Impact of Yuan on China Property

Posted in August 1, 2010 ¬ 10:31 amh.jeff4,187 Comments »

China’s decision to end the yuan’s de facto peg against the dollar could have a significant impact over time on the fortunes of corporations big and small, Chinese and foreign—even though any movement of the Chinese currency in the near term is likely to be too gradual to matter immediately for  the bottom line. Below is a look at how it might affect the property industry:

China’s property sector, which was on a tear until the government began tightening the sector in April, will benefit from the rising buying power of Chinese consumers, analysts say.

Commercial property–which sees more foreign investment than housing—could experience a boost in interest from foreign funds, says one property analyst from a Chinese brokerage. Real-estate investment funds with long-term horizons, for example, could be attracted to China if they expect long-term yuan appreciation.

One particular beneficiary will be landlords who lease space to retailers, such as Hong Kong-listed Hang Lung Properties and Renhe Commercial Holdings.

One significant effect of a rising yuan on the property business would be on how some developers raise capital. Some developers this year issued bonds abroad ahead of a possible appreciation—which would make dollar debt cheaper in yuan terms—even though they have to pay relatively high coupons. Hong Kong-listed Country Garden issued a $550 million global bond this year with a yield of 11.375%.

Such offerings have dried up more recently, because China property bonds have lost some of their appeal amid concerns that the government’s property-tightening measures will hurt their finances, and also because there was a glut in of supply in the bond market.

Johnson Hu, an analyst from UOB KayHian, says the main reason for overseas fundraising was tighter monetary conditions at home, but anticipation of yuan appreciation may have helped make developers like Country Garden more willing to offer fatter yields.

But the effect on most developers in China would be limited, analysts say. Residential developers wouldn’t see much impact on house sales from a mild appreciation of the yuan, analysts say, especially given recent property-tightening measures and restrictions on house purchases by foreigners.

And most developers are locally funded. CapitaLand, for instance, a Singapore-listed property developer that recently doubled its China portfolio through a $2.2 billion acquisition of Orient Overseas Developments, borrows in yuan for its China business. “This forms a natural hedge,” said a CapitaLand spokesperson.

Typically, property developers here source materials for construction and third-party vendors from domestic companies, so the revaluation of the yuan is expected to have minimal impact.

Johnson Choo, a spokesperson from CentraLand, a property developer based in Zhengzhou, said his company sometimes engages foreign consultants like architects, who must be paid in foreign currency, which would mean savings if the yuan rises. But these payments typically make up a very small part of CentraLand’s expenses, so “it would not have a significant impact,” he says.

China Real Time


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