A woman crosses a footbridge in front of towers standing near completion at Kaisa Plaza, developed by Kaisa Group (left) in Beijing. People’s Bank of China interest rate cuts and eased purchasing rules have driven a five-month gain in new-home sales, boosting confidence among investors burned by Kaisa’s landmark default in April.

Bloomberg/Hong Kong

China’s central bank has helped developers lead a world-beating rally in emerging-market property dollar debt, in a turnaround for an industry that suffered a landmark default earlier this year.
Future Land Development Holdings, which builds shopping malls in eastern China, has given holders of its 2018 notes a 13.5% return since December 31, the best in a Bloomberg index of dollar bonds from emerging-market builders. The 2021 securities of Country Garden Holdings Co, controlled by China’s second-richest woman Yang Huiyan, made 12.3%.
That’s contributed to an 8% gain for all emerging real estate debt in 2015, the best-performing sector among developing bonds globally.
People’s Bank of China interest-rate cuts and eased purchasing rules have driven a five-month gain in new-home sales, boosting confidence among investors burned by Kaisa Group Holdings’ landmark default in April. Premier Li Keqiang has also let more developers raise funds onshore, where borrowing costs are falling and repayment is unaffected by yuan weakness.
“The China property sector is the single most attractive sector in high-yield right now and will be for the next six months or so,” said Gordon Ip, a Hong Kong-based senior fund manager at Value Partners Group, which oversaw $16.5bn of assets at the end of July. “The easing from the Chinese government is good for capital intensive sectors such as property.”
A worsening slowdown in an already cooling economy has forced Li to fall back on old growth drivers such as property investment, even as he vows to focus on service sectors that don’t rely so heavily on debt.
Authorities lifted a ban on builders selling bonds onshore last year to stem a slide in the sector, which accounts for about one third of the economy. Local offerings reached 161.7bn yuan ($25.4bn) since June 30, almost three times of the 56.9bn yuan in the previous three months. Coupons averaged 5.26%, compared with 8.35% on developers’ offshore dollar debentures.
Most of the local funds are used to refinance expensive onshore loans, according to BlackRock. “The onshore issuances also allow developers to be better matched in terms of currency exposure, which is a big plus,” said Suanjin Tan, portfolio manager in the Asian fixed-income team.
Onshore note sizes tend to be bigger, making cheaper financing more efficient, according to Ross Lee, credit analyst at Bank of China Hong Kong.
Evergrande Real Estate Group, majority-owned by billionaire chairman Hui Ka Yan, paid as little as 5.3% in July for the equivalent of $2.4bn in an onshore two- part offering.
It had to give investors 12% to raise $1bn in an offshore note sale in February. Country Garden got the equivalent of about $943mn onshore last month at 4.2%, compared with 7.5% on $900mn of overseas notes earlier this year.
The cheaper onshore borrowings are boosting confidence developers can pay down industry debt that’s climbed to 104% of equity from 74% in 2007.
While defaults by weaker borrowers may expand, property investment is likely to continue trending down which will help, according to Bryan Collins, portfolio manager at Fidelity Worldwide Investment. “Prime landbank prices are high, and developers are more selective,” he said.
Builders cut new home starts 17.9% by floor area in the first eight months, according to data from National Bureau of Statistics.
Residential property investment growth slowed to 3.5% from 13.2% a year ago. Just as spending drops, sales are rebounding.
China’s home prices rose in August in half of the 70 cities the government monitors from 31 in July. While sentiment could “change in a dime” if transparency concerns again engulf developers and their executives as happened with Kaisa earlier this year, recent industry data are encouraging, according to Swee Ching Lim, credit analyst at Western Asset Management Co in Singapore. “Folks continue to believe in continued government support for this sector.”