Buyers of distressed loans eyeing China property market
Updated today at 01:24 AM
SINGAPORE - Buyers of distressed loans are watching China's property market closely as debt soars and growth falters.
Nomura Holdings and Bank of America say they will pay more attention to Chinese developers next year, having profited from trades in India, Australia, South Korea and Indonesia.
"There's been a lot of nervousness around the real estate sector in China," Mr Andrew Tan, Nomura's head of secondary trading for loans and special situations in Asia ex-Japan, said last week.
"We've seen some sell-off in terms of some of the bigger names in the loan space which, typically, you don't see being offered in the market. They are at high-yield, stressed levels."
The number of publicly traded developers with liabilities exceeding equity in China has jumped to 136 out of 334, or more than 40 per cent, from 57 in 2007, according to data compiled by Bloomberg.
China's leaders are discussing lowering next year's economic growth target amid falling home prices and rising inventory.
"A lot of people are waiting for large cracks to occur in China, but it's hard to pin down exactly when that will happen," said Mr Kevin Tham, a managing director of Bank of America's global credit and special situations group in Hong Kong.
"Our key themes in 2015 will revolve around deploying capital into more defensive, senior secured loans, while we wait for the next wave of distressed situations to come through."
China's property industry accounted for 16 per cent of the country's 7.7 per cent economic expansion last year, according to the World Bank. Home sales shrank 10 per cent in the first nine months of this year, with unsold units equal to 14.4 months of contracted sales, Moody's Investors Service said in a note last week. Non-performing loans at Chinese lenders jumped by the most since 2005 in the third quarter to 766.9 billion yuan (S$162 billion), the China Banking Regulatory Commission said in a statement on Saturday.
Soured credit accounted for 1.16 per cent of lending, up from 1.08 per cent three months earlier. The People's Bank of China has injected 769.5 billion yuan into its banking system over the past two months, stimulus that has done little to ease financing costs for borrowers, according to UBS.
"We see new deals getting printed at higher leveraged levels with lighter covenants, so we need to be vigilant," said Singapore-based Mr Tan.
China's last banking crisis was in the late 1990s when years of state directives saddled lenders with soured loans and forced some US$650 billion of bailouts over a decade.
Syndicated facilities in China are already at a record $46.1 billion this year, according to data compiled by Bloomberg. In Hong Kong, the total $60.1 billion thus far is approaching the record $63.9 billion in all of last year.
Moody's cut its outlook on China's real estate market to negative in May. Goldman Sachs Group turned bearish on property bonds in September, and called them the riskiest part of the Asian junk bond market last month.
Beijing home prices fell for the first time in almost two years as China’s property slowdown deepened, prompting developers to offer discounts to cut inventories.
New-home prices dropped in October in 67 cities of 70 tracked by the government from a year earlier, and in 69 from September, the National Bureau of Statistics said today. Prices in Beijing declined 1.3 percent, the first annual decrease since November 2012 and a reversal from the 14.7 percent jump in January from the previous year.
Home prices will continue to decline “modestly” next year as developers offer promotions or discounts to reduce stock that will remain high, according to Moody’s Investors Service. Housing sales slumped 10 percent in the first 10 months of this year from the same period in 2013 amid tight credit and an economic slowdown, prompting the government to ease curbs on an industry that has become a drag on growth.
“Many developers are still using price adjustments to at least get closer to their annual sales targets, although few can achieve them,” Donald Yu, Shenzhen-based analyst at Guotai Junan Securities Co., said. “Sales are rebounding, but not by that much. The oversupply issue remains quite severe.”
Developers tracked by Guotai Junan completed about 75 percent of their full-year sales targets in the first 10 months, Yu said.
The Shanghai Stock Exchange Property Index, which tracks developers listed on the city’s exchange, fell 1.1 percent as of 11:04 a.m. local time. The benchmark Shanghai Composite Index declined 0.5 percent.
Prices fell 1.1 percent from September in Beijing and 0.6 percent in Shanghai, according to the statement.
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China new home prices slide
DOW JONES
NOVEMBER 18, 2014 1:48PM
A man walks through a residential compound in Beijing. Falling property prices are a key issue for the economy.
THE average price of new homes in 70 Chinese cities continued to fall for the sixth straight month in October, but at a slower pace as some home buyers returned to the market following Beijing’s move to loosen mortgage rules.
The policy moves, however, have had a limited effect on buoying a sluggish market that is marked by looming inventories, and property developers remain under pressure to cut prices to attract home buyers.
On a month-over-month basis, prices in October slipped 0.8 per cent compared with a 1.0 per cent fall in September, according to calculations by The Wall Street Journal. This is the second consecutive month that the average price drop has moderated.
