Analysis: China developers launch funds to bridge finance gap

BEIJING Sun Jan 15, 2012 11:46pm EST

A construction site is seen in Beijing's central business district December 27, 2011. REUTERS/Jason Lee

A construction site is seen in Beijing's central business district December 27, 2011.

Credit: Reuters/Jason Lee

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BEIJING (Reuters) - China's fledgling real estate investment fund market could see a surge of activity in 2012 as property developers launch their own vehicles in a desperate bid to bridge an estimated $111 billion financing gap in the year ahead.

A government-led clampdown on bank, bond, equity and trust market financing for real estate has left developers with little choice other than to set up their own funds, which have raised barely 10 percent of the sum in the past two years that needs to be found to refinance maturing debt in 2012.

On the upside, China's high net-wealth families still favor property investment and funds give them an alternative to buying the physical asset while retaining exposure to the sector.

"Of course, it will take time, but in the next decade, you will see the Chinese property market become more institutionalized," Frank Marriott, Savills' (SVS.L) senior director of real estate capital markets for the Asia-Pacific, told Reuters.

Time is not on the developers' side. Slowing sales and falling prices are hitting just as refinancing pressures are soaring. Analysts widely expect industry consolidation to accelerate in 2012 and some players, even big ones, will have to sell assets and quit the market.

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About $2.2 billion of syndicated property loans and club deals will become due this year, according to Thomson Reuters data, while a further 117 billion yuan ($18.6 billion) needs to be found to repay maturing real estate trusts.

Add in the other credit lines that need repaying and developers need to find over 700 billion yuan this year, according to Hua Xia Times, a Chinese business newspaper in Beijing.

Major developers such as China Overseas Land & Investment (0688.HK), Gemdale Corp (600383.SS) and Forte, are among the first firms to have launched their own funds.

Others including China Vanke 000002.SZ, the country's biggest listed property firm by sales, chose to set up funds jointly with their peers to help each other survive tough times.

And more will follow.

"We must make more friends and widen our financing sources. That will help our future growth," Zhu Tong, chairman of Sun Real Estate, a mid-sized developer in Beijing, told an industry forum in Beijing last week.

A total of 29 property funds raised $4.1 billion in 2011, a big improvement on the $2.9 billion raised by 28 vehicles in 2010, according to consultancy Zero2IPO.

Industry analysts expect more than $6 billion will be raised in 2012 and that the property fund market will expand at an annual rate of 40-50 percent over the next few years.

The funds target wealthy entrepreneurs, with an investment threshold of 10 million yuan and above and are expected to offer annual returns of at least 25 percent, said Fu Zhe, a Zero2IPO analyst in Beijing.

"Private investors still have a strong interest in the property sector as there are really not many other options for them," Su Xin, chairman of Go-high Investment, which invests in commercial real estate, told an industry forum last week.

His company's recent survey in Wenzhou, Ordos and some coal-rich cities in northwestern Shaanxi province -- places with some of the biggest speculative property bubbles in the last decade -- shows that investment interest in property remains robust.

FUNDING CONSTRAINTS

That's lucky for Chinese developers given the funding constraints in the wake of government pledges to pull home prices back to a reasonable level after a decade of rocketing real estate inflation that saw prices surge 10-fold in 10 years in key cities across China.

Not only have the major state-backed banks been told to cut credit lines, the government has also halted all financial innovations to channel money into its targeted property sector. These include non-public trust funds launched by Chinese trust firms in private placements to channel funds to the sector and the long-awaited exchange-traded real estate investment trusts (REITs).

But it's going to take more than luck for developers to survive the financing drought.

Banks have prolonged mortgage loan approvals, forcing developers into a hand-to-mouth existence of surviving on downpayments and then seeing the bulk of the cash from sales going directly to the accounts of contractors and suppliers.

"That means even after you've sold residential units at a cheaper price, the cash in your hand still does not increase," Ren Zhiqiang, the outspoken chairman of Huayuan Property (600734.SS), told a forum last week.

As a result, the balance sheets of many Chinese developers deteriorated in 2011. Greentown China (3900.HK), a major player in eastern China, is now struggling to survive and having to sell assets to do so.

Developers are compelled to dig deep into internal reserves for working capital. Internal funding, including new property funds raised, was 41 percent of total financing in the industry in the first 11 months of 2011, up from 38 percent and 33 percent in the same period of 2010 and 2009 respectively, according to the National Bureau of Statistics.

New loans to the property sector accounted for only 17.5 percent of banks' total new local-currency lending in the first three quarters of 2011, down from 31.1 percent in the year 2007, according to data from the People's Bank of China.

With Beijing showing no mercy in cracking down on property speculation, developers like Greentown China that expanded rapidly in the past few years and have the high gearings to prove it, will have to sell land and half-built projects to repay debt.

That is why the real estate fund route is considered to have so much potential. It helps developers keep control of their assets and gain control of their finances.

Cao Shaoshan, chairman of Orizon Capital, is excited about the outlook of Chinese property funds.

He believes China's maturing real estate market means developers will specialize more on construction while outsourcing fundraising. But it won't happen fast enough for many struggling developers.

"The Chinese property fund sector is still at an infancy stage," Cao said. "It's unable to change the financing landscape a lot in the short term."

(Reporting by Langi Chiang and Nick Edwards; Editing by Matt Driskill)

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