Neuberger: China may face rare property defaults

SHANGHAI • Chinese developers may be headed for rare defaults on their debts as rising interest rates make it harder to roll over record borrowings, according to one of the few foreign money managers selling local financial products to the nation’s investors.

Smaller property firms might miss payments on bonds this year after the government’s leverage curbs pushed up borrowing costs, according to Neuberger Berman, which started its first onshore private fund this month for qualified investors, with a focus on fixed income. There haven’t yet been any defaults on publicly issued bonds from developers in China’s local market.

“Smaller developers don’t have sound cashflows and can’t tolerate any halt in refinancing because of their high leverage,” said Peter Ru, CIO of China fixed income at Neuberger Berman Investment Management (Shanghai) Ltd, a unit of the New York-based firm. “Weaker developers may face even higher borrowing costs.”

Real estate companies with total assets under 40 billion yuan (RM24.77 billion) and debt-to-asset ratios higher than 70% face high default risks this year as they don’t have enough sources to tap for refinancing, according to Ru at Neuberger Berman. The median total debt-to-asset ratio for 127 China-listed property developers was 31% as of Sept 30, according to data compiled by Bloomberg.

Neuberger Berman only buys bonds from developers in China that rank among the top 30 in terms of revenue, Ru said. — Bloomberg