Eastspring believes the risk surrounding the Chinese high yield property sector is largely still an idiosyncratic one. As such, it retains its base case scenario of an orderly industry consolidation in the medium-term.
The firm believes that the credit profile for the Chinese high yield property sector remains largely stable and the credit spreads are attractive enough to compensate investors for the risks involved.
“With credit spreads of Chinese high yield property bonds widening by more than 300 basis points as a result of the recent sell-off, current valuations have improved and are compensating investors more attractively for the risks involved.”
The larger property companies continued to report an average 10% year-on-year growth in contracted sales in 2014 and even shortfalls from their sales targets remained relatively small.
“Less aggressive land acquisitions during the year and signs of slowing property price declines, are also expected to help stabilise or improve debt ratios of property companies.”
Kaisa - a threat to sector?
Kaisa Group was recently in the news as the Shenzhen local land authority blocked pre-sales registration for three of its projects. Kaisa also had departures of key management personnel.
This along with similar moves in regard to other developers weighed on investors’ sentiments, leading to a sell-off in bond market.
“While the recent moves appear to be linked to the government’s investigations on corruption practices, we do not think that they would be pursued to such extent that would threaten the sustainability of the entire sector,” Eastspring said.
“Recent easing of property measures continues to point to the government’s willingness to support the sector and we believe the government is mindful of the filter-down impact on the rest of the economy in the event of a collapse in the property sector.”
The company said the firm has been managing downside risks by staying well diversified across the sector.
The Eastspring Investments – Asian High Yield Bond fund had its highest allocation to China with a 43.2% weighting on 31 December.