Offshore Financing by Property Firms on Track to Hit Record High

Tightened conditions for domestic financing amidst China’s ongoing deleveraging campaign have compelled the country’s real estate enterprises to look abroad for funding.

The latest data from Centaline Property indicates that Chinese real estate companies have seen a sharp rise in overseas financing, with figures on track to hit a record high by the year’s end.

As of end of November total overseas financing by property concerns reached USD$37.2 billion in total, for a 234% increase compared to the same period last year.

Regulators have issued a slew of policies since the start of 2017 to contain real estate financing by the banking, securities and insurance sectors, as Beijing endeavours to deleverage the Chinese economy as well as contain overheating urban property markets.

Tospur analyst Zhang Hongwei said that the 19th National Chinese Communist Party Congress report flagged further tightening of property sector financing when it made reference to “improving the two-pillar control framework of monetary policy and macro-prudential policy, deepening market reforms of interest rates and exchange rates, improving the financial regulatory system, and guarding the bottom line against the occurrence of systemic risk.”

“This indicates that real estate enterprise financial regulation will further tighten,” said Zhang to Economic Information Daily. “The difficulties of real estate enterprise financing will become more and more intense.”

A report from Tospur indicates that 40 of the listed real estate concerns that it monitors have seen a sharp drop in domestic financing, with a month-on-month fall of 24.14% to 53.153 billion yuan in October from 70.053 billion yuan in September.

“After the financing peak in June, total financing amounts for July and August saw continuous declines,” said Zhang.

“While there was an increase in the September financing amount compared to August, it still did not exceed the amount for July (81.615 billion yuan), and the October financing amount continued the decline, for a drop in absolute value of 9.055 billion yuan compared to August.”

Financing costs have also seen sharp increases, with public data from real estate concerns for October indicating that only one company had access to funding costs of under 5%, while others paid annualised rates of as high as  8.7%.

Equity financing accounted for only 2.3% of the total financing amount, with debt financing accounting for the remaining 97.7%, for an increase of over 10 percentage points compared to the preceding month, when bond financing accounted for 85.73% of total real estate enterprise funding.

“Domestic real estate financing continues to tighten, especially bank financing channels, with sustained declines in financing amount for the past four months,” said Zhang.

In tandem with the tightening of domestic financing channels, overseas financing by real setae concerns has seen ongoing gains.

“In terms of trends, domestic real estate enterprises have seen a reduction in their total financing, and a rise in funding costs has also become a trend,” said Centaline Property’s Zhang Dawei to Economic Information Daily.

“Under these conditions, many enterprises have started to search for financing opportunities overseas, despite US dollar fund prices also increasing.”

According to Zhang the rise in domestic financing costs is the key driver behind real estate enterprises turning abroad for financing, following a marked increase compared to an average rate of 4% in 2016.

“The main driver supporting explosive growth in the real estate market in 2016 was the various low-cost funding sources that real estate companies had, of which bonds was the financing source with the lowest costs.

“However, the difficulty of domestic bond issuance has increased for real estate enterprises, and funding costs have also been high.

“In terms of prices, the average yield for bonds issued by real estate companies domestically has been greater than 5% or 6% since the start of 207, and in June of this year the funding costs for some approached or exceeded 7%.”

Given the huge number of property market control policies issued by local Chinese governments in 2017, Zhang Dawei expects real estate enterprise financing to continue to come under pressure over the next six to nine months, and channels for bond issuance to further tighten.

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