China’s land rush could be riskier than it looks
China’s cash-strapped real estate developers could move borrowing costs internationally as the consolidating industry struggles with tighter domestic credit markets, and rapidly rising land prices.
According to Moody’s Investors Services, China’s real estate firms sold $17.88 billion of the notes by October 20th, up from about $8 billion during all of 2012,
This increase in overseas fund-raising is driven primarily by China’s attempt to reduce the risk to its own economy from a potential real estate bubble by tightening credit conditions to eliminate risky loans to property developers. Without domestic access to the bank credit which they had formerly used to buy land and finance construction, developers are looking to international markets.
And the result of this overseas borrowing trend is higher costs of international funding, as issuers compete to sell their debt.
From a report in Reuters last week:
High-rated Chinese issuers sold offshore U.S. dollar bonds with coupons as low as 1.86 percent this year, considerably cheaper than the cost of domestic bank loans or bonds.
For junk-rated real estate developers, funding costs reached as high as 13.88 percent.
And with China’s real estate prices continuing to rise rapidly, the government is not likely to ease credit conditions anytime soon.
A Burst of China Bond Issues and Busts
The trend towards overseas borrowing has been evident in a number of big bond issues by China’s developers in recent months. In late November, the country’s biggest developer, China Vanke issued RMB 1 billion in “dim sum” bonds, (yuan denominated bonds sold overseas), and in October private developer China Properties Group raised US$150 million and a subsidiary of competitor Franshion Properties China, took in US$300 million, both through bond sales.
During November, high-profile developer Dalian Wanda was forced to abandon a bond sale from lack of buyer interest. The company has since decided on an equity sales instead.
Rising Land Prices to Drive More Borrowing
Besides the challenge of domestic credit restrictions, China’s developers are just plain borrowing more because of rising costs.
According to research by real estate consultancy Centaline, during the first five months of this year, borrowing both locally and internationally by China’s 10 largest property developers had reached 38 billion yuan ($6.2 billion) nearly equal to all of 2012.
A major reason for this spike in borrowing is the increasing cost of land. Throughout 2013 there have been new records set for land prices at auction in China, as developers compete to build the project pipelines necessary for growth.
Earlier this month, Greenland Group paid RMB 5.95 billion (US$979 million) for a piece of land in Shanghai, and a Singapore developer set a record in late November by paying RMB 42,821 (US$7,028) per square metre of planned space for a plot near Xintiandi in Shanghai.
The pressure that escalating land costs put on developers, particularly the increasing costs of borrowing, have already led one major investment bank to downgrade the entire sector for 2014. A report by BNP Paribas downgraded the overall industry outlook for next year from “Improving” to “Stable.”
In their analysis, BNP noted that through the end of September, land prices in China’s first-tier cities – Shanghai, Beijing, Shenzhen and Guangzhou – had increased by 135 per cent year over the same period a year earlier. However, the average increase in housing prices had only risen by 15 percent in those same cities.
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