The improvement in the credit environment is putting Chinese real estate developers in a better funding position, but potential risk factors should not be overlooked, according to a new CBRE report.
Additional financing channels have opened for real estate developers since 2014. Not only are banks more receptive to offering construction loans, the government is also actively promoting onshore bonds and asset-backed securities markets.
In order to provide sufficient liquidity to the market, the government has eased bank-lending underwriting critieria by cutting interest rates to historic lows and dropped the required reserve ratio by 3 percent since the begining of 2015, down to 17 percent.
In addition, the domestic bond market offers a much lower interest rate of 5.4 percent, compared with the 8.1 percent of the offshore bond market. With the lower cost of capital, many developers can now refinance their debt and push the maturity to between 2018 and 2020 to reduce their repayment pressure.
Developers are also benefiting from a revival of the national housing market in upper-tier cities, which gives them with sufficient cash flow to repay debt. For example, residential sales surged by 40 percent year-over-year in first eight months of 2016, more than quadrupling the 9 percent growth in the same period in 2015.
Future policy policy changes could affect the favourable financing environment though, one firm official said.
“Despite the availability of alternative domestic financing channels in China, developers should be prepared for the possibility of future policy changes as well as an interest rate reversion that may subsequently impact their cost of capital and debt maturity exposure,“ said Canon Yau, a senior director of CBRE Capital Advisors, Asia Pacific.
Among the looming questions is developers’ ability to repay their debt during the next wave of corporate bond repayment by developers; some $72.8 billion is scheduled to mature between 2018 and 2021.
The sustainability of the residential sector is also in doubt, with some developers submitting aggressive bids on land parcels. There is a high risk of some firms overleveraging their balance sheet, thereby affecting their repayment ability.