The People’s Bank of China (PBoC), State Administration of Taxation and the Ministry of Housing and Urban-Rural Development surprised the market with a series of supportive measures for the property industry on March 30.
They include a reduction in the minimum downpayment for buyers of second homes to 40% from 60%-70% of the sale price, a reduction in the downpayment for first time homebuyers using public housing funds to 20% from 30% and capital gains tax exemption for properties bought at least two years ago. Previously only homes bought more than five years ago were exempted from the 5.6% tax.
"These changes will make it easier for homebuyers to obtain mortgages and [they will] lower the cost of property transactions," said Franco Leung, a senior analyst at Moody's. “We believe the relaxed mortgage terms and housing taxes will encourage more prospective buyers to buy homes for their own use and as an investment, and therefore support home sales.”
The Chinese property sector has been stuck in a rut since the second half of 2014 thanks to declining sales and high levels of unsold inventories. Things have so far failed to improve in 2015, with national contracted sales for the first two months declining 16.7% year on year.
To make things worse, Kaisa’s Group Holdings’ sudden fall from grace — with the resignation of several members of its senior management, missed bond payments and a subsequent debt restructuring — only served to create yet more uncertainty.
Surrounded by negative headlines, investors unsurprisingly took a step back from the sector, which has led to Chinese property bonds widening by around 75bp-100bp since the start of the year.
The primary market was also hit, with only eight deals pricing for a total of $5.45bn. This time last year, the sector had raised $8.1bn from 18 deals.
Getting better
Thankfully, investor sentiment has been on the mend since the new measures were introduced, with Chinese property bonds gaining almost one cash point across the board.
“We’re finally seeing some nice net inflows,” said a head of syndicate. “But it’s clear that the market has only just started to open up and it’s the higher rated guys that investors are putting their money into.”
The developers he was referring to include China Overseas Land & Investment, Shimao Property Holdings and KWG Property, which all focus on tier one and two cities. And the improved demand for their bonds is no coincidence since the larger Chinese cities are the ones that benefit the most from the new measures.
“One, it’s a lot easier to have people on the ground in Beijing and Shanghai to conduct research, so investors are more familiar with those cities,” the syndicate head said. “The other reason is because the oversupply is especially serious in the lower tier cities. All the reports on ghost towns you’ve been reading about are all in the tier three and four cities.”
Trigger needed
But one North Asia DCM banker said that, rather than wait for the market to open fully, some of the lower rated developers should consider tapping the market now.
“For most clients, I’ve been telling them that if you’re not desperate then don’t act desperately,” the DCM banker said. “But if they are in need of money then I’m not really helping them by saying that. So my advice to them would be to do an unconventional deal.”
Having deals covered by anchor orders would be one example of that approach, and the DCM banker said he already had one such deal ready for launch. It was supposed to have come on April 1, but was pushed back to April 2 because of documentation issues. The issuer is a Chinese property developer rated in the low BB or high single-B bracket, and is looking to print a small dollar benchmark.
Not everyone is thinking along the same lines, however. “It’s not something I’ll advise, because it’s more like a club deal rather than a public bond, but that’s what a lot of Chinese property bonds are anyway,” said another Hong Kong based syndicate banker.
Even though he did not agree with a heavy reliance on anchor orders, the Hong Kong banker nonetheless admitted that having a Chinese property deal successfully executed would help the subsequent pipeline as it could prompt others to follow suit.
While there has been reverse enquiry from investors looking at selected Chinese property names since the new measures were introduced, the banker said that nothing had materialised yet as many issuers were either well cashed or had already pre-financed their debt in 2013-2014.
“They don’t really need the money and the benefits of issuing a dollar bond have also diminished quite a lot thanks to rate cuts in China,” the Hong Kong banker said.
The spread between offshore and onshore borrowings has narrowed from 2% at the start of 2014 to only around 50bp-100bp in March 2015. “But if a deal appears and gets a good reception, I’m sure quite a few heads will be turned,” he said.