By Scott Murdoch and Karin Strohecker

HONG KONG, (Reuters) – China’s property firms could be barred from the offshore debt markets for at least one year. Global investors are waiting on China Evergrande Group to resolve its debt problems. Fund managers and advisors warned that this may happen.

Evergrande surprised markets by paying $83.5m to Citibank’s trustee to secure a bond coupon that was due on Sept. 23rd and avoiding imminent default. But the move won’t calm anxious property market investors.

Markets will likely remain fragmented, which may lead to increased asset sales as well as a rush to secure expensive private funds raising by companies with lower ratings who are looking to refinance their debt and avoid default in the coming year.

Arthur Lau, PineBridge Investments’s CEO said that it may be necessary to wait until full-year results. Investors will have to assess how tight the financials are for the developers.

Although Evergrande received a payment, this was positive. However, Evergrande still has to pay $195 million in overdue coupons. The next deadlines for default avoidance are Oct. 29th and Nov. 10th. The company still has $340 million in coupon payments on its offshore bonds due between November 1 and December 28.

Lau indicated that Chinese property sales would be monitored closely by investors and that capital markets will reopen best during the first quarter.

We do not expect any more defaults this year so it is difficult to get (developers), to the market against such a backdrop.

According to data released Friday, China’s land sales declined for the second consecutive month. This was in the sector of fast-cooling properties.

JPMorgan (NYSE 🙂 estimates that China’s entire bond stock is made up of 25% of its real estate sector and half of China’s high yield debt. It also holds 69% of all high-yield bonds.

Refinitiv estimates that bonds representing mainland Chinese businesses in various currencies will expire this quarter.

China’s property industry alone will have $28.3B worth of overseas debt over the next twelve months. Shui On Development’s 500 million dollar deal, which was signed in November, is the biggest before 2021.

Fantasia Holdings Group Co. missed the $206 million bond payment in October. However, it has almost $420 million in bonds due to mature in December.

LOSS OF INVESTOR CONFIDENCE

Fund managers state that investors will be cautious in buying low-rated Chinese property debt, until mortgage sales increase and property sales rise.

Hong Hao from BOCOM International, the head of research said that while property companies have been active in the U.S.-dollar bond market due to lower interest rates available, the future will be determined by how international investors view this sector.

Although there are still some high-risk investors interested in China’s property market, the dynamic of it has changed.

Refinitiv reported that China’s property developer issued $2.7 billion in offshore bonds, their lowest quarterly total since 2017 and is already indicating a slowdown in this sector’s debt issuance.

In October, there was little evidence of a recovery.

JPMorgan analyst Soo Chong Lim said that it was very challenging right now for China’s property-issuers to get access to the bond market. He anticipates even more defaults within the next few months.

She’d like to see “signaling by the central government regarding stabilising both financing conditions and the market before we tip-toe back into the lower credit portion of the curve.”

JPMorgan estimates that China’s high-yield market had an annual default rate of 5.2%, while the 6.7% was for property sector high yield markets. Both are record-breaking highs.

Alexander Aitken, Herbert Smith Freehills Partner, stated that property companies were experiencing a decline in investor confidence. This was likely to continue for the long-term.

He stated that “it could be difficult for high yield Chinese property issuesrs and their usual investor community, because we already see bond yields increasing very significantly.”

“The question that is interesting here is whether current conditions will only affect the Chinese real estate sector, or if they’ll spread further into China’s credit market.