SHANGHAI: Beaten-down dollar bonds issued by Chinese property developers are enticed by domestic and global fund managers, some of whom are planning to launch new funds targeting bargains as Beijing relents in its concerted effort to clean up the sector.
A Chinese wealth manager, Jupai Holdings Ltd, plans to start a fund to bet on offshore Chinese property bonds.
Judging Chairman Jianda Ni said that about half of the developers' dollar bonds were slaughtered by mistake.
We will spot value in what others have dumped as trash. The investment appeal of the fallen angels in the property sector has grown after China has loosened some of the financial and regulatory constraints it imposed last year.
China's property sector is facing a crisis due to borrowings by big real estate developers, with China Evergrande Group at the forefront. China's top-selling developer has around US $20 billion of international bonds, all of which are deemed to be in default.
A Markit iBoxx index, tracking China's high-yield real estate dollar bonds, fell as much as 19 per cent in January, after 2021's 38 per cent slump.
The selloff that began in October with Evergrande accelerated as other developers such as Kaisa Group and Shimao Group defaulted or delayed bond payments.
As the real estate sector moves from the bottom of the policy tightening cycle, there are pockets of opportunities, especially for distressed investors, said Paula Chan, senior portfolio manager at Manulife Investment Management.
In recent months, China has implemented several policies to help the economy, including a cut in mortgage rates, stepped-up approvals for developers' bond issuance, and government support for property acquisitions.
Fengshi Capital, a Chinese vulture fund manager, started buying junk bonds late in 2021 and is considering doubling down on such bets this year, according to a source with direct knowledge of the fund's plans, who was not authorized to talk to media.
Ni, who has worked for more than three decades in the Chinese real estate sector, said that the strategy is based on deep understanding of Chinese developers, as well as the character of their bosses.
Ni declined to name any targets, but said that many of the undervalued bonds are in the range of 70 -- 80 cents on the dollar.
According to Essence Securities last week, about half of the dollar bonds issued by Chinese developers trade below 80 cents on the dollar. Some bonds issued by major developers are currently yielding more than 60 per cent.
Mike Kelly, global head of multi-asset at US $140 billion asset manager PineBridge Investments said last week that the fund had started buying offshore Chinese property bonds and expected authorities' measures to stabilise the market would deliver extraordinary returns.
Kelly didn't want to name companies. He started to buy at the end of December, but he said he was still picking up securities at 75 -- 85 cents on the dollar.
Jean Charles Sambor, Head of Emerging Market Fixed Income at BNP Paribas Asset Management, expects significant easing of China's real estate policies, and the asset manager is building a long position in the sector's debt.