On a year-over-year basis, the average price of new homes declined by 2.5 per cent in October compared with a 1.1 per cent fall in September, which was the first annual decline in nearly two years.
Many investors are concerned that a prolonged slump in the property market could continue to drag growth in the world’s second largest economy. Analysts estimate that real estate accounts for nearly one-quarter of gross domestic product, factoring in construction, cement, steel, chemicals, furniture and other related industries.
Excluding public housing, private-sector home prices fell in 67 of the 70 cities in October from a year earlier, up from the 58 cities that posted declines in September. On a month-over-month basis, home prices fell in 69 of the 70 cities in October, unchanged from September.
The authorities have recently introduced measures to prop up the housing market. The central bank and banking regulator in late September loosened mortgage restrictions by extending qualification for first-time buyers’ preferential rates and terms to existing homeowners.
Housing sales in October showed a smaller year-over-year decline compared with September, as more favourable mortgage terms boosted home-buying sentiment. But some analysts warned that those measures won’t quickly solve the longer-term issues of excess inventory and rising leverage, and noted that some developers would do well to continue to cut prices to pare down their holdings.
Dow Jones
S&P sounds warning on Chinese property sector, Russian banks
Business | Updated today at 01:19 AM
LONDON (REUTERS) - Credit rating agency Standard and Poor's said on Wednesday that China's over-priced and over-supplied property market and capital-starved Russian banks were likely to face further downgrades in the coming years.
In two new emerging market-focused reports, S&P said Chinese property ratings were likely to be hit more than other large markets in Asia, while Russian banks in Turkey, South Africa and Brazil also faced difficulties.
S&P said in the property report that ratings in Asia would have "a negative bias" next year because of an expected fall in Chinese and Hong Kong house prices.
The property sector accounts for more than 15 per cent of China's annual economic output and banks provide much of the financing for building and buying, so a prolonged downturn poses possibly the biggest risk to the world's second-largest economy.
"Continuing sluggish sales, rising financing cost, and declining access to funding will hit smaller (Chinese) regional players... as a result, we may see further downgrades, and even defaults, at the lower end of our rating spectrum," S&P said.
In its banking sector analysis, it highlighted Russia as the big concern from a list of seven top emerging markets that also included China, South Africa, Brazil, Mexico, Turkey and India.
Almost 70 per cent of S&P's Russian bank ratings have negative outlooks, meaning there is roughly a one in three chance of a downgrade in the next two years.
"Russian banks remain the most vulnerable to the current operating difficulties created by Western sanctions and lower economic growth," S&P said.
"The main risks we see for 2015, are capital erosion on the back of rising risk costs and funding pressures."
Western sanctions directly affect more than half of Russia's bank assets it added, and although the immediate impact should be limited in the short term, the pressure will rise as customers use up or move savings.
"While we expect large banks' ratings to remain tied to the trajectory of sovereign ratings, due to the large state ownership in the banking sector, rating trends for small and midsize banks are likely to mirror their capacity to cope with their increasingly tough operating environment."
Turkish banks, meanwhile, remained vulnerable to a potential downturn in global debt and capital markets due to their large debts, while low growth in South African and Brazil would weigh on their banks.
Early signs of a floor under China's sinking property market
PUBLISHED: 3 HOURS 36 MINUTES AGO | UPDATE: 2 HOURS 37 MINUTES AGO
Early signs of a floor under China's sinking property market
Some home buyers, brokers and developers are confident a shift is under way in China. Photo: Reuters
SHAO XIAOYI AND KOH GUI QING
Lid lifted on Chinese commercial real estate plays
Goodman bets on China
World’s fragile economies give us pause
Even as China's home prices suffered their biggest annual fall in nearly four years in October, there are early indications the worst might have passed as property sales, investment and construction all show some signs of recovery.
For global investors who fear that a weak property market is the single biggest threat to the world's second-largest economy, a bottoming in house prices could be the best news they get from China as the year draws to a close.
The housing market is still vulnerable and could sag again if policy support fades, a risk noted by Australia's central bank this week, but some home buyers, brokers and developers are confident a shift is under way.
"The housing market seems to be warming up a little," said Guo, a 24-year-old who has been looking to buy in the capital, and who declined to give his full name. "Now I can think about buying a small house in the Beijing suburbs."
After home prices powered to record highs in four of the five years from 2009, the market sagged this year as Beijing tried to calm prices with controls such as lending restraints and limits on multiple purchases.
Prices have fallen in each of the past six months, to be down nearly 4 per cent from a record peak hit in April. In annual terms, prices fell 2.6 per cent last month.
That has seen policymakers beat a hasty retreat on some measures, and mortgage rates and downpayment levels were cut in September for the first time since the 2008-09 global financial crisis.
