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China Developers Set Up Funds as Cash Is Squeezed Amid Curbs

Chinese Developers Set Up Funds as Cash Is Squeezed
Chinese developers are seeking alternative off-the-balance sheet businesses as credit drained after the government’s two-year efforts to curb speculation in the real-estate market, including higher down payments and mortgage rates, and home purchase restrictions in 40 cities. Photographer: Qilai Shen/Bloomberg

Chinese developers are setting up property funds to diversify their sources of revenue as government real-estate curbs have led to a cash shortage.

Fosun International Ltd., a Shanghai-based company with interests in property, retail, mining and pharmaceuticals, is raising money for the second phase of a property fund after getting 3.7 billion yuan ($585 million) for the first, Co-President Fan Wei said at a conference in Beijing yesterday. Sino-Ocean Land Holdings Ltd., a state-owned developer, plans to start a 1 billion yuan fund this year for mergers and acquisitions, Deputy General Manager Li Zhenyu said in an interview.

Chinese developers are seeking alternative off-the-balance sheet businesses as credit drained after the government’s two-year efforts to curb speculation in the real-estate market, including higher down payments and mortgage rates, and home purchase restrictions in 40 cities. Relaxing the curbs could cause “chaos” in the market, Premier Wen Jiabao said last week.

“Raising money from the private sector opens up options for developers, but it’s a choice out of no choices,” said Albert Lau, Shanghai-based China head and managing director at Savills Plc, citing difficulties developers face to get bank loans and issue bonds. “Funds can join developers as joint venture partners so that to some extent also resolves the money problem.”

Chinese developers’ cash ratio dropped to the lowest since 2008 for the third quarter last year, according to data on 139 companies compiled by Bloomberg. The companies face a record amount of debt from non-bank lenders maturing this year and in 2013, according to China International Capital Corp., the country’s biggest investment bank.

Diversifying Assets

Fosun rose 0.2 percent to HK$4.77 at the close of trading in Hong Kong, while Sino-Ocean dropped 3.1 percent to HK$3.71. A gauge tracking property shares on the Shanghai Composite Index added 0.3 percent.

Sino-Ocean Land raised a $200 million fund with New York-based KKR & Co. in September and invested in a residential project in China, according to Li. It plans to invest in more projects in the coming half year, Li said, without elaborating.

“We are making efforts to diversify our investment, but our main business is still property development,” Li said in an interview in Beijing. “We also need to pay attention to our cash flow and resort more to leverage.”

China Overseas Land & Investment Ltd., the biggest Chinese developer listed in Hong Kong, said last month it set up a $500 million property fund with ICBC International Holdings Ltd. and APG, the Dutch pension asset manager, to invest in new residential property development in China.

Project Management

Greentown China Holdings Ltd., the biggest developer in eastern Zhejiang province, is working with real estate funds to invest in its own projects, Xu Feng, executive president of the developer’s property construction management subsidiary, said in an interview in Beijing this week without elaborating.

Greentown also is in talks with funds it didn’t identify to jointly seek investment opportunities, he added.

The company is building homes as a contracted builder for smaller developers to lower its capital expenditures, Xu said. It set up the property construction management subsidiary in 2010 and signed 67 contracts to build 15 million square meters (161 million square feet) of projects last year, he said. The projects are expected to achieve sales of 150 billion yuan within the next three to five years, bringing Greentown more than 10 billion yuan in revenue.

Chinese real-estate companies are selling the most dollar-denominated bonds in a year, paying investors more than twice the average global yield to replenish cash as their sales plunge.

Bond Sales

Agile Property Holdings Ltd. and KWG Property Holding Ltd. led $2.33 billion of issues since Dec. 31, the most since the first quarter of 2011, according to data compiled by Bloomberg. Agile sold five-year notes at 9.9 percent, while KWG Property’s 2017 securities paid 13.5 percent. Real estate companies yield an average of 3.9 percent globally, according to Bank of America Merrill Lynch indexes.

China’s February home prices posted the worst performance in a year with almost half of the cities monitored by the government falling from a year ago.

Developers need to control their balance sheets well as government curbs continue, and now is the best time to buy land as competing bids are scarce and many see opportunities in acquiring projects from trust companies that can’t pay back investors, Fosun’s Fan said.

“Almost everyone wants to set up fund, but it’s very difficult for Chinese developers to make it big because they are lacking fund managing experience,” said Savills’s Lau.

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