Foreign financing via bonds, and REITs, expand capital inflows into property
Overseas financing of Chinese real estate companies surged 107 percent year-on-year to reach $23.32 billion from January to April. Foreign capital mainly flowed in through purchase of bonds issued by Chinese realty firms.
This, industry insiders said, shows a growing foreign interest in Chinese real estate developers as well as local players' preference for fund-raising through asset securitization.
Chinese property operators were under greater pressure due to the slow down in sales in the first four months. Yet, some still decided to purchase more land.
That required huge financing, part of which was raised through bonds sold to foreign investors, Zhang Dawei, chief analyst of property consultancy Centaline, told the Economic Observer.
Since regulators have tightened rules to reduce financial risks, finance from banks and trusts has not been able to enter the property market for speculative investments.
So, overseas bond issuance became a popular option for companies looking for short-term financing, Zhang said.
During the last week of April, Poly Real Estate Group issued three-year medium-term notes used for the property rental business; Cifi Holdings Group issued senior notes valued at $500 million that will expire in 2021, whose interest rate was 6.875 percent; BBMG Corp also issued 1.5 billion yuan ($236 million) of chiefly short-term commercial paper.
Property financing generally has two forms: equity financing and debt financing. Companies tend to rely more on the latter to avoid losing management control and to reduce proportion of dividends, industry insiders said.
Compared with traditional debt financing modes, there is more policy support now for property asset securitization, especially in the property rental business. This is in line with the long-term strategy to guarantee housing for more people who cannot afford to buy a home of their own.
On April 25, the Ministry of Housing and Urban-Rural Development and the China Securities Regulatory Commission released a document to encourage developers to raise funds for the rental business through real estate investment trusts or REITs, a means of property asset securitization. The program expects to help ease surplus stock of rental assets, improve efficiency of capital and promote development of the rental market, regulators said.
By selling shares in a trust that owns a collection of buildings, a REIT can let shareholders enjoy the returns from rental income. "REITs feature stronger anti-inflation capability since real estate has proved itself to be a stable asset amid the fluctuations of market," said an investment adviser surnamed Li from a Shanghai-based real estate investment company.
"The relatively higher rate of return－about 6 to 7 percent－and lower risk can help ordinary people too to enjoy the profit from property industry's development."
Besides, it can lower leverage of property developers with less dependency on banks. In return, it can encourage more investment from banks to serve real economy, such as advanced manufacturing industry, Li said.
"Debt ratio can reach 70 to 80 percent in some listed property companies, and REITs can help maintain their cash flow by paying investors bonus with a continuous income from rental."
Though REITs have been widely used in some developed markets such as the United States and Singapore since the 1960s, they are still new in China.
By 2017, over 37 countries and regions have put forward REITs products worldwide, whose scale reached over $2 trillion in 2017, data from the National Association of Real Estate Investment Trusts in the U.S. showed.