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Rich Macauley:
Hello and welcome back to Cloud 9fin, I'm Asia editor Rich Macauley joined today by 9fin credit analyst Allen Chiu. We're both in Hong Kong and we're discussing a major report 9fin published just last week that delves into the state of China's real estate sector.
The motivation for this sector analysis came from the fact that it's been a good five years now since Beijing clamped down hard on the amount of debt property developers can hold, with its policy called the Three Red Lines. After that China's construction sector faced grave danger some of the nation's most iconic businesses defaulted many spent years negotiating terms on their debts and navigating dwindling revenues.
But that was then now at the beginning of 2026, we've seen something of a rush of Chinese builders once again tapping the US dollar bond market. So what's changed? Is the industry out of the woods? And if it is, how smooth is the path ahead? Allen is the author of our big report. Allen, thanks so much for joining. Let's get back to 2020. In your words, how did we get here?
Allen Chiu:
Thank you, Rich. So how did we get here? To start with the broader idea was that the Chinese government wanted to shift housing market and environment towards the principle that homes were more for occupancy rather than speculation. The policymakers were also getting kind of worried that the property model of borrowing, purchasing land, building, pre-sell, refinancing debt and repeat was getting unsustainable and creating a bubble.
So through the Three Red Lines policy, the government initially wanted developers to deleverage in order to restore a system that's more sustainable and also to redirect credit away from property to other more productive parts of the economy.
Now on paper, quite a number of developers improved after the policy was introduced but yet again back to your question of how did we get here, kind of means something went wrong and in this case the policy did backfire. The China's property sector downturn was not really just caused by the Three Red Lines but the policy did turn the long-running leverage problem into a liquidity crisis. And the rest is history, right? Evergrande blew up after aggressively expanding and being one of the most leveraged developers in the world. And after refinancing channels shut down, it collapsed and other developers also fell down like domino pieces.
Rich Macauley:
Okay, so let's return now to 2026. Chinese developers are coming back to the primary bond market in volumes we haven't seen in several years. Why now?
Allen Chiu:
So, Chinese developers are coming back because a narrow refinancing window has reopened for a certain group of issuers. So it's either developers that have credible state backing, like Yuexiu Property, like China Overseas Grand Oceans or high quality recurring income assets, or they own high quality recurrent income assets like Shui On Land, or they have both, right? So the story in early 2026 is really less of a sector recovering, but more of a capital markets are willing to refinance survivors again. But yes, I think there are several things that lined up this year that gets these developers back in the market.
First of all, there's a strong investor demand for yield after several years in which Asia high yield was disrupted by the property sector crash and short of credible new supply. And confidence also improved as the new policies like the three-arrow framework in 2022 and other supporting measures also stabilized the mortgage and funding conditions. And last but not least, the market is favoring these developers with solid credit stories.
So recurring mall or office rent, access to state-linked funding channels, or good quality urban assets. So the underlying concept for these investors’ appetite is that they want to buy high yield bonds, but they also care about whether the issuer would be able to service these coupon payments. And with recurring and stable income, it gives them greater confidence to say these issuers would be able to...
Rich Macauley:
So you mentioned that some developers have been coming back to tap the offshore market. Can you paint us a picture of what kind of developer is doing the best or is coming to market?
Allen Chiu:
Sure. So my favorite example would be Seazen Group. Seazen Group has tapped into the market last year and also this year with USD bond. This year, they did one in February, late February, where they issued $355 million dollars and they also launched a concurrent tender offer for their senior notes due this May and also next September in 2027. It's a very classic issuance that we've seen in a lot of issuers, not just Seazen, but also from Shui On Land. It's how they've done a bond issuance alongside with a concurrent tender offer because these issuance structure format allows the issuer to roll over, refinance their issuance and also showcase that the investor that they are doing active liability management.
