Money

China's property bonds lead the way in Asia

By Katrina Nicholas (China Daily)
Updated: 2010-10-19 11:24

Realtors speak with potential customers at a residential property fair in Zhengzhou, Henan province.[Photo/Agencies]

SINGAPORE - Chinese property bonds are beating company dollar debt across Asia this month after home values unexpectedly rose in September and Standard & Poor's said developers can withstand price drops of as much as 10 percent.

Evergrande Real Estate Group Ltd's $1.35 billion of 13 percent bonds due in January 2015 returned 4.2 percent, the most among the top 50 companies in Bank of America Merrill Lynch's Asian Dollar Corporate index. Agile Property Holdings Ltd's $650 million of 8.875 percent notes due April 2017 delivered 2.8 percent and Country Garden Holdings Co's similar-maturity 11.25 percent notes returned 2.1 percent, compared with a 1 percent regional average, the index and data compiled by Bloomberg show.

Home values climbed 0.5 percent last month from August and 9.1 percent from a year earlier, beating economists' estimates and increasing for the first month since May, even as policymakers in the world's fastest-growing major economy added to measures aimed at cooling the property market.

Meanwhile, developers' bonds have rallied since May after real estate prices jumped the most on record in April and China posted economic growth figures of 10.3 percent in the second-quarter.

"It's a cheap sector," said Viktor Hjort, a Morgan Stanley credit strategist in Hong Kong. "It's misguided to focus on policy alone in order to try and gauge where this sector is going," added Hjort.

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Faced with near-zero interest rates in Japan and the United States, the extra yield investors demand to own Guangdong-based Country Garden's 11.25 percent bonds instead of Treasuries fell 433 basis points, or 4.33 percentage points, since May to 759 basis points, according to ING Groep NV.

The spread on Los Angeles-based KB Home's similar-maturity 9.1 percent notes was last at 592, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Country Garden has a Ba2 rating from Moody's Investors Service, the risk assessor's second-highest speculative grade. KB Home, which focuses on first-time buyers in the US, is ranked two steps lower at B1.

"The authorities may not see the property curbs as successful until prices fall by double-digits from a year earlier, so the current restrictions may last into next year," Zhang Zhiwei, a Hong Kong-based economist at China International Capital Corp, said before the September housing data were published on Friday. "Cash-rich developers may be able to resist cutting prices for a while."

The International Monetary Fund forecast on Oct 6 that China's gross domestic product will grow 10.5 percent this year, outpacing expansion of 2.6 percent in the US.

The yield on China's benchmark local currency 10-year bond slid 2 basis points this month to 3.29 percent.

Bloomberg News