Chinese developers tap alternate options to finance projects
- 26 Jun 2019
Chinese developers are increasingly tapping alternate options to raise cash, including private-equity (PE) funds and securitisation tied to commercial properties, as regulators tighten the screws on popular financing channels.
While resorting to alternate channels will put more pressure on funding costs, developers said the move comes as Beijing is slowing approvals for onshore and offshore bond issuances to curb aggressive bidding for land, after premiums paid spiked in the first quarter.
Approvals for asset-backed securities packaging different receivables, another popular financing channel, were also tightened a few weeks ago, homebuilders said.
Even though most major developers have already acquired the quota needed for bond issuance at the start of the year and “are not short in credits”, they still need to “keep looking for different ways to raise funds”, said an official at a developer.
“Developers cannot rely on just one or two channels,” he added, declining to be named as he was not authorised to speak to media. “The industry has always been playing this game; regulators close one door, we find another open door.”
The developer he works for is planning to launch commercial mortgage-backed securities and has also submitted an application to form a real estate investment trust.
Regulations in China on securitisation linked to commercial properties have not been tightened yet as it is not popular among residential developers who do not own a large commercial portfolio.
Another developer said it plans to invest in more projects via onshore private-equity funds this year.
The cost is higher than bond financing, but it would help lower the company’s gearing, said the developer, which did not want to be named as the plans are not yet public.
Financing via private-equity funds is, however, not limited to onshore. China Evergrande Group raised a $100 million fund in Hong Kong last month specifically for a redevelopment project in the southwest city of Guiyang, according to a presentation document seen by Reuters.
While financing via offshore funds is not uncommon for Evergrande, it is rare among major players, analysts said.
Evergrande is the third-largest developer in China by sales, after Country Garden and Vanke.
“When the traditional channels are tightened, more developers seek this kind of project financing,” CRIC Hong Kong’s head of research, David Hong, said.
“Cost of the alternative channels is more expensive ... some small to mid-sized developers may go back to trust loan, but the problem is its cost is too high, raising the financing risk.”
The Chinese securities regulator did not reply to a Reuters’ request for comment on financing curbs for developers.
Analysts and developers, however, do not see a financing squeeze lasting much longer, as they expect a weaker economic growth exacerbated by the US-China trade war and lower land premiums in the coming months to prompt Beijing to ease curbs.
“There’s a lot of variables to the trade war between China and the US; when big uncertainties happen again, the central government may loosen up the tightening on the real estate sector,” CRIC’s Hong said.
Meanwhile, China stocks ended slightly lower on Wednesday as financial stocks weighed on the market, and as investors exercised caution ahead of the meeting between US President Donald Trump and his Chinese counterpart Xi Jinping.
The blue-chip CSI300 index fell 0.2%, to 3,794.33, while the Shanghai Composite Index shed 0.2% to 2,976.28. Trump views the meeting as a chance to see where Beijing stands on the two countries’ trade war, and is “comfortable with any outcome” from the talks, a senior US official said on Monday.
The United States hopes to re-launch trade talks with China after Trump and Xi meet in Japan on Saturday, but Washington will not accept any conditions around the US use of tariffs in the dispute, a senior administration official said on Tuesday.
Financial stocks led the decline on Wednesday, as investors planned to dump shares in leading brokerage firms, whose stocks slumped as a result.
Banking stocks also weakened, after a report said that some Chinese banks may face US action in N.Korean sanctions probe.
The CSI300 financials index and the CSI300 banks index retreated 0.8% and 0.5%, respectively.
Around the region, MSCI’s Asia ex-Japan stock index was weaker by 0.09%, while Japan’s Nikkei index closed down 0.51%.
The largest percentage gainers on the main Shanghai Composite index were Danhua Chemical Technology, up 10.12%, followed by Shanghai Shenqi Pharmaceutical Investment Management Co, gaining 10.06% and CSSC Offshore & Marine Engineering Group Co, up by 10.02%.
Reuters
