Bond maturities are being postponed by Chinese developers, and debt is expected to peak in 2020. Events
As several interest rate cuts were reported across the region, debt financing became more active while the equity funding market slowed, according to CBRE's second edition of Four Quadrants Asia Pacific, a study that provides a comparative analysis on the 'four quadrants' of private equity, public equity, private debt, and public debt.
After a record-breaking year in 2015, when real estate companies in Asia Pacific issued $55.7 billion in bonds, the strong momentum continued in the first five months of 2016, when $24.2 billion was issued, accounting for 43 percent of the total for the year.
REIT fundraising (excluding IPOs) totaled $2 billion during the same time, a 23 percent decrease year over year, owing to stock market uncertainty at the start of the year. Closed-ended real estate fundraising in the private equity quadrant totaled $9 billion, up from $3.2 billion in the same timeframe last year. However, two logistics developments in China and Japan, which raised $3.5 billion in total, skewed the total sum raised.
"The debt market in Asia Pacific is overall showing increased activity, mainly due to more monetary easing from central banks, with six countries—Australia, India, Indonesia, Japan, New Zealand, and Taiwan—cutting their rates in the first five months of the year," Ada Choi, Senior Director, Research, CBRE Asia Pacific, said. "The successful real estate bond market was primarily fueled by Japan's negative interest rate and China's onshore bond market opening."
Despite the fact that the Japanese bond market increased by $3.2 billion during the review period, Chinese developers remain the largest source, accounting for more than 70% of the total $24 billion in public bonds sold, mainly in mainland China.
"Government bond yields in Japan have turned negative as a result of the Bank of Japan's negative interest rate strategy, rendering bond offerings a more appealing funding tool for investors. This increased bond-raising activity in the market, particularly among J-REITs, who became more involved in accessing capital from the bond market due to the low cost of capital. Although in China, due to a weaker RMB and more lenient government approval procedures, Chinese developers became more involved in the domestic bond market, issuing more onshore bonds than offshore bonds. As opposed to offshore bonds, developers can get money from the domestic bond market at a lower interest rate "Ms. Choi continued.
Nonetheless, recent bond default cases involving state-owned enterprises have harmed investor sentiment against Chinese bonds. As a result, some developers have placed bond issuance on hold, resulting in slower bond issuance for the remainder of the year. Chinese developers, on the other hand, are under less pressure to repay their debt in the near term since their debt maturity has been pushed back to 2020, with about $28 billion scheduled to be settled by developers.
Bank lending appetites diverge; non-bank lending opportunities abound in Australia and India. Lending conditions are generally favorable for borrowers and developers in an atmosphere of lower interest rates and accommodative monetary policy by central banks, as some banks, such as those in China and Japan, are easing their loan approval stance as a result of strong liquidity in the banking system. Despite a more aggressive approach to lending for commercial real estate investment in Hong Kong, banks are taking a more cautious approach to residential construction projects due to softening housing prices.
"Despite policy rate cuts, the appetite for bank lending is diverging across the country, with Australia and India maintaining a more stringent approach to real estate development and investment lending," said Nick Crockett, Executive Director, Capital Advisors, CBRE Asia Pacific.
"Indian banks are hesitant to lend due to a high level of bad debt, while Australian banks face higher capital requirements from regulators, which would likely increase their funding costs and erode profit margins. Australian banks are now limiting lending to foreign buyers of residential property, which was a big supporter of the Australian housing market. Since projects have already begun, developers may need additional financing to complete them. Non-bank lending will continue to be available in both India and Australia as a result of this "he said
The remainder of the year will be more difficult for the private equity sector, as fund managers must first demonstrate that they can successfully invest the capital raised while meeting their funds' target returns.
"Due to a scarcity of investable assets and growing investor interest in real estate debt, fund managers have developed real estate debt based funds. A number of debt funds are still raising money, the majority of which are focused on debt opportunities in residential construction projects in Australia and India "Mr. Crockett added.