Property Developers Turn to Medium-Term Notes to Raise Funds Due to Limited Financing Channels
Luo Tao
/SOURCE : Yicai
Property Developers Turn to Medium-Term Notes to Raise Funds Due to Limited Financing Channels

(Yicai Global) May 17 -- China's property developers find fewer financing channels and rising financing costs against the background of recent property market restrictions and de-leveraging.

"We used to receive property financing projects regularly. However, the regulator has tightened the review of non-standard and corporate debt since last October. Very few financing programs have been approved these days," a financial rating agency employee told Yicai Global.  

The difficulty to issue bonds and rising funding costs has become a major issue for property developers. In terms of the latest state of the competition in the real estate industry, capital determines developers' ability to expand businesses. However, developers are facing growing pressure to raise funds.

"We only needed to provide our own funds worth 10 percent of the total land costs to purchase land. But now, we need to provide 25 percent," a real estate company executive told Yicai Global. That is because most of the financing channels, which were previously available in the property industry, have been banned recently.

Developers have turned to medium-term notes as many channels have been cut off. Real estate firms generally issue medium-term notes with a maturity of three to five years and an interest rate of 4.5 percent to 6.5 percent, Yicai Global found. Medium-term notes are debt financing instruments issued by non-financial corporations in the interbank bond market in tranches, with agreed repayment for principal and interest within a certain period.

Under the current circumstances, market-based financing methods such as domestic bank loans, medium-term notes and overseas bond issuance have become important ways for property developers to raise funds, Zhang Hongwei, director of Tospur's research unit, told Yicai Global.

"Developers need to borrow money and banks need to grant loans. Issuing medium-term notes have become a natural option for real estate firms, especially when financing channels have become fewer," an investor relations manager at a property company told Yicai Global.

Commercial banks are still tightening financing policies of late, which will weigh on developers' future strategic expansion, said Yan Yuejing, director of E-house China R&D Institute. Short-term capital gap for property developers are set to increase, and practices such as equity pledge will become more common as developers will have to resort to such practices to secure funds.

For real estate companies which rapidly expand their businesses, rising funding costs will lead to higher industry risks, and they will be under growing pressure to sell inventories in the coming months, insiders said.

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Keywords: Bank , FINANCING , Real Estate Developer , Risk , Commercial Paper , Deleverage