Their efforts may be paying off.
The monthly fall in prices moderated to a four-month low of 0.8 per cent last month. The slide in mortgage demand also eased. Loans were down 4.3 per cent in the first 10 months of this year, after a 4.9 per cent drop between January and September.
"Before October, it was hard to persuade people to view houses," said Zhang, a broker at Lianjia Real Estate in Beijing. "Now, many are willing, and they decide to buy really quickly if they like the homes."
Inventories of unsold homes in the biggest cities fell 0.9 per cent on a monthly basis for the first time in nearly nine months, real-estate services firm E-House China said.
Tim Condon, ING's head of research for Asia, said the housing data pointed to fewer cities reporting falling prices in the months ahead, and it was a matter of time before house prices reached a floor.
"We think housing represents a potential upside surprise to growth forecasts," he wrote.
China is set to post its weakest growth in 24 years this year and market economists are expecting growth to come in just under the government's 7.5 per cent target. Next year, there are expectations the government will aim for 7 per cent growth.
There are other positive signs for the housing market. Annual growth in property investment quickened to 11.8 per cent last month, as housing construction leapt around 43 per cent from a year earlier, a sharp reversal after September's 0.2 per cent decline.
Land bought by developers climbed an annual 1.2 per cent annually in the first 10 months, after a 4.6 per cent fall between January and September.
"The market is bottoming out," said Fan Xiongchong, vice-president of Sunshine 100 China, a mid-sized developer in Beijing.
"But it's hard to tell how fast or stable the rebound would be."
Reuters
China Property - Positive surprise from rate cut | OVERWEIGHT
— Buy China property stocks! China interest rate cut came earlier than we expected; last two China lending rate cuts were on 7 Jun 2012 and 5 Jul 2012. We believe China developers with high gearing levels such as GZ R&F (2777 HK, BUY, TP HKD11.0) and Poly Prop (119 HK, Non-rated) should benefit more in interest savings than lower geared companies like COLI and SOHO China.
— We also like Sino-Ocean (3377 HK) and Shimao (813 HK) at these levels for its solid fundamentals and landbanking in key Tier 1 and 2 cities in the past several months, and see good upside from here.
— Positive impact on China property sector is twofold: 1) developers’ on-shore borrowing costs will come down and 2) homebuyers’ mortgage rates which are benchmarked against PBoC lending rate will drop. 1st home buyers typically enjoy 5-10% discount off 5+ year PBoC benchmark rate (previously 6.55%, now 6.15%) for mortgages; assuming a 10% discount, first-time home buyers will enjoy 36bps drop in mortgage rate after the rate cut. We expect this to help create a short-term boast to property transactions.
Click HEREto download PDF report
Shanghai new home sales jump on policy support
By Cherry Cao | November 24, 2014, Monday | Online Edition
THE implementation of revised criteria for normal housing fueled home transactions in Shanghai last week with a particularly notable surge in suburban properties, latest market data suggested.
Sales of new residential properties, excluding government-subsidized affordable housing, jumped 19.2 percent week over week to 257,700 square meters, Shanghai Deovolente Realty Co said in a report released today.
"The revised criteria, which went effective Thursday, left direct impact on transactions with those located beyond the city's Outer Ring Road seeing the biggest surge," said Lu Qilin, a Deovolente researcher. "Coupled with central bank's latest cut in interest rate, housing transactions will continue to increase."
Daily transaction of new homes, located beyond the Outer Ring Road, averaged 34,500 square meters between Thursday and Sunday, a nearly 66 percent surge from the average daily volume registered between November 1 and 19, according to Deovolente data. In comparison, sales of new houses located within the Inner Ring Road jumped 36.8 percent while those located between the Inner and Outer ring roads rose 11.7 percent, respectively.
The surge in sales of mid- to low-end homes pulled average cost of new homes down by 10.1 percent from the previous week to 27,120 yuan (US$4,424) per square meter, Deovolente data showed.
Citywide, seven of the ten best-selling projects last week cost around 20,000 yuan per square meter or below, with a development in Nanqiao, outlying Fengxian District, recording sales of 120 apartments, or 12,715 square meters, the most among all.
Last week also witnessed a surge in supply. New homes totaling 388,700 square meters were released to the local market, a week-over-week rise of 45.6 percent, or the second-highest weekly volume registered so far this year.
As of Sunday, new home sales totaled almost 720,000 square meters this month, compared to October's 1.09 million square meters, Deovolente said.
China's real collision course
Lisa Murray AFR correspondent
690 words
29 Nov 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Shanghai It has been described as a "kiss" or a "bump", but residents of two Shanghai apartment blocks that tilted and hit each other last weekend believe the collision was far more serious.
