Property Fears Put Bond Revival In Danger

The return of Chinese property developers to the international bond markets in recent weeks points to greater investor appetite for the sector, even as the mainland housing market continues to deteriorate.

Having been in effect locked out of the bond markets during the second half of 2011, Agile property, KWG property and shui on land have issued a total of $1.7billion bonds this year and more of their peers are expected to follow suit.

The rebound in sentiment towards the debt-laden developers that have fuelled China’s housing construction boom has been “extraordinary”, says Gury Stear,  Credit strategist at Societe Generale .

To see the extent of the rally, consider country garden’s $900 million of bonds due 2018, which are among the most liquid in the sector.  Just six months  ago, as global risk aversion and worries about a mainland property crash reached a high, the bonds were trading at only 55 cents on the dollar and yielding more than 20 per cent, and level that implies significant risk of default.  Yesterday, having rallied to within a whisker of their par value, the bonds yielded 11 per cent

Yet the revival is fast running out of steam, according to market participants.

The total value of property sales across China contracted 20 per cent in January and February from the same period last year, government data show.

Contract sales figures provided by many of the biggest Chinese developers themselves show even sharper declines.

Ever grande’s sales are down 70 per cent so far this year, says Mr Gallimore, while country Garden, Long for and KWG have suffered declines of 65, 55, and 54 per cent, respectively.

A prolonged period of falling sales would pose a big problem for many developers. This is because they have been struggling to obtain financing from local banks and could , therefore, fall short of the cash needed to complete construction projects, pay outstanding land premiums and honour debt obligations.