Chinese property developers’ financing plunged in August amid tightening regulations, deleveraging efforts

Chinese real estate developers’ total financing plunged in August amid tightening restrictions on lending to the sector and homebuilders’ continued deleveraging efforts to meet regulatory requirements.

Property developers’ total financing was 1,172.8 billion yuan last month, slumping 50.3 per cent from a year earlier and plunging 42.4 per cent from the previous month, according to data from the China Index Academy, one of the country’s largest independent real estate research firms.

Notable, that marks the first time this year that real estate developers’ financing through all channels have declined on both year-on-year and month-on-month basis.

The sector’s average borrowing cost stood at 5.51 per cent last month, down 0.54 percentage points from a year earlier, but up 0.46 percentage points fro a month earlier, according to the data.

In particular, property developers’ financing through offshore bonds and asset-backed securities (ABS) plunged the most. Their financing through offshore bonds slumped 93.5 per cent in August from the same period last year and tumbled 91.4 per cent from the previous month. Their ABS financing slumped 50.2 per cent in August from a year earlier, down 70.6 per cent from the prior month.

In the first eight months of the year, property developers’ total financing amounted to 1.43 trillion yuan, falling 14.4 per cent from the same period last year, with August’s volume accounting for only 8.2 per cent of the total, showed the data.

The sharp decline in homebuilders’ financing was partly due to the authority’s tightening scrutiny on lending to developers in a move to deleverage the sector and also attributable to the downward trend in the sector, which turned investors increasingly cautious over real estate-related investment, said Liu Shui, deputy research director at the China Index Academy.

While homebuilders’ interest-bearing debts have been declining, there remains a distance before the sector meets the regulatory requirements and in addition, the strengthen of the sector’s debt cut this year is weaker than that in the second half of last year, they need to try harder to curb new debt growth, said Liu.

As August is usually a peak season for real estate developers’ financing in previous years before a traditional lower time in September – October, the weakness last month may indicate more uncertainties in their financing for the rest of the year, Liu added.

Separate data from Beike Research Institute, another real estate consultancy, showed that in the first eight months of the year, property developers’ total onshore and offshore bond financing reached 699.9 billion yuan, down 21 per cent from the same period in 2020.

While lower financing helps developers to shrink their debt size, it also means rising pressure to repay maturing debt. Data from Beike Research Institute showed that developers saw about 119.6 billion yuan of onshore and offshore bonds mature in August, up 3.3 per cent from the prior month and rising by 21.2 per cent from a year earlier, with net maturing debt at 62.5 billion yuan.

The declining borrowing came after China imposed a new concentration management system to limit banks’ property-related lending and a so-called “three red lines” to cap developers’ borrowing and leverage level.

The real estate sector is currently under mounting pressure as China Evergrande Group, one of the country’s biggest homebuilders, is struggling to avoid defaulting on billions of dollars of debt.

Evergrande ran into a cash crunch after its borrowing to build apartments, office towers and shopping malls collided with pressure from Beijing to reduce corporate debt loads that are seen as a threat to the economy.

Evergrande’s struggle has prompted warnings that a broader financial squeeze on real estate — an industry that propelled China’s explosive 1998-2008 boom — could lead to trouble for banks and an abrupt and politically dangerous collapse in economic growth.