Relaxed rules for credit and mortgages could brighten a gloomy real estate market. But banks are treading carefully.
Zhang Yingguang and Xiao Hua, Caijing 4 January 2009
After a year of tightening real estate credit controls, China’s central government started switching gears in October with a series of stimulus policies aimed at boosting the country’s gloomy property market. But industry insiders remain cautious.
The central bank allowed commercial banks to begin offering more favorable loan terms for first-time homebuyers on October 22. Down payments and lending rates were relaxed.
In a follow-up December 17, the State Council announced another round of measures to ease rules for buyers of second homes.
The council, China’s cabinet, also asked financial institutions to boost credit support for builders of low-income housing, and promote mergers and acquisitions among property developers. It was the government’s first move to loosen credit controls for property development since 2007.
Nevertheless, industry insiders criticized the stimuli for what some said was a focus on encouraging consumption, rather than easing controls for property developers. And some experts claimed the government was far more cautious than the market expected.
Seeking Moderation
Times have changed since September 2007, when the central bank and the China Banking Regulatory Commission (CBRC) jointly announced that banks were required to raise down payments for second home buyers to 40 percent, and hike loan interest rates 10 percent over the benchmark.
Regulators wanted to stem housing market speculation. But their decisions were blamed for seriously restraining China’s property market.
And although the central bank’s credit-easing announcement in October offered hope, its follow-up announcement two days later – warning commercial banks about mortgage risks – darkened the skies again. The warning prompted commercial banks to think twice about loosening credit controls on housing loans. Some banks even suspended mortgage services.
A China Construction Bank (CCB) source told Caijing the bank stopped processing individual mortgages between the October policy announcement and November 26, when implementation guidelines were finalized.
According to an official at the Ministry of Housing and Urban-Rural Development, some local governments earlier tried to loosen controls on second home buying. But the central government hesitated.
On one hand, the ministry and local governments expected the central government to issue stimulus policies and ease controls on second home buying to encourage homeowners to upgrade and boost the property market. But on the other hand, CBRC and some senior officials worried about speculation.
“It has been difficult for banks to distinguish between genuine second home buyers and speculators,” the ministry official said. “Opinions also differ among different government departments.”
The State Council’s latest policies allow favourable loan terms for second home buyers whose first apartments are “considered smaller than average.” This is expected to draw a line between buyers who want to improve their living standards and speculators.
Bank Pressure
Banker attitudes toward property loans are complicated. Property projects are usually major loan targets for banks and can provide additional opportunities, such as mortgage business.
“A property loan deal is usually the equivalent of dozens of loans offered to small- and medium-sized enterprises for banks,” said a CCB source. At the same time, commercial banks are aware that property loans carry high risks.
Caijing learned that property related loans account for up to 27 percent of the all bank lending in China. And according to the China Real Estate Chamber of Commerce, bank loans account for up to 20 percent of developer funds, while advance payments and collateral account for up to 50 percent.
When market demand weakens and transactions decline, banks as well as property developers can be seriously hurt.
Although despite government support for easing credit, commercial banks have been cautious about lending to developers due to an uncertain market outlook.
“The current situation is unpredictable and nobody is sure about the future,” said the CCB source, adding the bank stopped offering loans to large-scale property projects that may have potential liquidity risks.
“Now, in addition to tightening project evaluations for loan applications, we are also investigating the financial status of each developer,” said a senior source at China Minsheng Bank. “Sometimes we even have to study all of their previous projects.”
At the same time, the weakening market has forced property developers to slow business expansions. Major developers such as Vanke and China Overseas Property cut back on new projects for 2009. Others such as Gemdale bought no new land plots in 2008.
“In fact, even though banks are willing to loan, developers now face weaker demand,” an industry insider told Caijing.
Property developers also face mounting pressure from rising debt. In November, the chairman of R&F Properties, Li Silian, revealed the company would extend payments for 8 billion yuan in short-term loans that were due. Meanwhile, the company’s long-term loans have reached 20 billion yuan.
The CCB source told Caijing “many developers facing a capital crunch have extended or transferred their short-term loans, and the total amount is quite astonishing.”
According to the latest stimulus policies, commercial banks are encouraged to offer credit to qualified developers for projects as well as merger and acquisition activities. Low-income housing projects are also encouraged.
The Minsheng source told Caijing the bank is working on details for implementing merger and acquisition loans. “Since some small- and medium-sized developers have seen disrupted capital chains, pushing forward mergers among developers will reduce the risks of emerging unfinished projects. It will be an important business for banks next year (2009),” the source said.
Financial Innovations
The government’s 2007 credit controls forced commercial banks to seek ways to lend to property developers while keeping loans off the books. One technique can involve the use of a Real Estate Investment Trust (REIT). But citing risk prevention, the government in 2007 banned banks from backing REITs.
Banks continued investing in real estate companies, sometimes by helping developers through back-door listings, private placements and other financial products.
Now, REITs are getting a second chance. The State Council’s Financial 30 list of financial market incentives released in December included first-time support for REITs as a way to diversify investment channels and stabilize the property market.
Caijing learned that CBRC and the China Securities Regulatory Commission are actively working on details for REITs. They hope to launch the system in 2009 on the interbank market and stock exchanges.
Innovative financial measures are seen as urgently needed to boost China’s property market. However, the U.S. financial crisis offers a warning about potential risks. Many experts are calling for close scrutiny of any innovative financial vehicle offered to the property industry.
