Chinese property group in bond payment default

One of China’s prominent real estate companies, in the shape of Kaisa, has defaulted on its US dollar bonds with intrigue, concern and amazement shown by many experts. While perhaps not one of China’s best-known property companies it is more the fact that the financial crisis seemed to envelop the company in a very short space of time which is concerning investors. This is just one of China’s Hong Kong listed property developers which have in total raised in excess of $65 billion over the last two years from the worldwide bond market. So what does this mean for the future?

A one-off or the start of a trend?

This is the $64 million question, is this a one-off situation specific to the company or is there more of an underlying issue within the Chinese property market.  At this moment in time opinion is divided with some experts predicting little or no impact on the broader Chinese property market while others are forecasting the start of a very rocky period.

Until we can ascertain why this company has hit the financial offers so quickly and so dramatically this will have an obvious impact upon investor trust in the sector. Up until recently, with some very positive figures announced by the company, there seemed no reason for concern and the company appeared to be well backed with a strong balance sheet. There is speculation that investors have in recent times ploughed excessive amounts of money into the Chinese property sector with little or no real research carried out.

Bondholders

It is also now becoming apparent that many Chinese property companies created offshore subsidiaries for their bond issues which effectively place bond investors at the back of the creditors queue. In theory bond market investors will have little or no say in any future financial restructuring of Kaisa although in reality there is a need to balance the legality of the situation and the requirement to keep international investors “onside”.

Quote from PropertyForum.com: “Japanese commercial property outside of Tokyo struggling”

Some experts are suggesting that the company directors were too slow to inform the market of financial problems although the issues which have arisen lately seem to be linked directly to a sales ban relating to the company’s properties in Shenzhen. Whether or not this is correct it does potentially highlight the very thin margins upon which real estate companies operate and the speed at which a financial crisis can engulf what seemed to be a rock solid company. The fact that credit rating agencies have announced multiple downgrades on Kaisa bonds hammers yet a further nail into the company’s coffin.

Conclusion

It will be interesting to see how the Chinese government react to this problem within the property market, a problem which some investors have been forecasting for some time. While there is a need to support the markets and maintain some level of trust with international investors the authorities and investors cannot afford to carry deadwood. Experts believe that we will get more consolidation in the Chinese real estate market in the short to medium term with companies amalgamating their balance sheets and financial strength.

Whatever happens it will be a rocky ride in the short to medium term although in the longer term this bloodletting could prove to be more healthy than it seems at the moment.