The government has declared the two 15-storey towers in Shanghai's Pudong area, completed two years ago and which house 150 families, safe to live in. According to its investigation, the tilting episode was not the result of land subsidence – a real issue for China's commercial capital – but because the towers were too close together. This was cold comfort for residents. "We are still afraid the building will collapse," one man told Shanghai's Qingnian newspaper.
Lax building standards are not the only repercussion of China's two-decade-long construction frenzy. The rush to create new cities, apartments, shopping centres and commercial towers has left the property market with a glut.
Before the late 1990s, most city dwellers still had their housing provided by their "work unit". Once the property market opened to private ownership, a frantic period of building began.
The development powered China's economy, as property investment grew to make up a fifth of gross domestic product. But now that reliance has made the economy vulnerable to a property market correction.
It has also fuelled the rapid growth of China's shadow banking sector, as credit grew from about 120 per cent to more than 200 per cent of GDP in just five years.
But the property market has reached "a structural turning point, marked by oversupply and faltering investment demand", according to UBS analyst Wang Tao.
She says the gap between supply – 11 million units completed in 2013 and more than 15 million new starts – and underlying demand of around 8 to 9 million units per year, has widened. Investors have discovered other places to put their money as the government gradually makes it easier for them to invest offshore. As a result, she expects housing will fall another 10 per cent next year, largely because the market is struggling to soak up inventory.Government nervous too
This week, the government flagged it may start buying homes from commercial developers as part of its social housing program, in a sign it too is concerned about oversupply.
"This will help to solve the inventory problem because it's better for the government to buy rather than build if there is oversupply," said ANZ's Shanghai-based economist Zhou Hao. "The property market is bottoming out but it will take a long time to recover."
The government is rolling out policies in a bid to stabilise the market. It recently relaxed the definition of first home buyers, effectively lowering down-payments, and last week the central bank cut interest rates.
However, most economists agree the property market will have at least two years of sluggish growth and act as a drag on the economy.
Slowing construction will hit demand for steel and in turn, iron ore.
This week, Li Xingchuang, president of the government-linked China Metallurgical Industry Planning Association, said steel consumption would top out in 2017 at 740 million tonnes.
This is nearly a decade ahead of widely circulated forecasts from Australian iron ore giants, Rio Tinto and BHP Billiton.
Arguably, a property market correction will be good for China's economy in the long run, reducing debt and resulting in more efficient allocation of capital.
Shanghai's Pudong is one of the products of China's building frenzy. Twenty years ago, there were hardly any tall buildings. Now, it is home to the rows of skyscrapers that make up Shanghai's impressive skyline.
Further out from the central business district on the outskirts of the district, a huge tract of land is being cleared for the city's $US5 billion ($9.3 billion) Disneyland project. Whole villages were relocated and some of those people ended up in the two buildings which "bumped together" this week.
"They built hundreds of apartment buildings in just two years," one resident who told AFR Weekend. "They were going up like bamboo."
Fairfax Media Management Pty Limited
Document AFNR000020141128eabt00004
China gears up for national property registry
PAUL PENNAY DECEMBER 02, 2014 3:15PM
China has issued draft rules that would regulate the establishment of a nationwide property-registration system in August this year.
According to news website The Paper, the draft rules have been approved by the State Council -- the equivalent of China's cabinet -- and will come into effect on March 1, 2015.
The property-registration system is hoped to help the government track homeownership, fight corruption and eventually make it easier to rollout a property tax nationwide.
The establishment of some kind of property registry has long been a stated goal of the central government but the plan has been delayed many times in the face of obstruction from local governments and other vested interests.
It appears that some changes have been made to the original draft guidelines, with the addition of 5 clauses, including more detailed provisions for different types of assets and other clarifications.
However, the information contained in the registry still won't be available to the general public, according to the final draft of the rules.
A preparation for property tax?
(02-12-2014, 02:15 PM)greengiraffe Wrote: [ -> ]China gears up for national property registry
PAUL PENNAY DECEMBER 02, 2014 3:15PM
China has issued draft rules that would regulate the establishment of a nationwide property-registration system in August this year.
According to news website The Paper, the draft rules have been approved by the State Council -- the equivalent of China's cabinet -- and will come into effect on March 1, 2015.
The property-registration system is hoped to help the government track homeownership, fight corruption and eventually make it easier to rollout a property tax nationwide.
The establishment of some kind of property registry has long been a stated goal of the central government but the plan has been delayed many times in the face of obstruction from local governments and other vested interests.
It appears that some changes have been made to the original draft guidelines, with the addition of 5 clauses, including more detailed provisions for different types of assets and other clarifications.
However, the information contained in the registry still won't be available to the general public, according to the final draft of the rules.