Developers eye access to direct funding sources

A series of articles published by Xinhua News Agency on Wednesday, which called for a lift of the ban on property developers' normal financing activities, has added to evidence that domestic developers will soon gain access to a broader range of financing options.

In order to tame soaring property prices, the State Council - China's cabinet - required the securities regulator on April 2010 to suspend approvals to the listing, refinancing and major-asset restructuring proposals submitted by developers that were found to keep land plots idle or participate in housing market speculation activities.

As a matter of fact, direct financing for developers on the mainland's capital markets was blocked even before that, as no successful listing on the A-share market for domestic developers was seen after Wuhan Langold Real Estate Co Ltd went public in November 2009 in Shenzhen.

Although the policy was launched on worries that land and property prices would be hiked if developers had enough access to financing, the three-year moratorium has driven property companies to raise money via offshore listings, bonds, or even support from private equity firms and trusts.

Analysts said that these financing channels have pushed up the companies' borrowing costs, which are then passed on to the end consumers, and heightened the threshold for other sectors in the real economy to raise funds.

What's worse, some developers are seeking help from the shadow-banking system, usually made up of non-bank intermediaries that escape regulations and harbor financial risks.

"When developers are blocked from getting money through ways such as initial public offerings, refinancing and restructuring of major assets, they will target other ways, which increase costs as well as risks," said Chen Sheng, vice-president of the China Real Estate Data Academy.

"Most of us property developers have to borrow short-term money with high interest rates from trust companies, underwriting companies and private money lenders for about a week every three months if we have a new project launching," said Peng Shangyue, the chairman of Jiangsu Jucheng Real Estate Co Ltd.

He added that there will be risks if he doesn't have enough money to pay back the high-interest loans if the number of buyers continues to decline.

Figures from property agency Centaline showed that in the first half of this year, major domestic developers raised more money than they did in the whole of 2012, with 43 billion yuan ($6.97 billion) coming from offshore sources.

In addition, research by Bank of Communications indicated that more than 70 percent of the increased funds raised in the first quarter flowed to the property market and local government financing vehicles.

According to He Zhicheng, chief economist at the Agricultural Bank of China, no corporate loans were flowing from commercial banks to the real estate sector in the first half, but developers still saw their capital jump by 32.1 percent year-on-year to 5.7 trillion yuan by end-June.

A flurry of facts and figures all point to the possibility of loosened controls on the developers' future financing activities on the A-share market. In July, quite a few A-share listed property companies suspended trading for "planned major events related to the company". Insiders explained that these companies are making preparations for refinancing or restructuring plans once the policy is adjusted.

Shanghai Jinfeng Investment Co Ltd is one of the companies that suspended trading. It is widely speculated that Shanghai-based property developer Greenland Group is seeking a backdoor listing on the Shanghai Stock Exchange through the purchase of Jinfeng Investment.

Zhang Yuliang, president and chairman of Greenland, said that such a possibility can't be ruled out, but declined to comment on the news, People's Daily Online reported.

Greenland has longed for a capital platform to support its rapid development. In May, it took control of Hong Kong-listed SPG Land Holdings Ltd after buying HK$3 billion ($386.8 million) worth of additional shares of the latter.

Su Xuejing, an analyst with China Securities, said that direct financing in the capital markets will help increase effective supply and guarantee the consistency and continuity of the market-based macro controls on the property market.

Analysts expect the property sector to have a sustained rebound following the removal of financing curbs for developers, which may come as an approval of their planned IPOs first.

"If the financing platform is reopened with more cash flowing to the property market in the near future, now is the best time to buy land, to avoid the increasing demand from developers when they obtain money," said Shao Wu, the chairman of Wenzhou Jingdu Realty Development Co Ltd.