“We are being very careful where we trade,” said Jagger. “We want to make sure we are exposed to issues which we like and which are in the right cities. Because we do not want to increase exposure to companies that are exposed to chronic oversupply issues in some tier 3 and tier 4 cities.”
China’s residential property sales fell 8% in the first seven months of 2014 compared to the same period last year. But sales of leading developers, who comprise most Chinese real estate high yield issuers, have actually grown 12% over the same period.
Top property developers have been remarkably resilient, Jagger added.
“These companies are growing sales, and cashflow and liquidity positions are strong.”
Over half of the Asian high yield debt is issued by Chinese companies with the real estate sector being the largest component. Aviva’s Asian High Yield Bond Fund in September had 55.1% allocation to Chinese issuers.
Aviva was concerned over the fall in the real estate prices earlier in the year, but it now believes the downturn is manageable.
The government has relaxed home-purchase restriction in its efforts to stimulate demand and reduce excess housing inventory.
Mortgage rates for first-time buyers are falling and reform of the household registration system and other structural changes are seen boosting housing demand in the long-term.
Jagger said property prices could fall further because excess inventory clearing is slowing, but he doesn’t believe it will result in a calamity. China does not have as much household debt as the US did during the housing crisis in 2008 or in the UK in 2009.
“You may see a default of or two, but it will not result in serious ripple effects. Typically, when real estate companies in China get into difficulty, there is a buyer for some or all of their assets. The loss may not be as severe as in other type of businesses.”
