Source: Zhao Wei Macro Exploration
Authors: Zhao Wei, Yang Fei, Ma Jieying (Zhao Wei is the Chief Economist of Kaiyuan Securities and a director of the China Chief Economist Forum)
Report highlights
Recently, the risk of real estate debt has aroused widespread discussion in the market. As an important financing method for private real estate enterprises, what are the changes in offshore real estate bonds and what potential risks are they facing? This paper can provide different perspectives on real estate debt.
A question: How much offshore real estate debt is there? It ranks first among non-financial enterprises, mainly private enterprises and small and medium-sized enterprises
The stock of offshore real estate bonds ranks first among non-financial corporate bonds, and financing has increased significantly in recent years, repeatedly exceeding onshore real estate bonds. As of the beginning of October, the stock of offshore real estate bonds of Chinese-funded real estate enterprises reached US$211.8 billion, accounting for 22% of all offshore bonds, second only to the scale of offshore bonds of financial institutions. The net financing scale of offshore real estate debt has gradually risen since 2017, with more than 200 billion yuan in 2019 and 2020, far higher than the scale of about 50 billion yuan of onshore real estate debt, making the stock of offshore real estate debt gradually rise, accounting for more than 70% of onshore real estate debt.
Offshore real estate bonds are mainly private enterprises and small and medium-sized enterprises, and the scale of offshore debt of some housing enterprises far exceeds that of onshore bonds. Nearly 65% of the existing offshore real estate bonds are issued by private enterprises, while the proportion of private enterprises with existing onshore real estate bonds is only about 20%; the proportion of small and medium-sized enterprises with a registered capital of less than 1 billion yuan in offshore real estate accounts for more than 62%, while onshore bonds account for only 17%. The scale of offshore real estate bonds issued by some private enterprises and small and medium-sized enterprises even exceeds that of onshore real estate bonds, and the scale of offshore bonds such as Country Garden and Xuhui is about 2 times that of onshore bonds, and longhu is as high as 50 times.
Second question: Under real estate regulation, what are the changes in offshore real estate debt? Offshore property debt financing contracted and costs rose
There is a certain "substitution" relationship between offshore and onshore real estate bonds, which is related to real estate regulation and financing costs. In recent years, offshore and onshore real estate bond financing has "traded off", for example, in 2017, the issuance of offshore bonds has increased significantly, while onshore bonds have continued to contract, which is closely related to the relatively low financing costs of offshore bonds; with the tightening of supervision of offshore bond issuance, offshore bond financing has declined in 2018, while onshore bond issuance has accelerated, and similar changes have occurred in 2019 and 2020. However, since 2021, both offshore and onshore real estate financing has weakened, and financing has turned negative in the first 9 months.
With the fermentation of credit risk, the difficulty of issuing offshore bonds has increased and the cost has risen, which has a particularly obvious impact on enterprises with greater debt pressure. Under the regulation of real estate, the financing and sales collection of housing enterprises have gradually contracted, increasing debt pressure, and offshore and onshore real estate debt defaults have occurred frequently. With the rise of credit risk concerns, the scale of offshore real estate bond financing has dropped significantly year-on-year since May, and the average issuance cost has risen significantly by about 100BP to more than 8%, and the gap with the cost of onshore bond issuance has widened; among them, private enterprises with greater debt pressure have a larger financing contraction and cost increase.
Three questions: Will offshore real estate debt become a minefield for real estate debt? Under refinancing pressure, repayment risk rises
In the first half of 2022, the maturity of offshore real estate bonds hit a record high in the same period of history, and some entities with large debt pressure and weak qualifications may face greater refinancing pressure. In the first half of 2022, offshore real estate bonds matured by 215 billion yuan, an increase of 10% year-on-year, exceeding the 171.6 billion yuan due of onshore bonds, and private enterprises and small and medium-sized enterprises accounted for more than 66% and 70% respectively. Under the concern of default, the financing of offshore real estate debt has shrunk significantly, and nearly half of the 30 housing enterprises with the highest maturity scale have negative offshore debt financing in the past year, and the short-term superimposed liabilities may further increase the pressure of refinancing.
Under the pressure of sales collection, it is necessary to closely track the financing of housing enterprises and changes in real estate related policies in the future. Different from the past, this round of real estate regulation and control has focused more on the financing supervision of housing enterprises, three red lines, loan concentration assessment, etc., the impact on the financing of housing enterprises continues to appear; debt maturity, sales decline, etc., further increase the cash flow pressure of housing enterprises. Experience shows that in the past, housing enterprises out of the debt "predicament" mostly relied on regulatory relaxation, sales recovery, etc.; under the change of real estate positioning, the current round of real estate regulation and control is strong, the general direction remains unchanged, and follow-up measures need to be tracked to deal with "secondary risks".
Risk Warning: Debt risk exposure, regulatory policy changes.
The body of the report
A question: How much offshore real estate debt is there at present?
The stock of offshore real estate bonds ranks first among non-financial corporate bonds, and financing has increased significantly in recent years. As of the beginning of October, the stock of offshore debt was nearly $1 trillion, mostly Chinese dollar bonds, accounting for more than 90%. The stock of offshore real estate bonds of Chinese-funded real estate enterprises reached US$211.8 billion, accounting for 22% of all offshore bonds, second only to the scale of offshore debt of financial institutions. In recent years, the scale of offshore real estate bond issuance has gradually increased, from less than US$3.5 billion in 2016 to US$37.3 billion in the first nine months of 2021, accounting for more than 24% of all offshore bonds.
