Most Private Developers May Have Just Lost Access to China’s Bond Markets

The walls continue to close in on small and mid-sized property developers in China after financial regulators reportedly slammed the door to new domestic bond issues for companies not measuring up to newly devised standards. Reports in official Chinese media noted that some developers have already had bond-raising applications rejected while new guidelines are expected to officially be announced by the stock exchange shortly.

In order to qualify to issue bonds, property companies will need to be rated AA or above by a ratings agency and meet one of four conditions, according to an official document outlining the new rules obtained by the South China Morning Post. Companies hoping to qualify for bond financing under the new conditions must meet at least one of the following qualifications:

• Be listed on a mainland or overseas stock exchange
• Be a central government-owned company with real estate development as its core business
• Be a property company owned by local government above the provincial capital level
• If they are privately owned, then they must rank within the top 100 developers as compiled by the China Real Estate Research Association.

Developers that meet the first two steps would then see their bond issuances categorized into three groups: normal, special and risky. Those groups will be based upon the assets, revenue, profitability, liquidity and land banks of the developer.

The restriction closes off a form of cheap financing that China had used to rekindle growth in real estate investment after the market soured in 2014. China reopened the door to domestic bond issues by property developers at the end of 2014 after effectively cutting off the real estate industry’s access to bonds in 2009. With monetary easing the theme in 2015, developers last year issued RMB 272.2 billion ($30.4 billion) in local bonds and have surpassed that total already in 2016 issuing 292.8 billion ($43.4 billion).

Funding For Small Developers Is Getting Harder To Find

While Liu Feifan, an analyst with Guotai Junan Securities, believes the Chinese government is implementing the new bond measures in an attempt to cool down the sizzling property market, the restriction also seems carefully aimed at giving the government greater control over the development industry.

As one veteran mainland developer explained to Mingtiandi, “The state-owned developers get the first chance – at fractionally above benchmark rates. Next in line are the favored private developers, and then everybody else gets what’s left over at benchmark rates plus 15 percent.”

This favoritism is rooted in part by the government’s preference for companies controlled directly by the state, as well as by a continuing drive to reduce the number of developers in the market. At the Central Economic Work Conference held in Beijing last December, the mainland’s leadership confirmed that “the country will promote the consolidation of property developers and encourage them to change their marketing strategies,” according to an account in the official People’s Daily.

Will Bond Restrictions Lead To More Consolidation?

In 2014, China Vanke CEO Yu Liang predicted the real estate sector would pare down from the more than 85,000 firms operating at the time to only 10,000 by 2029 with industry consolidation being commonplace.

“It’s not going to be big fish eating small fish,” Yu claimed. “It will more be in the form of co-operation rather than takeover.”

A number of large mainland developers have acquired smaller counterparts since Yu went all Nostradamus. Skyrocketing land prices have made it difficult for some homebuilders to get their hands on new land, which caused profits to drop.

The largest consolidation transaction took place in March when CITIC Group, one of China’s largest state-owned investment conglomerates, sold off its mainland residential development business to China Overseas Land & Investment Ltd for RMB31 billion ($4.8 billion).

Evergrande Real Estate had no qualms about adding to its debt pile when it bought a 52.78 percent stake in Shenzhen-listed real estate developer China Calxon Group for RMB 3.6 billion ($553.8 million) in April.