Builders turn to overseas bond investors

Domestic funding sources are shrinking for the nation's property industry, which is going through a period of transformation, and developers may need to look at offshore markets to raise cash, said analysts.

And there's rising demand for developers' debt overseas, because it offers high yields and low default rates, the analysts said.

In the Asian market, high-yield bonds issued by Chinese enterprises get relatively high ratings, Laura Acres of Moody's Investors Service told a high-yield bond forum in Shanghai in late April.

"As of April, about 54 percent of high-yield bond issuing enterprises in Asia were from the Chinese mainland, and many are in the pipeline to issue bonds, half of which are realty developers," said Acres.

Issuing bonds has become one of the major funding sources for China's developers, which are in some cases bypassing the interbank and equity markets in favor of dollar-denominated debt overseas.

Onshore funding conditions tightened in the first quarter of 2014 amid tougher lending policies and risk concerns about both banks and the shadow banking system.

Listed property developers with nationwide operations are still priority clients for onshore banks. But their unlisted counterparts, many of which operate in limited local areas, find it's hard to raise funds domestically.

Those smaller developers have been cutting sales prices to raise cash. But that strategy has simply prompted potential apartment buyers to wait for further discounts, according to Andy Chang, an analyst with Fitch Ratings Inc.

With domestic funding sources shrinking, market insiders said, developers are scrambling to offer high-yield dim sum bonds (yuan-denominated debt issued abroad) to take advantage of robust demand for yuan assets. Most of the bonds were sold to Asian fund managers, although private bank investors and banks have taken about 25 percent of this debt.

The recent insolvency of Ningbo-based Zhejiang Xingrun Real Estate Co raised worries among some investors that China's developers may face broader solvency problems, but analysts said big players in the market are less likely to default, and the high-yield bonds they offer are still good to buy.

Xingrun's problems weren't surprising, given that it's a private developer of relatively small size whose debts outweighed its assets, said Wallace Lam, an analyst with HSBC Holdings Plc.

"China has more than 10,000 developers, and if we look at the top 50, many of which offer bonds, they are doing well," said Lam.

Most rated developers are more resilient than the nationwide average, as reflected by annual growth in contracted sales, the report said.

The growth potential for megadevelopers in the "BBB" category is more limited, and smaller developers whose debt has been rated display more volatile sales performance and more vulnerability to the overall macroeconomic environment, it said.

Most notably, developers in the "BB" category performed the best, probably because most have reached the critical scale to achieve superior management, execution and corporate governance compared with their competitors in the "B" category, the ratings agency said.

Developers that offer bonds overseas may experience less solvency pressure, and considering that bonds issued by China's rated developers haven't experienced any defaults, the homebuilder bond market is steady and performing well, according to Wang Ying, an analyst at Fitch Ratings.