Real estate and related industries account for more than a quarter of China’s economy, according to Moody’s estimates.
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China’s real estate bonds were once key performance drivers for Asia junk bond funds, but the market share from property bonds has fallen as a result of the country’s property debt crisis.
As a result, investors of high-yield bonds in Asia must brace for lower returns, investment analysts tell CNBC.
The market capitalization of those real estate bonds has fallen from an average of over 35% to around 15% within some Asia high-yield funds as the debt crisis drove down prices of property bonds, according to portfolio managers and analysts who spoke to CNBC.
Property bonds traditionally form the bulk of the Asia high-yield universe. But as their market value fell, their share in the overall Asian junk bond market shrank as well. Consequently, fund managers turned to other kinds of bonds to make up for those losses, and investors in these high-yield funds might not be able to find the same kind of returns again.
High-yield bonds, also known as junk bonds, are non-investment grade debt securities that carry bigger default risks — and therefore higher interest rates to compensate for those risks.
“The share of China real estate has fallen substantially,” said Carol Lye, associate portfolio manager at investment manager Brandywine Global. “With China real estate bond supply down by near 50% year-on-year, the market remains pretty broken with only selected high quality developers able to refinance.”
The drop is mainly due to a combination of lower bond supply and defaulted bonds falling out of the indexes, according to financial research firm Morningstar.
“As a result, China real estate’s importance in [the] Asian credit universe is shrinking,” said Patrick Ge, research analyst at Morningstar.
Last December, the world’s most indebted property developer China Evergrande defaulted on its debt. The fallout from that crisis spread to other firms in China’s property sector. Other developers showed signs of strain — some missed interest payments, while others defaulted on their debt altogether.
Fund managers are pivoting to other areas to fill the gap left by China real estate, but analysts say these replacements are unlikely to offer better yields than their predecessors.
“Shifting to other sectors and countries [away from the very high yielding China property space] certainly reduces relative yield [to the index] in the portfolio,” said Elisabeth Colleran, emerging markets debt portfolio manager at Loomis Sayles.
“However, managers need to think about what yield can actually be achieved with the loss from a default,” she told CNBC.
With lower supply from China, interest in Indonesian high-yield has grown since the China property crisis.
Carol Lye
associate portfolio manager, Brandywine Global
In the past, funds that were more overweight on China’s real estate bonds…
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