According to Moody’s estimates, real estate and related industries account for more than a quarter of China’s economy.
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China’s real estate bonds were once the main driver of junk bond funds in Asia, but the market share of real estate bonds has declined as a result of the country’s asset debt crisis.
As a result, investors in high-yield bonds in Asia have had to brace for lower returns, investment analysts told CNBC.
The market capitalization of those real estate bonds has fallen from an average of more than 35 percent to about 15 percent in some high-yield funds, portfolio managers and analysts told CNBC. interest rates were high in Asia as the debt crisis drove down real estate bond prices.
Asset bonds have traditionally been a big part of the Asian high-yield universe. But as their market value falls, so does their share of the Asian junk bond market as a whole. As a result, fund managers have turned to other types of bonds to cover those losses, and investors in these high-yield funds may not find the same kind of return.
High-yield bonds, also known as junk bonds, are non-investment debt securities that carry a greater risk of default – and therefore higher interest rates to offset those risks.
“The Chinese real estate market share has dropped significantly,” said Carol Lye, vice portfolio manager at investment management firm Brandywine Global. “With China’s supply of real estate bonds down nearly 50% year-on-year, the market remains quite depressed with only select high-quality developers able to refinance. “
The drop was mainly due to a combination of lower bond supply and defaults falling out of the indexes, according to financial research firm Morningstar, according to financial research firm Morningstar.
“Therefore, the importance of Chinese real estate in [the] “The Asian credit universe is shrinking,” said Patrick Ge, research analyst at Morningstar.
Last December, the world’s most indebted property developer China Evergrande defaulted on its debt. The fallout from that crisis has spread to other companies in China’s real estate sector. Other developers show signs of stress – some missed interest payments, while others defaulted entirely.
Fund managers are turning to other sectors to fill the void left by Chinese property, but analysts say these alternatives are unlikely to offer better yields than those left by China. predecessors.
“Transfer to other areas and countries [away from the very high yielding China property space] certainly reduces the relative productivity [to the index] Elisabeth Colleran, portfolio manager of emerging markets debt at Loomis Sayles, said.
“However, managers need to think about the real returns that can be achieved with losses on default,” she told CNBC.
With lower supply from China, interest in Indonesia’s high yield has increased since the Chinese property crisis.
Carol Lye
portfolio manager affiliate, Brandywine Global
In the past, funds with a Chinese real estate bond weighted better than funds with a less Chinese real estate bond weighting, Ge said – but that’s not the case anymore.
“It is unlikely that this will be the case in the future, at least in the short term due to the industry’s ongoing liquidity struggles and damaged reputation,” he said.
China’s huge property sector has come under pressure over the past year as Beijing curbs developers’ heavy reliance on debt and soaring housing prices.
Fill the void
As Asia’s high-yield bond fund managers move their money away from Chinese assets, the sectors they are diversifying include renewable energy and metals in India, according to the report. Morningstar.
Some are also seeing potential upside in property prices in Indonesia, where they expect to benefit from low mortgage rates and prolonged government stimulus measures to support the Covid recovery. , Ge said.
“With lower supply from China, interest in Indonesia’s high yield has increased since the property crisis in China,” said Lye of Brandywine Global. “Indonesia is relatively more stable as it benefits from commodities, housing demand and inflation not getting out of control. “
According to a recent Moody’s report, Asia’s high-yield portfolios in Southeast Asia may be less risky for investors, as they have “relatively stable” credit quality. and lower default risk, according to a recent report from Moody’s.
“Portfolio managers will have to rely on their bottom-up credit selection more than in the past to pick out winners/survivors in this area,” Morningstar’s Ge told. CNBC. Bottom-up investing is an approach that focuses on analyzing individual stocks, as opposed to macroeconomic factors.
Mr. Lye said encroaching into other areas is a “healthy” development as it helps diversify investors’ portfolios.
The way forward for developers
China’s property debt crisis has led to investor confidence in developers’ ability to repay debt. they have received a series of rating downgrades.
According to ratings agency Moody’s in a report in June, real estate companies are also facing challenges in attracting capital from abroad – and that will pose liquidity and reinsurance risks. funding is high, ratings agency Moody’s said in a June report.
“The US dollar bond market remains largely closed to Asians [high yield] Annalisa Dichiara, senior vice president at Moody’s, said companies are concerned about their ability to refinance upcoming big maturities.
Moody’s expects more Chinese property developers to default this year – half of the 50 names the agency includes are under review for a downgrade or have a negative outlook.
Data published earlier in June showed China’s real estate market continues to be quiet.
According to China’s National Bureau of Statistics, real estate investment in the first five months of this year fell 4% year-on-year, despite overall growth in fixed-asset investment.
Property prices in China’s 70 cities still fell in May, up 0.1% from a year ago, according to analysis of official data by Goldman Sachs.
– Evelyn Cheng of CNBC contributed to this report.