In recent years, the net financing of offshore real estate debt has repeatedly surpassed that of onshore real estate debt, and the stock scale has been accumulating, accounting for more than 70% of the onshore. After 2016, onshore real estate debt financing fell sharply, and the scale of offshore real estate debt financing began to climb. In just one year, the net financing of offshore real estate debt has increased significantly from -33.1 billion yuan in 2016 to 147.2 billion yuan in 2017, and the average annual net financing in 2019 and 2020 reached more than 200 billion yuan, which is much higher than the net financing of onshore real estate debt of about 50 billion yuan in the same period. After experiencing substantial growth, the stock of offshore real estate debt accounts for more than 70% of onshore real estate debt.
Second question: Under real estate regulation, what are the changes in offshore real estate debt?
There is a certain "substitution" relationship between offshore and onshore real estate bonds, which is related to real estate regulation and financing costs. In recent years, offshore and onshore real estate bond financing has "traded off", for example, in 2017, the issuance of offshore bonds has increased significantly, while onshore bonds have continued to contract, which is closely related to the relatively low financing costs of offshore bonds; with the tightening of supervision of offshore bond issuance, offshore bond financing has declined in 2018, while onshore bond issuance has accelerated, and similar changes have occurred in 2019 and 2020. However, since 2021, both offshore and onshore real estate financing has weakened, and financing has turned negative in the first three quarters.
With the fermentation of credit risk, the issuance of offshore bonds has become more difficult and the cost has risen. Under the regulation of real estate, the financing and sales collection of housing enterprises have gradually contracted, increasing debt pressure, and offshore and onshore real estate debt defaults have occurred frequently. With rising credit risk concerns, private offshore bond issuance has fallen since May, making net financing fall to -$2.1 billion in August, a nearly three-year low. At the same time, the issuance cost of offshore bonds has also risen significantly, from about 7% at the beginning of the year to more than 8% in the third quarter, and the interest rate of a single bond issuance has even reached 12.5%, further widening the interest rate differential with onshore real estate bonds.
Enterprises with greater debt pressures have been particularly affected, while state-owned enterprises and high-quality private enterprises have been less affected. With the increasing difficulty and rising cost of offshore bonds, the pressure on refinancing has increased, especially for housing enterprises with greater debt pressure. Since the second half of 2020, The offshore bond issuance scale of real estate enterprises such as Jianye Real Estate, Greenland, R&F Real Estate and Rongxin, which has a relatively high asset-liability ratio, has a small scale of issuance of offshore bonds, and the net financing is in the negative range, and the financing of onshore real estate bonds in the same period is also relatively sluggish; the financing of offshore and onshore real estate bonds of housing enterprises such as Huafa Industry and Yanlord Real Estate is both positive.
Three questions: Will offshore real estate debt become a minefield for real estate debt?
The pressure on the repayment of offshore real estate bonds due is gradually rising, and the scale of repayment will exceed that of onshore debt. In 2022, the maturity scale of real estate bonds reached 352 billion yuan, a record high, an increase of 2.4 times over 2018, of which the maturity scale in the first half of the year even exceeded that of onshore real estate bonds, reaching 215 billion yuan, an increase of more than 10% year-on-year. Specifically, Evergrande, Kaisa and Sunac have a large maturity scale of offshore real estate bonds, all of which are more than 9 billion yuan, in addition to offshore bonds, huaxia happiness, R&F real estate and other housing enterprises have a relatively large maturity scale of onshore real estate bonds.
The fermentation of credit default further increases the difficulty of refinancing, especially for entities with greater debt pressure and weak qualifications. Under the regulation of real estate, the financing and sales collection of housing enterprises have gradually contracted, increasing debt pressure, and offshore and onshore real estate debt defaults have occurred frequently. With rising credit risk concerns, the credit spread of Chinese dollar real estate bonds widened by more than 350BP to about 800BP, hitting a new high in nearly a year. The rising cost of issuance, the increase in difficulty, and the short-term issuance of superimposed bonds have further increased the refinancing pressure of offshore real estate bonds, especially for entities with large debts and weak qualifications, in the first half of 2022, offshore real estate bonds will mature with private enterprises and small and medium-sized enterprises, accounting for more than 66% and 70% respectively.
Under the pressure of sales collection, it is necessary to closely track the financing of housing enterprises and changes in real estate related policies in the future. Different from the past, this round of real estate regulation and control is more focused on the financing supervision of housing enterprises (for details, see "Real Estate Regulation, this time is different?). "), the three red lines, loan concentration assessment, etc., the impact on the financing of housing enterprises continues to appear; debt maturity, sales decline, etc., further increase the cash flow pressure of housing enterprises. Experience shows that in the past, housing enterprises out of the debt "predicament" mostly relied on regulatory relaxation, sales recovery, etc.; under the change of real estate positioning, the current round of real estate regulation and control is strong, the general direction remains unchanged, and follow-up measures need to be tracked to deal with "secondary risks".
After research, we found that:
(1) Offshore non-financial stock bonds, real estate debt accounted for the highest proportion, in recent years, financing has increased significantly, once exceeded the onshore real estate debt, the current stock of about 211.8 billion US dollars, private enterprises and small and medium-sized enterprises accounted for 65% and 62% respectively, some housing enterprises offshore debt has exceeded the onshore debt.
(2) There is a certain "complementarity" between offshore debt and onshore debt, which is related to real estate regulation and financing costs. With the fermentation of debt risks, the difficulty of issuing offshore bonds has increased, the cost has risen, and the impact on housing enterprises with greater debt pressure is more obvious.
(3) In the first half of 2022, the maturity of offshore real estate bonds reached a new high, and some entities with large debt pressure and weak qualifications may face greater refinancing pressure. Under the pressure of sales collection, it is necessary to closely track the financing of real estate bonds and the changes of real estate related policies in the future.
Risk Warning:
Debt risk exposure, regulatory policy changes.