Many in New York associate Chinese real estate companies with limitless funds and a never-ending ability to invest here. But what if they are wrong?
On Monday, Shenzhen-based megadeveloper Kaisa defaulted, sending shockwaves through the worlds of real estate and finance. As the Chinese property market continues to soften, observers are starting to wonder who will be next.
Kaisa’s default carries significance for New York’s real estate industry. Chinese investors spent $3 billion on New York properties in 2014, second only to Canadian buyers. While none of the major Chinese investors in New York appear to be in immediate trouble, some are highly leveraged, and could be vulnerable to a further slump in the Chinese real estate market.
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“Some developers that have overborrowed in the expansion are going to be in trouble,” David Dollar, an economist at the Brookings Institution and former U.S. Treasury emissary to China, told The Real Deal. “We are now going to see some of them default or reschedule their debts.”
Dollar doesn’t expect a wave of defaults akin to what happened during the U.S. financial crisis in 2008. But continued weakness in the Chinese property market, he said, will hold some developers down.
Chinese home prices fell by 6 percent last year, according to The Economist, ending a long boom cycle. While what’s been happening lately hardly qualifies as a crash, many observers expect the property market to stay in the doldrums for now. This could pose a serious problem for Chinese developers on an unstable financial footing – especially those that have loaded up on dollar-denominated debt (debt measured in dollars).
Bond rating agency Standard and Poor’s released a report last week that found “many developers are in significantly worse shape than in the previous year,” and are at higher risk of default. A March report by rival agency Fitch stated that a third of Chinese developers saw declining sales over the past year.
Paying the bills
Chinese developers currently have $66 billion in dollar (or offshore) bonds outstanding, according to Dealogic data. The recent strengthening of the dollar has made these bonds harder to service, since these firms make the vast majority of their income in Chinese Yuan. It’s no coincidence that Kaisa defaulted on a dollar bond.
Chinese developers that have invested in New York are among the most active issuers of dollar bonds, according to Dealogic data compiled for The Real Deal.
Greenland Holdings, which bought a majority stake in Forest City Ratner’s Pacific Park (formerly Atlantic Yards) project in late 2013, issued $2.7 billion in dollar bonds in 2014. Soho China, a stakeholder in the GM building, issued $1 billion in 2012. China Vanke, China’s largest publicly-traded developer, has issued another $1 billion to-date. The firm has partnered with Aby Rosen’s RFR Realty to develop a 61-story condo tower at 610 Lexington Avenue. Finally, Xinyuan Real Estate, whose subsidiary XIN is developing the Oosten condo project in Williamsburg, has issued $475 million in dollar bonds.
Xinyuan Real Estate
Among Chinese developers active in New York, Xinyuan Real Estate appears to be most vulnerable to a market shock at home. Fitch rates the firm’s bonds as highly speculative (B+) and last August revised its outlook down to negative. “Xinyuan spent substantial amounts on land acquisitions in 1H14 to expand its business scale in 2014, but sales failed to keep pace amid negative sentiment in the sector and its selling,” the agency wrote, explaining the revision. The firm’s debt grew by more than a third in the first half of 2014 alone while earnings fell from 91 cents to 20 cents per share, according to Seeking Alpha.
China Vanke is rated investment grade by Moody’s and Fitch. Despite the slowing market, Vanke managed to increase profits by 8 percent last year and its total debt of 69 million Yuan ($11.1 billion) stood at a manageable 46.7 percent of capitalization (the sum of a company’s debt and equity) in 2014, according to Moody’s.
NYC investments: Pacific Park
Greenland is also rated investment grade, though it received slightly lower ratings than Vanke, and its debt level was much higher at 70 percent of capitalization. Still, Moody’s expects the firm “to manage its debt leverage down from the current level through contracted sales growth.”
Soho China appears to be in even better shape than Vanke and Greenland with a debt-to-capitalization ratio of 27.7 percent in 2014. Moody’s gave the firm a rating of Baa1, ahead of Vanke’s Baa2 and Greenland’s Baa3.
A bright future (still)
Other major Chinese investors in New York real estate, such as Anbang Insurance Group, Sunshine Insurance Group and Fosun International, are not primarily real estate developers and so aren’t as vulnerable to the troubles in the Chinese real estate market.
Though ratings agencies seem a little skeptical of Xinyuan, it appears that, for now, other major Chinese developers investing in New York are in good health. And any turmoil in China’s domestic real estate market could actually benefit the market here. As prices in Beijing and Shanghai keep falling, more yield-hungry Chinese investors could seek a taste of the Big Apple.