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With fewer financing options, Chinese property developers face difficult 2018

A lack of on- and off-shore funding sources is squeezing Chinese property developers and could lead to a wave of consolidation in the sector, industry experts said.

Most real estate developers have been shut out of the domestic bond market since late 2016, and now, Chinese regulators have made it harder for banks to lend to developers as part of the government's nationwide effort to reduce debt levels at companies and financial institutions. Trillions of yuan worth of bank loans made to real estate developers through irregular, off-balance-sheet channels are now under heightened scrutiny by officials eager to curb the potential property bubble and prevent systemic financial risks.

The China Banking Regulatory Commission's Shanghai bureau instructed banks in the city to restrict acquisition loans for buying land plots. Further, a number of Chinese banks have tightened their credit exposure to the property sector recently, Economic Information Daily reported Feb. 5. Hengfeng Bank Co. Ltd., a regional Chinese lender, suspended granting new credit quotas to property companies as of Jan. 29.

"Onshore borrowing has been tightened a fair bit," Christopher Yip, senior director of corporate ratings at S&P Global Ratings, said in an interview. Bank loans and trusts are among the few financing channels still available for property companies, he said, but the review process has become stricter, and financing costs are surging. The interest rate on trust loans previously was about 5% to 6%, he said, but developers now say they are paying 9% to 10%.

Yuzhou Properties Company Ltd Chairman Lin Longan noted during a media briefing that developers with domestic credit ratings below AA are finding it "extremely hard" to obtain financing from local banks.

Offshore issuances

Facing pressure from the credit crackdown in mainland China, mainland Chinese developers in January rushed to issue offshore bonds in Hong Kong. S&P Global Ratings data indicates that Chinese developers completed US$6.84 billion in overseas bond offerings in January, a significant jump from US$3.79 billion in the year-ago period. The January figure does not include China Evergrande Group's US$2.30 billion convertible bond issuance, which was announced Jan. 31.

That fundraising window, however, will not remain open indefinitely, David Hong, head of research at consultancy China Real Estate Information, said in an interview. "The intensive new issuances have absorbed most of the [overseas] demand for real estate bond offerings [by Chinese companies]," he said.

He noted that Evergrande, China's third-largest homebuilder, had to downsize its offering to US$2.30 billion of five-year convertible bonds from its planned original US$2.90 billion perpetual bond issuance. The offering also priced at 4.25%, above the estimated range of 3% to 4%.

Yip also cautioned that the recent weakening in global stock markets will weigh on developers' offshore financing plans in the coming months as market sentiment is not likely to be "supportive," making it more challenging to secure funding.

Market consolidation accelerates

The credit squeeze could also further widen the gap between the larger and smaller players, speeding up industry consolidation. "It won't be a surprise to see a batch of developers collapse," Hong said.

Also looming on the horizon is a wave of bond maturities starting in the second quarter. Chinese developers will see US$31 billion worth of onshore and offshore bonds maturing in 2018, which could more than double with the exercise of put options, according to data from Bloomberg News.

Larger companies are likely to have an easier time receiving needed financing, as lenders are usually more inclined to extend financing to leading developers amid tightened liquidity, Wu Bijun, CFO of Country Garden Holdings Co. Ltd., told reporters at a media briefing Feb. 2.

That also means larger developers will be in a better position to acquire even more land than their smaller, struggling competitors, which they could also be poised to take over.

Country Garden raised HK$23.4 billion through the placement of 460 million shares and the issuance of convertible bonds in Hong Kong in January. That fundraising was done to ensure the company will have adequate cashflow for the potential acquisition of cash-strapped smaller developers through 2018, Wu said.

"Many mid- and small-sized companies may face liquidity problems in 2018; we have already been approached by some developers who want to be acquired," she said.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.