Biggest-ever default looming for China’s property trusts

(ECNS) – Record-high payments will come due for China's real estate investment trusts (REITs) next year, but they may not have the money to pay back their investors, the Shanghai Securities News said on Thursday.

Trust products worth 203.5 billion yuan ($32.8 billion) will enter maturity in 2015, doubling this year's volume, according to Use Trust, a website specializing in the trust industry.

Funds raised through the sale of these products typically flow to weaker borrowers who struggle to obtain bank loans, especially small property builders. Therefore, small firms are more vulnerable to defaults, said Frank Chen, China head of CBRE, a Los Angeles-based real estate services company.

Data from the China Trustee Association show that as of March 31, unpaid REIT amounted to 115 million yuan ($18.5 million), which was 10.4 percent of all industries' unpaid trust products.

"China's REIT default is unavoidable this or next year," said Yao Wei, economist at Société Générale's Hong Kong arm. He said the industry is at a turning point, with a huge imbalance in demand and supply.

In March, Xingrun Real Estate Co., one of the biggest property developers in east China's Zhejiang province, was on the brink of bankruptcy with debt of over 3.5 billion yuan ($565 m).

The China Banking Regulatory Commission, concerned with the risk of more collapses in the property sector, said in June that it will keep a close eye on the financial conditions of real estate developers.

Fiona Cheung, head of Asia credit at Manulife Asset Management's fixed-income team, said trust defaults would continue to rise substantially, and that it won't surprise her if more Chinese property developers go bankrupt.

China is taking measures to crack down on off-balance-sheet lending, or shadow banking, which includes trust companies and wealth management products issued by banks.

However, given the amount of loans and lending that developers have, Yao said "the cooling property market will definitely take a toll on China's financial system."