Covid-19 causing a shock to real estate debt in China

Lenders are shifting towards stable assets amid coronavirus-led disruptions.

The covid-19 outbreak has caused a shock to the real estate debt market in China, data show, as corporate borrowers come under liquidity pressure and lenders shift towards stable assets.

See all Private Debt Investor’s coverage of covid-19 and its impact.

Data from S&P Ratings on 7 April show that three real estate developers’ credit ratings were downgraded into junk territory in February and March.

Among the Chinese developers, Shanghai-based Yida China Holdings was downgraded to ‘CCC’ on 27 February. It was then revised down again to ‘SD’, which indicates an issuer default, on 27 March.

No rated developers fell from the investment-grade category into the high yield group.

The downgrades suggest that the negative impact of the pandemic on Chinese real estate developers has been weighing on highly levered corporates.

The coronavirus outbreak has also caused a change in private credit investors’ risk appetite.

According to Grant Chien, Hong Kong-based head of special situations financing at InfraRed NF Investment Advisers, many Chinese real estate developers seem to be under greater liquidity pressure than last year.

“There is credit bipolarisation,” he said. “The stronger developers have re-entered land auctions while weaker companies are seeing residential presales down by 40 to 60 percent in the first quarter.” Chien added that although situations are different between cities, some of the construction sites remain below full capacity owing to coronavirus-led disruption.

InfraRed NF made a $45.9 million loan to Heneng Group, a Chengdu-based real estate developer, for a residential project in Changsha, a city in Hunan province, according to a statement on 30 December 2019.

Over the past few years, the total principal amount extended to the private borrower by InfraRed NF and its consortium partners was $105 million. Given the uncertainty seen in the real estate sector, Chien is considering more stable assets to invest in based on an assessment of risk-adjusted opportunities. “If proper due diligence is performed, there are favourable opportunities in China,” he said.