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China Eases Controls for Property Market
Relaxed rules for credit and mortgages could brighten a gloomy real estate market. But banks are treading carefully.
Zhang Yingguang and Xiao Hua, Caijing
4 January 2009
After a year of tightening real estate credit controls, China’s central government started switching gears in October with a series of stimulus policies aimed at boosting the country’s gloomy property market. But industry insiders remain cautious.
The central bank allowed commercial banks to begin offering more favorable loan terms for first-time homebuyers on October 22. Down payments and lending rates were relaxed.
In a follow-up December 17, the State Council announced another round of measures to ease rules for buyers of second homes.
The council, China’s cabinet, also asked financial institutions to boost credit support for builders of low-income housing, and promote mergers and acquisitions among property developers. It was the government’s first move to loosen credit controls for property development since 2007.
Nevertheless, industry insiders criticized the stimuli for what some said was a focus on encouraging consumption, rather than easing controls for property developers. And some experts claimed the government was far more cautious than the market expected.
Seeking Moderation
Times have changed since September 2007, when the central bank and the China Banking Regulatory Commission (CBRC) jointly announced that banks were required to raise down payments for second home buyers to 40 percent, and hike loan interest rates 10 percent over the benchmark.
Regulators wanted to stem housing market speculation. But their decisions were blamed for seriously restraining China’s property market.
And although the central bank’s credit-easing announcement in October offered hope, its follow-up announcement two days later – warning commercial banks about mortgage risks – darkened the skies again. The warning prompted commercial banks to think twice about loosening credit controls on housing loans. Some banks even suspended mortgage services.
A China Construction Bank (CCB) source told Caijing the bank stopped processing individual mortgages between the October policy announcement and November 26, when implementation guidelines were finalized.
According to an official at the Ministry of Housing and Urban-Rural Development, some local governments earlier tried to loosen controls on second home buying. But the central government hesitated.
On one hand, the ministry and local governments expected the central government to issue stimulus policies and ease controls on second home buying to encourage homeowners to upgrade and boost the property market. But on the other hand, CBRC and some senior officials worried about speculation.
“It has been difficult for banks to distinguish between genuine second home buyers and speculators,” the ministry official said. “Opinions also differ among different government departments.”
The State Council’s latest policies allow favourable loan terms for second home buyers whose first apartments are “considered smaller than average.” This is expected to draw a line between buyers who want to improve their living standards and speculators.
Bank Pressure
Banker attitudes toward property loans are complicated. Property projects are usually major loan targets for banks and can provide additional opportunities, such as mortgage business.
“A property loan deal is usually the equivalent of dozens of loans offered to small- and medium-sized enterprises for banks,” said a CCB source. At the same time, commercial banks are aware that property loans carry high risks.
Caijing learned that property related loans account for up to 27 percent of the all bank lending in China. And according to the China Real Estate Chamber of Commerce, bank loans account for up to 20 percent of developer funds, while advance payments and collateral account for up to 50 percent.
When market demand weakens and transactions decline, banks as well as property developers can be seriously hurt.
Although despite government support for easing credit, commercial banks have been cautious about lending to developers due to an uncertain market outlook.
“The current situation is unpredictable and nobody is sure about the future,” said the CCB source, adding the bank stopped offering loans to large-scale property projects that may have potential liquidity risks.
“Now, in addition to tightening project evaluations for loan applications, we are also investigating the financial status of each developer,” said a senior source at China Minsheng Bank. “Sometimes we even have to study all of their previous projects.”
At the same time, the weakening market has forced property developers to slow business expansions. Major developers such as Vanke and China Overseas Property cut back on new projects for 2009. Others such as Gemdale bought no new land plots in 2008.
“In fact, even though banks are willing to loan, developers now face weaker demand,” an industry insider told Caijing.
Property developers also face mounting pressure from rising debt. In November, the chairman of R&F Properties, Li Silian, revealed the company would extend payments for 8 billion yuan in short-term loans that were due. Meanwhile, the company’s long-term loans have reached 20 billion yuan.
The CCB source told Caijing “many developers facing a capital crunch have extended or transferred their short-term loans, and the total amount is quite astonishing.”
According to the latest stimulus policies, commercial banks are encouraged to offer credit to qualified developers for projects as well as merger and acquisition activities. Low-income housing projects are also encouraged.
The Minsheng source told Caijing the bank is working on details for implementing merger and acquisition loans. “Since some small- and medium-sized developers have seen disrupted capital chains, pushing forward mergers among developers will reduce the risks of emerging unfinished projects. It will be an important business for banks next year (2009),” the source said.
Financial Innovations
The government’s 2007 credit controls forced commercial banks to seek ways to lend to property developers while keeping loans off the books. One technique can involve the use of a Real Estate Investment Trust (REIT). But citing risk prevention, the government in 2007 banned banks from backing REITs.
Banks continued investing in real estate companies, sometimes by helping developers through back-door listings, private placements and other financial products.
Now, REITs are getting a second chance. The State Council’s Financial 30 list of financial market incentives released in December included first-time support for REITs as a way to diversify investment channels and stabilize the property market.
Caijing learned that CBRC and the China Securities Regulatory Commission are actively working on details for REITs. They hope to launch the system in 2009 on the interbank market and stock exchanges.
Innovative financial measures are seen as urgently needed to boost China’s property market. However, the U.S. financial crisis offers a warning about potential risks. Many experts are calling for close scrutiny of any innovative financial vehicle offered to the property industry.
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