Some Chinese and international institutional investors are returning to Chinese real estate bonds, betting on an improving outlook as the government accelerates efforts to boost economic growth and revive a property sector beset by a debt crisis.
Investors began to return after Tuesday’s announcement of the most aggressive stimulus measures since the pandemic, mainly targeting the real estate sector and triggering a rally in offshore bonds of real estate developers.
Credit investment specialist Beijing G Capital Private Fund Management Center has placed orders worth “a few tens of millions of yuan” to buy real estate bonds for the first time in several months, its chairman said. Li Gen.
“We have seen a determination to revive the real estate sector… which represents a radical change from efforts in recent years,” Li said.
The recovery highlights the extent to which stimulus measures are restoring confidence in the sector, although analysts are divided on the near-term recovery prospects.
The sector, a pillar of the world’s second-largest economy, has lurched from one crisis to another since 2021, after a regulatory crackdown on debt-financed construction spooked investors and lenders, reducing access to funds.
Sales slowed and many developers defaulted, causing the value of U.S. dollar-denominated developer bonds to fall to historic lows.
Bonds from major developers that did not default – including China Vanke and Longfor Group – were among the largest in the rally.
Vanke’s dollar bonds maturing in November 2027 rose to 70 cents against the dollar on Thursday, up from 49 cents before Tuesday’s announcement, according to Duration Finance data.
Longfor dollar bonds maturing in April 2027 rose to 84 cents from 75 cents during the same period, according to data from Duration Finance.
Defaulted developers’ offshore bonds also improved, with Country Garden’s dollar bonds maturing in September rising about 2 cents to trade at about 9.1 cents.
Real estate stock prices have also risen since the announcement.
A POSITIVE POSITION
Two days after the stimulus announcement, investor sentiment strengthened further as Chinese leaders pledged to meet the 2024 economic growth target of around 5% and “stop the decline” of the real estate market.
On Sunday, Guangzhou became the first first-tier city to lift all restrictions on home purchases, while Shanghai and Shenzhen said they would reduce the minimum down payment ratio for first-time home buyers and make it easier to purchase by non-local buyers.
Enhanced Investment Products, a $400 million Hong Kong-based hedge fund, increased its holdings of Vanke 2027 dollar bonds, said Jason Jiang, chief investment officer.
“Even though the stock rally might be bigger, buying Vanke bonds provides a better margin of safety,” Mr. Jiang said.
Home sales data to be released after China’s Golden Week holiday, which ends on October 7, could be a trigger for the next move in the market, according to Jason Jiang.
Another Hong Kong-based credit fund manager said property bonds made up up to 20% of its portfolio and that it had built up stocks ahead of the announcement, believing they were oversold.
He has since withdrawn due to uncertainty over whether the measures will boost new home sales enough to revive the sector in the short term, said the manager, who declined to be identified because he does not was not authorized to speak to the media.
Hedge fund Gramercy Funds Management, based in Greenwich, Connecticut, US, holds a portfolio of defaulted real estate developer bonds, betting on a recovery in the sector. The recovery has boosted returns and improving macroeconomic and sector fundamentals will further strengthen them, said Philip Meier, deputy chief information officer.
“The latest measures taken by the Chinese authorities confirm our positive position and significantly reduce the risks associated with holding these bonds,” Mr. Meier said.
