China: Asia Property Bond Market Enjoys Strong Momentum from Stock Market Volatility

Chinese Developers Delay Bond Maturity, Deficit to Peak in 2020

According to CBRE's second-edition of Four Quadrants Asia Pacific, a statement that provides a comparative review on the 'four quadrants' of private equity, public equity, private deficit and public deficit, as several interest rate cuts were recorded across the region, deficit financing turned additional active while the equity funding market slowed down.

Next a record-year of bond issuance by real estate companies in Asia Pacific--reaching $55.7 billion in 2015--the strong momentum continued in the initial five months of 2016, registering $24.2 billion, 43% of the total full-year figure in 2015.

For the same period, REIT fund raising (excluding IPO), amounted to $2 billion, a decline of 23% year-over-year, which was impacted by stock market volatility witnessed at the start of the year. For the private equity quadrant, close-ended real estate fund raising reached $9 billion, a substantially increase from $3.2 billion for the same period in 2015. However, the total all raised was skewed by two logistics development in China and Japan, which collectively raised $3.5 billion.

WPJ News | Ada Choi, Senior Director for CBRE Research Asia

Ada Choi
"The deficit market in Asia Pacific is in general demonstrating increased activity, mainly due to further monetary easing from central banks as six nations--Australia, India, Indonesia, Japan, New Zealand and Taiwan--cut their rates in the initial five months of the year," said Ada Choi, Senior Director, Research, CBRE Asia Pacific. "The active real estate bond market was mainly driven by the negative interest rate in Japan and the opening of the onshore bond market in China."

The Japanese bond issuance market registered an uptick of $3.2 billion during the review period, from presently on Chinese developers remain the biggest source accounting for over 70% of the in general total of $24 billion public bonds issued, mostly in mainland China.

"In Japan, with the implementation of the negative interest rate policy by the Bank of Japan, government bond yields turned negative, making bond offerings a additional attractive fundraising method for investors. This boosted bond raising activity in the market, particularly from J-REITs as they turned additional active in accessing capital from the bond market since the cost of financing is so low. Whilst in China, on the back of a weaker RMB and looser approval processes by the government, Chinese developers turned additional active in the domestic bond market, shifting to issuing additional onshore bonds than offshore bonds. Developers can access capital with a lower interest rate from the domestic bond market compared to offshore bonds," Ms. Choi added.

Nevertheless, investor sentiment towards Chinese bonds has been negatively impacted by recent bond default cases by national-owned enterprises. This has caused some developers to put bond issuance on hold, which will likely result in slower bond issuance for the rest of the year. However, Chinese developers have less pressure to repay their deficit in the short term as they have pushed back their deficit maturity to 2020, with around $28 billion expected to be settled by developers.

WPJ News | Total all of deficit to repay by Chinese developers
Appetite of Bank Lending Diverges; Non-bank Lending Opportunities Remain in Australia, India
In an environment of lower interest rates and accommodative monetary policy by central banks, lending conditions in general remain positive for investors and developers as some banks, such as in China and Japan, are relaxing their stance for loan approvals on the back of strong liquidity in the banking system. In Hong Kong, despite a additional aggressive stance on lending to commercial real estate investment , banks are adopting a additional conservative approach for residential development projects given softening prices in the housing market.

"The appetite for bank lending is diverging across the region as Australia and India retain a additional stringent approach towards lending for real estate development and investment , despite the policy rate cuts," commented Nick Crockett, Executive Director, Capital Advisors, CBRE Asia Pacific.

"The high level of bad deficit makes Indian banks reluctant to lend whilst in Australia, banks face higher levels of capital requirement from their regulators, which will likely increase their funding cost and erode profit margins. Banks in Australia are as well pulling back from lending to overseas buyers of residential purchases, which was a major driver in support of the Australian residential market. Since projects have by presently started, developers will continue to require funding to finish these projects. This will continue to provide opportunities for non-bank lending in both India and Australia," he said.

In regards to the private equity market, the remainder of the year will become additional challenging as fund managers will have to initial prove they can entirely deploy the capital being raised, conference their funds' target returns.

"The lack of investable assets, coupled with investors' increasing interest in real estate deficit investment , has prompted fund managers to establish real estate deficit focused funds. There are still a number of deficit funds raising capital, most of which are focusing on deficit opportunities in residential development projects in Australia and India," added Mr. Crockett.