• Something significant happened in China on April 20th – Kaisa, a Shenzen-based property developer, finally buckled under $10.5 billion of debt. While Kaisa investors are undoubtedly angry, this is not the whole story. With an estimated $78.8 billion funnelled into the Chinese property market there are serious concerns defaults will now spread – with direct consequences for the Australian economy.

 

Down with Kaisa

  • The development of the Kaisa story surprisingly started with a Chinese government initiative to temper the expansion of a domestic property bubble. In short, the Chinese authorities prohibited property developers from using borrowed money from the PRC banks to purchase land. However this did not stop developers and had the unintended consequence of pushing them to search for finance offshore. With international investors eager to find high yields following the GFC, investment proved easy to come by.
  • Importantly Kaisa was not alone in finding this loophole, but they were the first; issuing $650 million of five year bonds in April of 2010, offering a solid 13.5% return. Compare this with the US real estate yields at the time (6.3%), and there is little wonder why investment became a flood.

 

Not Loose Change

  • As the graph below shows, over the five year period from 2010 to 2014 Chinese property developers’ issuance of international bonds increased substantially. In 2010 a mere nine real estate companies issued US$4 in offshore bonds but by 2014 that number had almost quadrupled. Now the total bonds issued has reached an extraordinary US$78.8 billion – equivalent in value to 13 times the entire Australian residential property market.

 

 

 /></p>
<p> </p>
<ul>
<li>While some have suggested Kaisa’s default will be an isolated case, others, like Standard and Poors, have said that the ‘dark clouds over China’s property sector are unlikely to pass anytime soon’ and Chinese property developers are ‘in a significantly worse shape’ than they were previously. With a swathe of debt maturing in the coming months, the prospect of more defaults seems real.</li>
</ul>
<p> </p>
<h2>Not Looking Good</h2>
<ul>
<li>Unsurprisingly, developer bond sales have slowed markedly since the Kaisa fiasco broke. As property development accounts for a mammoth one third of China’s economy, this is significant. Any changes in the capacity of developers to secure funding will filter through the Chinese economy and in turn will impact demand for Australia’s resources. As it stands, the situation does not look promising.</li>
<li>The graph below reveals how the growth rate of investment in real estate development has dropped off. Investment growth rates peaked in April 2011 with an enormous 38.6%. In December 2014 this figure decreased markedly to 9.2% and by March 2015 it had dropped to a unfavourably low 5.9%.</li>
</ul>
<p> </p>
<h2>Total Investment in Residential Buildings in Real Estate Development Accumulated Growth rate 2010-2015 (monthly)</h2>
<p> </p>
<p><img decoding=This update does not constitute financial advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek professional advice before acting or relying on any of the content.

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