool property prices have forced developers to look elsewhere for financing.

Larger Developers Still Selling Well

Despite China Properties struggles, some more established developers are still finding demand for their bonds.

State-owned China Resources Land, successfully launched a two-tranche offering last week that totaled US$1.1 billion. A tranche of five year bonds offering a 4.426 percent yield and a 10-year offering amounting to US$700 million, offering a yield of 6% were said to trade well in secondary markets.