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China's Real-Estate Firms Rush to Tap Capital Markets

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HONG KONG—China’s economy may be cooling, but its real-estate companies are fueling a debt-and-equity underwriting boom.

Chinese real-estate companies have issued $69.32 billion of debt and equity so far this year, up from $25.8 billion during the same period a year ago, according to data provided by Dealogic. Such companies issued $103.47 billion of debt and equity in 2015, the highest year on record.

Real-estate companies are rushing to tap the capital markets to raise new, cheaper debt denominated in yuan and refinance existing, more expensive debt they had issued in offshore markets. They also are raising capital to fund development and expansion projects as property prices and sales have been rising in recent months.

The housing market in China is slowly recovering after a two-year downturn. From January to April, housing sales rose 61% to 2.41 trillion yuan ($366.08 billion) from a year ago, the National Bureau of Statistics said last month. Property investment in the first four months of this year rose 7.2% to 2.54 trillion yuan. Construction starts gained 21% to 434.3 million square meters (4,675 square feet).


Analysts at J.P. Morgan Chase
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& Co. expect there to be a housing recovery in China in 2016, and say home prices will rise by 5% to 10% this year.

The success of real-estate companies in tapping the capital markets shows that the cooling of the broader economy hasn’t damped their appetite for growth. There still is profit to be made in many cities and regions, said a senior investment banker at China International Capital Corp.
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CICC has been investing resources into its real-estate team because it considers real estate an important sector of China’s economic growth, the banker said.

Moreover the recent debt and equity raising shows that homeland banks now are reaping the rewards from all the new issuance. Expanding Chinese investment banking and securities firms are muscling out nonmainland players who used to dominate the league-table rankings in the region.

Between 2012 and 2014, U.S., European and Japanese banks routinely dominated the Asia-Pacific league tables for debt and equity issuance in the region. Now just a few are eking out spots in the top 10 as Chinese banks and securities firms climb the rankings from the business they are acquiring from Chinese real-estate companies.

So far this year, only Morgan Stanley,
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whose ranking also includes deals done by its joint venture with Japanese giant Mitsubishi UFJ Financial Group Inc.,
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retains a spot in the top 10 banks leading bond issuance; the rest are Chinese, according to Dealogic. For initial public offerings and other equity-linked transactions, Morgan Stanley and UBS Group AG currently are duking it out with Chinese and Japanese players.

In 2015, Morgan Stanley, UBS and J.P. Morgan appeared among the top 10 firms for equity transactions alongside Chinese, Hong Kong and Japanese banks. For debt issuance that year, all of the top banks were Chinese, except HSBC Holdings
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PLC and DBS Group Holdings Ltd.
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The dominance of Chinese banks in the real-estate fundraising league tables follows surging demand from Chinese companies, which overwhelmingly prefer to do business with homegrown firms, industry participants say.

Chinese real-estate companies are making up a greater proportion of Asian companies seeking capital-markets transactions, leading to more business for Chinese firms and increased representation in the league tables.

Chinese real-estate companies so far this year account for 87% of the $72.87 billion in Asia-Pacific debt issuance by all real-estate companies in the region. For the same period in 2012, they accounted for only 44% of the $25.42 billion in such deals.

In the region’s equity markets, Chinese issuers make up 54% of the $10.82 billion in real-estate-related deals, up from the same period in 2012, when they made up 12% of the $4.18 billion in deal value.

Chinese companies increasingly are issuing yuan-denominated bonds on the mainland after facing restrictions in seeking capital from China’s public markets. Those restrictions were loosened in late 2013 and early 2014.

Fears sparked by a Chinese real-estate bond default last year have benefited mainland banks, said Nitin Jain, senior expert for Asia capital markets and investment banking at consulting firm McKinsey & Co. Ordinarily, many Chinese companies seeking funds would issue debt or list shares in Hong Kong or Singapore in U.S. dollars to sell to overseas investors.

But appetite has cooled for Chinese real-estate debt from international investors, so companies are fundraising at home in yuan, further bolstering Chinese banks’ ability to arrange deals, Mr. Jain said.

The cost of funding has become cheaper on the mainland than in offshore markets, a result of the country’s credit-easing initiatives in recent years, bankers say.

Another advantage for Chinese banks is long-standing relationships with local companies, which historically relied on them for financing. Foreign banks traditionally haven’t had strong lending relationships with Chinese real-estate companies, leaving them less well-positioned to lead deals once those companies sought to access public financing, said Eric Pascal, a partner with consulting firm Oliver Wyman who specializes in capital markets.

Chinese firms are benefiting from foreign banks’ relatively limited scope of operations in China. Foreign banks must form joint ventures with local banks to offer securities transactions and aren’t allowed to own more than 49%. Such joint ventures hold less than 5% of the market share in mainland China, according to McKinsey estimates.

Write to Julie Steinberg at julie.steinberg@wsj.com

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