So, for example, a Seazen would have issued like a three- or four-year paper and they used the proceeds to take out near-dated bonds to show investors that instead of simply waiting for the maturities to come, they are actively managing their debt structure and debt stack. Right? It also helps and reassures the investors that these proceeds are being used in a more defensive way rather than to fund aggressive land buying like previous unless the issuers to swap out the near-dated bonds with longer-dated ones.
So let's say a common way that we've seen how these concurrent tender offer works out is, if you're a current bondholder, an existing bondholder, you can tap into the current tender offer to get your notes redeemed. And also the new issuance, you can also participate in that. So you would effectively, it works like an exchange offer. you'll just exchange what you have right now with like the new issuance where there's usually a better coupon rate because they're issued nowadays not like when the interest rate was really low a few years back and it also allows the investors to preserve a similar level or even the same level or same exposure towards the issuer's offshore notes.
And Seazen does a really good job other than having carrying out these issuance and concurrent tender offer they also a really good job in shifting their business model. So Seazen Group operates over 100 plazas across China, spanning in cities like Jiangsu, Zhejiang, Shanghai. So like the popular and tier one, tier two cities where there's a lot of tourists and it's more populated. The company previously was more leaning towards property sales like housing property markets a few years back. But recent years, they shift their business focus towards operating their portfolio of investment properties, which is primarily the Wuyue Plaza, which is the brand, which it's shopping mall brand essentially.
And this shift in business model has pumped up their commercial operation income from only around 4% in 2020 to, I remember my first half was almost like 30%, right? And it really gives the bondholders a very clear picture of what Seazen Group is trying to do here: They're trying to shift their business model from a residential housing developer where that income is not really stable. It goes with the old business model as we've previously said. You need to get funding, you buy a piece of land, you need to build, construct. And pre-sale isn't really a method nowadays anymore because the market is so flooded by supply from residential housings.
So since this method doesn't work anymore with the housing property market, you have to build out the whole building before you can sell out. And it takes years before you can get your money back essentially, right? Whereas when you're looking at a new business model of commercial assets, where you have your plazas. You can have them leased out even before your plaza was built out. And once your plaza is built, you're having these stable income every month.
And that just funds into why investors are feeling more comfortable and confident on issues like Seazen Group to come into the market, to issue bonds, to showcase how they are able to repay this new bond's interest.
Rich Macauley:
Okay, so they've moved from residential build-to-sell into retail or commercial build-to-lease-and-operate, I guess more recurring steady income instead of big windfalls. How has the market taken to the bonds we've seen come through this year so far?
Allen Chiu:
The market is generally receptive. So from my understanding, Shui On Land has been marketing their bond issuance for quite some time. I think it was as early as 2024, and this year was the year where investors went on to say, okay, you can come to market, we'll lend you the money.
I'm pretty sure they gathered enough reverse interest or they've found enough anchor investors before they tapped into the market. No issuer wants to come to the market blindfolded, betting on whether investors would lend their money that's the whole point of having the non-deal roadshows to test the water before they actually do come to the market.
We’ve also seen issuers like Dalian Wanda Group that actually came to market directly with final pricing because they found enough anchor investors or they've already have enough order books and did the allocation. So they literally just came to the marketing told everyone the deal is done, here is the pricing, and here is the size.
I think the market generally it's really different the dynamic is really different from what we've seen in the past years. In the post years when the pricing was good what when the price was good in the morning real estate developers would come to banks and say let's tap into market today. I want to raise funds so we can do this we can do that. Whether it may be buying land, whether it maybe trying to get funding just for other development purposes.
But nowadays the market dynamic is a lot more conservative, and pricing levels are also not as ideal. We've seen a lot of fluctuations coming out in the past few months. Last year, it was tariffs. This year, It was more about the wars going around. There's the Korean issuers that had to delay their bond issuance. So for Chinese property developers, which are more sensitive to pricing and investor sentiment. They are a lot more cautious on getting the marketing done before they tap into market, making sure that they have enough interest and they're going to be able to get enough orders before they tap into the market so it won't be a failed or last minute pullout type of issuance.
