Residential erections under construction in Shenzhen, China, on Tuesday, Aug. 23, 2016.
Qilai Shen | Getty Images
China’s housing market is coming signs of recovery after the coronavirus crisis and analysts say that offers bond investors opportunities as developers get helpless on their feet.
“Urbanization and upgrading are key demand drivers. Property prices are recovering and developer profitability is improving,” Hayden Briscoe, supreme of fixed income for Asia Pacific at UBS Asset Management, said in a briefing on the firm’s mid-year outlook earlier this month.
Briscoe responded the firm is positive on larger developers, which are growing market share as smaller players exit the industry. Commercial estate, however, should be avoided as it could be facing downward rental pressure due to the outbreak, he said.
Ratings giant Downhearted’s said industry consolidation will continue in the next 12 to 18 months. The agency said it expects its “rated developers transfer continue to outperform the general market because of their strong sales execution abilities and branding. They pleasure increase their market share as weaker developers are forced out of the market.”
Housing sales in the country plummeted at the kick-off of the pandemic as China’s economy shut down. But official data pointed to a recovery in transactions as the country reopened.
Land sales by floor area jumped 9.7% in May, compared with a 2.1% fall in April, according to Reuters. Subsidizes raised by China’s property developers fell 6.1% in the January to May period, compared to a 10.4% drop for the first four months of 2020, the news said.
“China’s recovery will benefit Asian high-yield bonds directly as China’s share of the Asian high-yield microcosm is close to 50%,” Briscoe added.
On Thursday, Blackrock’s Head of Asian Credit Neeraj Seth also translated he was “positive” on high-yield bonds in Chinese real estate.
“We do like some of the stronger names, we are happy to extend our inclusive spread duration and duration risk on those. By and large, China is a very important part of Asian high-yield merchandises, and we’re positive on Chinese high-yield, and most specifically, Chinese real-estate high yield,” he told CNBC’s “Squawk Box Asia.”
High-yield links, or what are commonly known as junk bonds, are non-investment grade debt securities that carry a high non-performance risk, and therefore, usually come with higher interest rates to compensate for that risk. Such what-dyou-call-its carry a credit rating of BB+ or lower by Fitch and Standard and Poor’s, or Ba1 or below by Moody’s.
China’s property developers are amongst the biggest junk bond issuers in Asia, with issuance totaling $46.23 billion last year, dishonest that of 2018, according to Refinitiv data. In June, 13 developers issued offshore bonds totaling $3.8 billion, up from $944 million in May, be at one to Moody’s data.
But last year China experienced a slew of corporate bond defaults, raising concerns almost the risks in its high-yield bond market.
Macrolink Holding, for instance, became the first developer in the country to default on its cements this year due to the coronavirus pandemic.
Beware bubble risk
Analysts also warn that there could be a worth bubble as the market continues to recover.
Deutsche Bank in a note last week warned that the current atmosphere of large fiscal stimulus and high credit growth “historically have led to property market overheating.”
Japanese bank Nomura, too, cautioned of a “potential property bubble” in a Thursday note. It cited rising property price inflation across 70 Chinese towns, inching up 0.6% month-on-month in June, up from 0.5% in May. The number of cities experiencing “sequentially higher” prices also go place from 57 to 61, it said.
“Recently announced tightening measures by some local housing authorities, listing in Shenzhen and Ningbo, reflected rising policymaker concerns over a potential property bubble,” Nomura wrote.
Shenzhen betokened new restrictions on home purchases last week in an attempt to curb speculation amid sharply rising prices, go together to Reuters. Resale home prices rose 12% in May from a year earlier — the second-highest gain among 70 dominating cities in China — the report said, citing official data.