Where the opportunities are in Chinese real estate credit

Real estate equity investors are also looking at the Chinese real estate debt space because they could get similar yields to equity investments.

While real estate debt professionals see potential distress opportunities emerging in China, they believe lenders should focus on high-quality developers.

“We are currently seeing more deals of higher quality that you usually won’t be able to see in the market. It’s due to the tightening of credit and people under pressure to find  liquidity and to cash out some positions,” said Jinglei Chen, managing director, BEI Capital, speaking at affiliate title Private Debt Investor’s APAC Forum 2022.

Such opportunities are emerging from the Chinese government’s growing scrutiny of its property sector. Not only did the government introduce the ‘three red lines’ policy in August 2020 to restrict bank lending to developers, it also limited mortgage credit, which made property purchases less affordable.

“So all of these together are really leading to a weaker liquidity position for the property developers who were already under a lot of pressure,” explained Joyce Liang, managing director and head of Asia Pacific Credit Research, BofA Securities, also speaking on the panel.

Liang pointed out that the market has already seen 26 developers default on their dollar bonds since the beginning of 2021. “In terms of dollar amount, that actually represented 50 percent of all outstanding Chinese high-yield dollar bonds at the beginning of last year,” she said. She thought it was “not just difficult, but practically impossible” for any developer to come to the dollar bond market for any financing at all.

Private investors can now see opportunity to fill the funding gap for developers that have not been able to refinance from other channels. “Private lenders can now lend to much better sponsors than they could have ever dreamed of. Some of the top sponsors now are willing to negotiate with private lenders, where that was never the case because they had such cheap money from other sources. So that’s a really good thing for the high yield debt market,” said panellist Marc Bosnyak, managing director, Core Capital Asia.

Chen agreed with Bosnyak that the time was right for investors to get a good risk-adjusted return without having to “compete head-to-head with the banks” like they did before.

With that in mind, typical real estate equity investors are now also looking at the debt space because they could get similar type yields to what they would get in equity, Bosnyak noted. These investments can be structured as debt with mortgage security or equity pledges, which makes them “much safer investments than just straight equity investments.”

All three speakers on the panel thought investors should focus on high-quality developers and projects rather than those that are distressed.

The high-quality investors are likely to survive the latest wave of crisis and are the ones that will benefit from any potential easing the market is going to see, Liang said. “They will be the market consolidators in the next few years,” she explained.

Bosnyak believed investors could get low-teens return from lending to some of the “top names” in the market on “very good projects on offshore financings.”

As for distressed real estate, Liang expected opportunities on the market but warned investors that there is “no rush” to go into that side of the market yet.

“We continue to see defaults and we are really not seeing a lot of incentives on the developers’ side to push ahead with restructuring. In fact, no defaulted developer has really proposed a comprehensive restructuring plan yet. And that’s part of the reason why we are not seeing a lot of incremental interest in that space at the moment,” Liang explained. She thought such developers may still be waiting for more guidance from the Chinese government about what potential pathways might be.

Having said that, she advised investors to “start doing their homework and there will be good opportunities” on the distressed space going forward.