Rich Macauley:
So is it fair to say that it's a combination of Chinese developers doing enough of the heavy lifting to kind of clean up their book? In the last five years plus, investor demand for high yield. I mean, the supply of high yield has just been so low recently that finally the two have met each other, that investment demand and a good-enough situation among Chinese developers?
Allen Chiu:
I would say that is one way to paint a story. After all, it's been quite a few years since the default wave has happened, and it's also been a while since we've seen another developer default. I think what the market is generally perceiving is that default wave has effectively ended and we're coming to a new phase after the property downturn.
It would be to mould the market into a way that we can find like a middle ground, a more sustainable way for A, investors to be able to buy high-yield products which they feel comfortable, they feel confident about and B, for issuers to come out and be able to convince investors why they should put in money with them. And there's, as I said, right? It's really different from before. Before the whole property sector had a whole business model on borrowing money, on buying land, building, pre-sell and, boom, they can just refinance the debt or they can just, you know, repeat the whole process again.
Rich Macauley:
All right. And obviously your report makes clear that the return of borrowers to the market, while positive isn't necessarily an indicator that all is well in China's property market. Can you explain the issue of oversupply that's now weighing on the sector?
Allen Chiu:
Yeah, okay. So the underlying assets of these developers were maybe housing offices, retail assets like shopping malls and plazas are still facing oversupply. And the market demand is just too soft to absorb all these years of overbuilding.
So first of all, the office market, right? The common pattern that we see in these tier-1 cities like Shanghai, Beijing, Guangzhou and Shenzhen is that the new supply arriving faster than there's demand and leaving the vacancy elevated and landlords in a more tenant favorable market. The Chinese government's official statistics data shows that the full year in 2025, real estate development investment fell by 17.2%. And even through January and February this year, it was still down 11.1% year-over-year. So that's better than the 2025 pace, but it still means the sector is contracting.
And demand wise, right? The office demand in tier-1 cities are more driven by relocations than by new office or business formation or expansion. So, in other words, tenants are taking advantage of these lower rents and better incentives to move into higher quality buildings, right?
That very same dynamic is very visible in Hong Kong as well. So Hong Kong tenants have been taking advantage of the downturn to move into a higher-quality space in more competitive rents. And early 2026 Central's Grade-A rent has actually risen by 3.5% in the first two months of this year. So that gives us a picture on how the other tier-1 cities within China could eventually come together. Because these big names, these big banks, asset managers, hedge funds, eventually they would want to move into nicer or more custom built accommodation.
Instead of saying that they're going to save up a little bit of rent. I think that's very marginal in terms of their cost structure. but we've seen like Jane Street taking up a big chunk of office space in the new seafront office building developed by Henderson Land which is right next to IFC. And UBS is also moving its Hong Kong headquarters to a new office in West Kowloon right on top of the high -speed rail West Kowloon Terminus developed by Sun Hung Kai. So it really shows that these new buildings either provide enough incentives or they can allow new tenants to renovate as they would want as they wish, as a big incentive for these banks, these funds to just move out of their current office and upgrade into a nicer office.
In tier-1 cities, the recovery would typically come faster than tier-2, tier-3 cities just because these big names usually care less about how much money they can save. It's just very marginal. They're going to spend that money on office rental anyways. They would care a lot more about whether they can have nicer facilities for client meetings. They would rather move into a flagship office building than to just save that little bit of rent that's really marginal on their cost structure.
For the residential property market after peaking in 2021, the market really shift towards deleveraging and delivery as we said. Government policy support has not really translated into getting a price floor around. Last year, new home prices still dropped around 3%, and second-hand homes in the tier-1 cities actually dropped further, I think almost like 7% or 8%.
Now, home buyers are being supported with some policies from the government. We've seen the PBOC cut its benchmark lending rates by 10 bps last year around may so the personal housing provident fund loan rates also dropped by 25 bps so first-time buyers can get loans at around 2.6% for loans of five years or less but all these policy support doesn't really translate to a price floor, as I previously said the housing residential market is still facing the biggest issue of not having enough demand to absorb the homes being built.
