Beaten-down dollar bonds issued by Chinese property developers are enticing domestic and global fund managers, some of whom are even planning to launch new funds targeting bargains as Beijing relents in its concerted drive to clean up the sector.
Jupai Holdings Ltd, a Chinese wealth manager, plans to start a fund to bet on such offshore Chinese property bonds.
“I think roughly half of the developers’ dollar bonds were slaughtered by mistake,” Jupai chairman Jianda Ni said. “We will spot value in what others dumped as trash.”
The investment appeal of the fallen angels in the property sector has grown on the heels of moves by China to ease some of the financial and regulatory constraints it imposed last year.
Curbs on borrowings by big real estate developers have driven China’s property sector into a crisis, with China Evergrande Group at its forefront. Once China’s top-selling developer, it has around $20 billion of international bonds, all deemed to be in default.
A Markit iBoxx index tracking China’s high-yield real estate dollar bonds tumbled as much as 19% in January, following 2021’s 38% slump.
The selloff, which began in October with Evergrande, accelerated as other developers such as Kaisa Group and Shimao Group defaulted or delayed bond payments.
Paula Chan, senior portfolio manager at Manulife Investment Management, also sees “pockets of opportunities” as the real estate sector moves “from the bottom of the policy tightening cycle.”
“The high-yield space presents a lot of opportunities, especially for distressed investors,” Chan said.
Doubling Down
China has in recent months rolled out several policies to stabilise the slowing economy, including a cut in mortgage rates, stepped-up approvals for developers’ bond issuance, and government support for property acquisitions.
Fengshui Capital, a Chinese vulture fund manager, started buying developers’ junk bonds late in 2021, and is considering doubling down on such bets this year, said a source with direct knowledge of the fund’s plans who declined to be identified because the source was not authorised to talk to media.
Wealth manager Jupai’s Ni says the firm’s new fund will buy heavily discounted bonds that will mature shortly, betting they will not default. Such a strategy is based on a deep understanding of Chinese developers, as well as the character of their bosses, said Ni, who has worked for more than three decades in the Chinese real estate sector.
Ni declined to name any targets, but said many undervalued bonds are in the range of 70-80 cents on the dollar.
Roughly half of the dollar bonds issued by Chinese developers trade below 80 cents on the dollar, according to an estimate by Essence Securities last week. Some bonds issued by major developers currently yield more than 60%.
Mike Kelly, global head of multi-asset at the $140 billion asset manager PineBridge Investments said last week that the fund had started buying offshore Chinese property bonds and expected authorities’ measures to stabilise the market would deliver “extraordinary” returns.
Kelly declined to name companies. Having started to buy at the end of December, he said he was still “in the accumulation stage,” picking up securities at 75-85 cents on the dollar.
Jean Charles Sambor, head of emerging market fixed income at BNP Paribas Asset Management, also expects “significant easing” in China’s real estate policies, and the asset manager too is building a long position in the sector’s debt.
• Reuters with additional editing by Jim Pollard
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