Analysis: China’s real estate problems undermine real estate investment products

A woman walks past a real estate model at a Kaisa Group Holdings Ltd sales office in Shenzhen, Guangdong province, China, November 10, 2021. REUTERS / David Kirton / File Photo

Register now for FREE and unlimited access to Reuters.com

Register

SHANGHAI, Nov. 16 (Reuters) – Chinese investors abandon their age-old attachment to real estate investment products and seek returns on stocks and other segments of the capital markets, as authorities crack down on debt-fueled real estate sector .

The flow of cash in real estate investment products issued by trust companies has collapsed since September, as debt problems at real estate giant China Evergrande (3333.HK) worsened.

This in turn shuts down one of the remaining funding channels for property developers who already suffer from tight restrictions on onshore lending and record borrowing costs in the offshore bond market.

Register now for FREE and unlimited access to Reuters.com

Register

“The previous investment logic has collapsed,” said Shanghai businessman Desmond Pan, who plans to transfer millions of yuan in real estate trust products to China’s Bridgewater fund called All Weather Enhanced Strategy. .

Sifting through a brochure with the smiley face of billionaire founder Ray Dalio and a smooth, rising performance curve, Pan believes the multi-asset fund, with an annualized return of 19%, is a suitable investment substitute. .

Chinese investors have long had a fondness for real estate investments, but the money invested in real estate investment products has declined in recent years since Beijing began restricting shadow banking in 2017. Evergrande’s default on Wealth Management Products (WMP) in September, which sparked investment protests in many cities, only accelerated this trend.

At the end of June, trust funds invested in real estate stood at 2.100 billion yuan ($ 329.3 billion), down 17% from the previous year. In contrast, fiduciary products investing in securities such as bonds and stocks jumped 35% to 2.8 trillion yuan, according to the China Trustee Association.

RISKS ARE GROWING

Money turnover has accelerated in recent months, with fundraising through real estate-related trust products falling 38% in September from the previous month and 55% in October, according to Use Finance. & Trust Research Institute.

“Property-linked trust products aren’t selling these days, and we’re seeing clients ramp up transferring money to funds with relatively stable returns, such as funds of funds (FoFs) and ‘funds of funds. quantum, ”a FoF manager told Shenwan. Hongyuan Group, who declined to be identified because he is not authorized to speak to the media.

Quantitative funds, or quantitative funds, use software to automate investment decisions and often generate higher returns than bonds, but carry less risk than stocks.

“Chinese policies are diverting capital from real estate, which is absolutely positive news for the asset management industry,” said Jason Hsu, founder and chairman of Rayliant Global Advisors, which recently started a hedge fund multi-strategy in China which uses quantitative analysis. .

Shi Ke, partner of Shanghai iFund Asset Management Co, a quantitative hedge fund house, agrees: “You have to be careful with real estate investment products. The risk of default increases.

According to Citi Securities, China’s quantitative private funds have reached 1,000 billion yuan ($ 154.6 billion) in recent months. That’s almost 10 times their size in 2017.

In addition to fiduciary products, real estate wealth management products sold through banks or independent wealth management companies have also suffered from the failures of Evergrande and, more recently, a liquidity crisis at developer Kaisa. Group (1638.HK). Read more

Jianda Ni, chairman of real estate wealth management firm Jupai Holdings (JP.N), said there has been an irreversible shift in investment to equities in sectors such as tech and news. energies, and far from the debt issued by developers.

The company, which distributes products to finance projects from Yango Group Co (000671.SZ), Kaisa and Guangzhou R&F Properties Co (2777.HK), said it continued to diversify its product line and introduce more equity products, abroad and on the secondary market.

Rival Hywin Holdings Ltd (HYW.O), which distributes products to fund projects from developers including Evergrande, told Reuters in September that it aims to reduce its reliance on real estate by developing new products and expanding its activities abroad. read more When contacted for comment, he did not provide further details.

Liang Dongqing, head of the wealth management department at China International Capital Corp (CICC), told a conference in October that while real estate remains the most important component of Chinese household balance sheets, the demographic and economic drivers. The liquidity behind the Chinese real estate bull cycle has disappeared.

“Guiding clients to divert some of their existing real estate wealth and reallocate assets to share China’s future economic growth represents the greatest opportunity for wealth managers over the next decade. “

($ 1 = 6.3776 Chinese yuan)

Register now for FREE and unlimited access to Reuters.com

Register

Reporting by Samuel Shen Additional reporting by Vidya Ranganathan in Singapore; Editing by Jacqueline Wong

Our Standards: Thomson Reuters Trust Principles.