Real estate and related industries account for more than a quarter of China’s economy, according to Moody’s estimates.
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China’s real estate bonds were once the key yield drivers for sweeping bond funds in Asia, but the market share of property bonds has fallen due to the country’s debt crisis.
As a result, investors in high-yield bonds in Asia will be preparing for lower returns, investment analysts tell CNBC.
The market capitalization of those real estate bonds has fallen from an average of more than 35% to about 15% in some high-yield Asian funds, as the debt crisis has pushed down real estate bond prices. , according to portfolio managers and analysts who spoke to CNBC.
Traditional property bonds form most of the high-yield Asian universe. But as its market value has fallen, its share in the overall Asian bond market has also declined. As a result, fund managers have turned to other types of bonds to compensate for these losses, and investors in these high-yield funds may not find the same type of returns.
High-yield bonds, also known as junk bonds, are non-investment debt securities that carry greater default risks – and therefore higher interest rates to offset those risks.
“The share of real estate in China has dropped substantially,” said Carol Lye, associate portfolio manager at Brandywine Global investment manager. “With the supply of real estate bonds in China declining by almost 50% year-on-year, the market remains fairly broken with only selected high-quality developers able to refinance.”
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The fall is mainly due to a combination of lower bond supply and default bonds falling outside the index, according to financial research company Morningstar. See the article : Uncertainty in real estate is inevitable. Use these tips to keep going.
“As a result, the importance of real estate in China in the Asian credit universe is declining,” said Patrick Ge, a research analyst at Morningstar.
Last December, the world’s most indebted real estate developer, China Evergrande, skipped its debt. The fall of that crisis spread to other companies in China’s property sector. Other developers have shown signs of tension – some have cut interest payments, while others have missed out on debt.
Fund managers are pivoting into other areas to make up for the gap left by China’s real estate, but analysts say these replacements are unlikely to offer a better return than their predecessors.
“Moving to other sectors and countries [away from China’s very high-yield property space] will certainly reduce the relative yield [to the index] in the portfolio,” said Elisabeth Colleran, emerging market debt portfolio manager. Loomis Sayles.
“However, managers need to think about what performance can really be achieved with the loss from a default,” he told CNBC.
With lower supply from China, interest in Indonesia’s high yields has grown from China’s property crisis.
associate portfolio manager, Brandywine Global
In the past, funds that were more overburdened on Chinese real estate bonds have surpassed those that had less weight on Chinese property bonds, Ge said – but that is no longer the case.
“It is unlikely that this will be the case in the future, at least in the short term, given the sector’s ongoing liquidity struggle and damaged reputation,” he said.
China’s massive real estate sector has come under pressure in the past year, as Beijing has squeezed developers ’high confidence in debt and a rise in house prices.
Filling the gap
As fund managers for Asia’s high-yield bonds move their money out of China’s property, areas in which they diversify include the renewable energy and metals sectors in India, according to Morningstar . This may interest you : Proposed climate rule signals new era for real estate.
Some also see a potential upside in real estate in Indonesia, which they expect to take advantage of low mortgage rates and extended government incentives to support Covid’s recovery, Ge said.
“With lower supply from China, interest in Indonesia’s high yields has grown since the property crisis in China,” said Lye of Brandywine Global. “Indonesia has been relatively more stable in terms of commodity benefits, there is a demand for housing and inflation has not gone out of control.”
Asia’s high-yield portfolios in Southeast Asia are likely to be less risky for investors, as they have a “relatively stable” credit quality and a lower default risk, according to a recent Moody’s report.
“Portfolio managers need to rely on their in-depth credit screening capabilities more than in the past to select winners / survivors in this sector,” Morningstar’s Ge told CNBC. Fund investment is an approach that focuses on the analysis of individual stocks, as opposed to macroeconomic factors.
Going to other sectors is a “healthy” development since it helps diversify investors ’portfolios, said Lye, who however warned that it comes with other risks.
Road ahead for developers
China’s property debt crisis has resulted in a decline in investor confidence in the ability of its developers to repay their debt, after receiving a series of rating downgrades. On the same subject : What Homeowners Think About the Housing Boom.
Real estate companies have also faced challenges in attracting overseas financing – and that keep liquidity and refinancing risks high, according to rating agency Moody’s in a June report.
“The U.S. dollar bond market remains largely closed to Asian [high yield] companies, raising concerns about the ability of companies to refinance their impending large maturities,” said Annalisa Dichiara, senior vice president of Moody’s.
Moody’s expects more Chinese real estate developers to be in debt this year – half of the 50 names the agency covers are under review for downgrade, or to have a negative outlook.
Data released before June shows that China’s real estate market remains subdued.
Real estate investment during the first five months of this year fell 4% from the same period last year, despite overall growth in fixed asset investment, according to the National Bureau of Statistics. China.
Real estate prices in 70 Chinese cities were silent in May, up 0.1% from a year ago, according to analysis by official Goldman Sachs data.
– CNBC’s Evelyn Cheng contributed to this report.
