MNI: China’s Property Financing Plans Confront Collateral Test

Beijing’s plans to revive the property sector by easing financing rules is being undermined by weak sales that have diminished the value of developers’ collateral needed to access finance, raising pressure on local governments to deliver more policy support to boost transactions, advisers and analysts told MNI.

Collateral is key for developers to access financing under the new “three arrows” regime, in which regulators have eased access to credit, encouraged bond issuance, and lifted a 12-year ban on equity financing to curb a slump in China’s property market that has delivered broadly weaker prices across China’s smaller cities.

Analysts are concerned that prices will remain weak without lower down-payments or the lifting of purchase restrictions, leaving developers hamstrung by the diminished value of project collateral that will hinder their ability to access these financing channels.

PLEDGES AREN’T LOANS

“For credit loans, developers are still required to provide good quality collateral,” said Xie Yifeng, Dean of China Urban Real Estate Research Institute, and who is a consultant to the Ministry of Housing and Urban-Rural Development.

A total of CNY4.58 trillion had been pledged by 46 banks to 108 developers through letters of intent by December 7, but most of those pledges have yet to be delivered. “These are not formal loan contracts - so far only Vanke and Longfor have actually obtained loans with good collateral,” he said.

Bond issuance has also proved difficult. Only nine developers had received the required credit enhancement by December 7 to sell about CNY100 billion in bonds, according to Xie’s calculations. On the equity side, eight developers planned to allocate new shares and 16 applied for non-public offerings to certain investors, which he expects will raise less than CNY50 billion by the end of this year.

“Though the three arrows have largely injected confidence in the market, they are too little to reverse the plight of developers’ external financing. More importantly, their major funding source of home sales are still falling sharply,” Xie said. (See: MNI: Chinese Developer Defaults Loom Despite Property Support)

He suggests the scale and scope of the “three arrows” should be expanded next year, coupled with the easing of restrictions on home purchases and mortgages.

GOOD COLLATERAL

Distressed developers will struggle to provide good quality collateral and third-party guarantees, said Kelly Chen, a Moody's vice president and senior analyst. This will limit their access to the credit and bond arrows, which will benefit state-owned developers and a small number of private developers the most.

However, she believes equity financing may offer some support to weaker firms. “We have seen companies like Greenland, who have extended maturity on their offshore payments, are planning to do private placement, so it seems the third arrow will also bring some benefit to the lower end of the market”.

REVIVING DEMAND

“It is still possible to see a relaxation of housing restrictions in first-tier cities given top policymakers’ call to prioritise economic growth next year, as seen during the recent Politburo meeting,” said Xie. (See: MNI: China Must Target Growth Above 5%, Refine Covid Controls)

However, Chen expects the government will “remain cautious” when easing restrictions in first-tier cities. Policies that increase home sales but avoid price speculation are more likely.

Chen highlights lowering of down-payment ratios for first time buyers in major cities as a policy that remains available to authorities. “This was done during previous downturns, but so far has only been rolled out in non-first-tier cities and for second property purchases. Down-payments went as low as 20% in previous downturns,” she said.

The lifting of Covid restrictions will be important. “Authorities will likely wait and see if this leads to a rebound in confidence,” Chen said.

Sustaining housing market demand will make the “three arrows” more effective, otherwise external funds will be unwilling to enter the sector, said Li Yujia, chief research fellow at Guangdong Urban & Rural Planning and Design Institute.