Turbulences in China's Real Estate Sector
Headlines about China Evergrande’s potential insolvency sent shockwaves through the market.
For several weeks now, we have been receiving regular news about the Chinese real estate sector. The headlines about China Evergrande’s potential insolvency rattled the market. China Evergrande, the second-largest real estate developer in the People’s Republic, employs 200,000 people and supports 3.8 million jobs. It is heavily indebted with USD 300 billion and is in a liquidity crisis, where a (structured) bankruptcy or restructuring cannot be ruled out. The high risk of default at China Evergrande also affected other heavily indebted companies in the real estate sector, as banks and other capital providers reassessed the risks and became extremely restrictive in granting new funds.
Last night, it was reported that another developer, Fantasia (aptly named), also missed interest and, in this case, principal payments on time. Fantasia, a developer of luxury apartments in China, announced that it failed to repay a bond of USD 206 million due on October 4, 2021, further intensifying concerns about the highly indebted real estate companies in the country.
A short-term solution to the debt problems in the Chinese real estate sector is not in sight, and this issue will likely continue to occupy us in the coming months. Further defaults by heavily indebted real estate companies are expected to follow, which could lead to partial consolidation in the sector. Companies with healthy balance sheets and state-backed firms could emerge as winners, as they may acquire attractive assets at significantly reduced prices.
This consolidation is also in the interest of the Chinese government, which has been striving for years to regulate the real estate sector more strictly and reduce its indebtedness. Therefore, a cleanup of the sector and (controlled/structured) bankruptcies are inevitable. The real estate sector is important for stability within China, so the government is making strong efforts to prevent uncontrolled spillover into the credit market. This was recently reflected in the injection of money into the banking system to prevent contagion and systemic risks.
Convertible Bonds in the Chinese Real Estate Sector
The proportion of convertible bonds from Chinese real estate companies is currently quite small: in the Refinitiv Global Focus Index, there are 5 convertibles with a total weight of just under 1.5%. This is in stark contrast to a few years ago when the real estate sector made up a significant portion of the Chinese convertible bond universe.
Real Estate Positions in the H.A.M. Global Convertible Bond Fund
The fund has a global investment of 3.2% in the real estate sector.
This exposure is spread across three positions.
Weight |
Company |
Country |
Commentary |
1.4% |
Longfor (Citi) 0% 2024 |
China |
Issuer: Citigroup (A+ rated) convertible into Longfor (USD 27 bn market cap, BBB rated) |
1.0% |
Primary Health Properties 2.875% 2025 |
GB |
PHP is a leading investor in health care facilities in the UK (91% of its business is with governmental parties) |
0.8% |
Relo Group 0% 2027 |
Japan |
Relo Group operates service apartments in Japan |
For these reasons, the direct impact of the turbulence in the Chinese real estate sector on the fund is very limited.