A series of regulatory changes on asset management, trusts and entrusted loans were introduced in China in early 2018, resulting in much stricter controls on non-standard debt financing. Meanwhile, the deleveraging campaign is leading to a very tight overall financing environment. It was evidenced in the growth of total social financing which had been falling since mid-2017 to a record low of 10.5% in April 2018. Against this backdrop, the weighted average lending rate of loans by financial institutions has been gradually rising since Q3 2016, although the benchmark lending rates have remained unchanged since October 2015.
During the first four months of 2018, the total credit issuance by listed Chinese developers reached RMB 74.3 billion, more than 50% of the annual total in 2017.
The average cost increased to 5.89%, up by 0.21% compared with that in the whole year of 2017. Meanwhile, the overseas debt issuance reached RMB 99.6 billion, with the average cost rising above 100 basis points to 6.98% from 2017.
Figure 1: Real estate company credit bond and oversea bond issuing and yield
Source: China Index Academy
Figure 2: Issued bond pie chart based on developers’ contracted sales
Source: China Index Academy
Under the tight credit environment, we expect that more property stock will be put onto the market for sale, which should boost en-bloc transactions over the rest of 2018. A large portion of tradable stocks will be provided by mid to small-sized developers, whose financing capacities are being squeezed by tighter lending channels and higher financing costs.
Deep-pocketed investors, such as pension funds and sovereign wealth funds, are stepping up to capture these investment opportunities. In May 2018, Singapore’s sovereign wealth fund GIC established a partnership with NOVA to invest in China. With these investors increasing their capital allocations to China, we expect 2018 to see more large-scale en-bloc transactions, which are likely to push up commercial property investment to a new high.
In terms of asset class, the office sector continues drawing strong interest. However, appetite for retail assets is rebounding due to the improving performance of retail malls. While logistics assets remain highly sought after, rental housing investment is accelerating under the government’s supports. The purpose of the above-mentioned partnership between GIC and NOVA is to invest in rental housing in China’s tier 1 cities, with the first deal being closed earlier this month.
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