And investor confidence is a bit easier to restore as long as you have strong fundamentals, you have a strong credit profile, investors generally would feel more comfortable lending money. Whereas home buyer confidence is a lot trickier in that sense. The big part of the confidence falling apart was with all these developers defaulting, a lot of homebuyers were worried that whether these developers would be unable to deliver the buildings that has already pre-sold. And now with the market being flooded by supply, homebuyers tend to be more willing to buy apartments that have been built already instead of trying to put their hopes on the ones that are being being built in the pre-sale type of method in the past, right?
So, what I think is homebuyers confidence will take time to restore and confidence as the general economy gets better, as the residential housing developers are able to deliver in a more timely manner, at least to be able to guarantee that they can deliver as stable as they were in the previous years before the property sector downturn.
And lastly, for retail property market. The retail property market is also more tenant favorable like the office market because the weaker consumption by households drag down the overall market. But we're also seeing a lot of these office spaces having a relatively more stable vacancy rate. Rental prices for retail are slightly down from previous years, but the vacancy rate actually maintained right around at 8%, which isn't actually a lot higher than what we've seen in 2020 and 2021. It was always around 6% to 8%.
This is also the reason why investors are more willing to lend money to developers with retail assets. Because despite rental income might have decreased because of prices coming down, the vacancy rate being stable means that this income is recurring, it's stable. It might have decreased but it's still coming in every month, every year and these developers are able to showcase to investors that they could generate that income every single year instead of compared to housing property developers where it's kind of like a one-off type of situation. You sell off your inventory, your stock and you either need to replenish them or you need to wait for the next cycle or there's a lot of uncertainty that doesn't appeal to investors anymore since the business model of the housing property sector was gone after the property sector downturn.
Rich Macauley:
Okay so looking ahead are we expecting more issuers to come to market in the near future or has this been it for now?
Allen Chiu:
Yes, so I think other developers will also come back into the primary bond market. But as we've broken down in our property sector analysis there's only a handful of names are considered as green, which is what we consider as performing credits with either some state backing or they're private product developers with stronger cash flow assets, like retail models, like Shui On Land and Seazen Group.
So I personally think there won't be a lot of these names that come into the market aside from the ones that already have. What we've seen is Ping An Real Estate has $300 million senior notes due July this year. There's also Greentown China that they have a $350 million note that's callable next year in February. So these are some new names aside from the issuers that did bonds this year that may come to the market.
I would be surprised if there's deals from developers that lies within our yellow group or even a red group to come into the market. That in one of their group is one of the companies that we considered under our yellow distressed credit category and they are able to do a bond And just because of how, well, Dalian Wanda Group maintains conversations with their investors very frequently. We've seen them do a lot of consent solicitation in the past few years just to push out the maturity to renegotiate terms with the investors.
What they've been doing really well is to make sure that these investors are comfortable and on the same page with them in terms of how they're managing their debt stack, how they are pushing out their maturities. And despite that they’re hanging by a thread, they are able to not go into an official default type of situation, and even to come to market this year to issue a US dollar bond is really impressive. But it's also unlikely that other companies are able to replicate this given the difference in business model, which is one that has probably the strongest commercial asset portfolio among a lot of developers.
New World China is one that I would think around these distressed credit names that might do something, given that it's part of the New World Development’s umbrella organization. But from what we've also analyzed and looked into, right? So let’s see. I feel like quite a few names are interesting names that we can wait and see whether or not they'll make a move or test the waters through investor calls or non-deal roadshows and see if they can tap into the market or if they have enough, if they generate enough investor interest.
Rich Macauley:
All right, Allen, thank you so much for anyone listening who would like to get a read of that report, head over to the 9fin dashboard. Search for oversupply haunts China's recovering real estate. That's the sector analysis from Allen Chiu and Shane Chin. Thanks so much for listening.