The city of Chengdu, capital of southwest China’s Sichuan province, announced several measures including stepping up the quota of property loans and relaxing regulations on developers’ use of property pre-sale proceeds, in the first such package by a Chinese city to help developers ease a sector-wide cash crunch.
Chengdu’s local authority will help with financial institutions to increase the quota of real estate loans, accelerate loan approval and disbursement and ensure property developers and home buyers’ reasonable funding needs are met, according to a notice released by Chengdu’s local housing regulator on Wednesday.
The regulator asked banks to offer property development loan extension and lower interest rates for key companies in the sector, according to the notice.
Property developers can withdraw 95% of property pre-sale proceeds held in escrow accounts when housing projects are completed, and the proportion of proceeds that can be withdrawn when three-fourths of the projects is completed and when the roof-topping of the main body is completed was both raised by 5%, said the regulator, adding that the work for approving qualified pre-sale proceeds withdrawal should be completed in five working days.
The regulator will also set up an adjustment mechanism to encourage projects that meet requirement for pre-sale to enter the market, according to the notice.
Chinese real estate companies face a cash crunch due to regulatory curbs on borrowing, with China Evergrande Group at the centre of a crisis which has involved offshore debt defaults, credit rating downgrades and the dumping of shares and bonds.
The troubles have worsened in recent months, with prices falling in both new and resale homes in October amid deeper contractions in construction starts and investment by developers, weighing on China’s economic outlook.
Unlike Chengdu’s move, several local governments have actually tightened regulations on property pre-sale proceeds to ensures the funds are used for project construction and prevent properties being left unfinished. Since September, nearly ten cities including Chongqing, Dongguan, Zhuhai and Qingdao have tightened the regulations.
TF Securities said in a note on Tuesday that, prior to the ongoing liquidity crisis in the sector, pre-sale proceeds had been used by developers as interest rate-free loans which played a key role in the sector’s high-turnover and high-leverage business model. Since 2021, authorities have tightened regulation on pre-sale proceeds, bringing challenges to property developers’ cash flows.
Chengdu’s move came after new home and second-hand home sales in the city declined significantly. According to data from E-House China R&D Institute, second-hand home sales in Chengdu slid 20.1% in October from the previous month. Separate data from China Index Academy showed that new home sales in the city tumbled 54.2% in October from a month earlier to 1.12 million square meters.
Chengfu regulator’s move encourages property developers to accelerate home supply and sales to increase cash flows and meanwhile asks banks to support the real estate sector’s reasonable funding needs, indicating that the local government is worried about property developers’ liquidity risks, said Pan Hao, senior analyst at Beike Research Institutie.
“That is the first city to clearly step up the quota of property loans and it sends a strong policy signal,” said Yan Yuejin, director of Shanghai-based E-house China Research and Development Institution.
All kinds of measures are expected to be introduced to accelerate issuance of property loans to stabilize the housing market and prevent presold projects from being half-finished, Yan said, adding that “the slowdown in home sales in November will ease”.