Several Chinese cities step up regulation on pre-sale proceeds, adding pressure on property developers’ cash flow

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Several Chinese cities have stepped up regulations on property developers’ pre-sale proceeds after an increasing number of property projects were suspended amid the sector-wide liquidity crunch.

Authorities in Shijiazhuang, capital of North China’s Hebei province, said on Monday that deposits, down payments and other payment from home buyers should be all put in special bank accounts and pre-sale proceeds can only be used for construction of the property projects buyers pay for, according to a statement on Monday.

After November 8, developers can only apply for pre-sale permit for a project after roof-topping works are finished, according to the statement, a tougher requirement compared to previous rules in which developers can apply for pre-sale for properties when the buildings reach one third of the designed height.

The authority will step up scrutiny throughout the construction, and will make adjustments to regulations on developers’ pre-sale proceeds to make sure the funds are used for the projects that are paid for and the projects are finished as planned.

On the same day, Haimen district in Nantong city, East China’s Jiangsu province, also pledged to tighten regulations of developers’ pre-sale proceeds, requiring banks and developers to make sure pre-sale proceeds are only used for the projects buyers pay for, in a move to safeguard home buyers’ rights.

Four days earlier, China’s capital city of Beijing had also tightened pre-sale fund regulations. Home buyers’ deposits and down payment are required to be put into a special escrow bank account before the transaction can be processed in the regulator’s online system, according to draft rules released by the city’s housing authority, the PBOC’s local branch and the city’s banking and insurance bureau.

In addition, the regulators will place no lower than 5,000 yuan per square meter of pre-sale proceeds under special watch, according to the draft rules, which marks a 43 per cent increase from the previous requirement.

When a property projects have major risks, local housing authority should take over the account of pre-sale proceeds or set up a separate government escrow account to guarantee security of the fund, according to the draft rules, after some developers embezzled pre-sale funds for other purposes and caused difficulties for the project construction.

In addtion, Luohe city in central China’s Henan province, Tianjin city and Suzhou city in East China’s Jiangsu province also held meetings recently about regulations of property developers’ pre-sale funds.

According to public information, since August this year, more than ten cities including Lianyungang, Sanming, Tianjin, Qinhuangdao, Zhenjiang, Hengyang, Zhangzhou, Lanzhou, Xuchang, Shanghai, Chongqing, Chengdu and Beijing have announced measures to tighten regulations on developers’ pre-sale funds.

Yan Yuejin, research director at the E-House China R&D Institute, said that the stepped-up regulations in many cities came as local governments are facing risks that many property projects could be left unfinished amid sector-wide cash crunch in the real estate sector. “Due to the ongoing liquidity crunch, many developers have failed debt repayment and a number of property projects have been suspended.”

“So far, we have seen four types of government measures to prevent risks of unfinished projects, including that commercial banks are told to increase credit support to the housing sector, developers are encouraged to sell undeveloped land to get cash back and guarantee construction of ongoing projects; local governments step up regulations on pre-sale proceeds, and they also gradually guide developers to sell finished projects,” said Yan.

The tightened regulation on pre-sale proceeds will inevitably add pressure on cash flow of property developers which had already been struggling in a liquidity crunch.

“The housing market have started to turn cold since the second half of the year and we had predicted challenges in cash flow, so we had launched promotion and offered discounts to accelerate cash collection. It worked well, but the funds that can actually returned to us was less that 30% of the total due to tighter regulations,” said an executive of a leading property developer based in East China.

“Under the latest rules, we are basically required to sell properties only after they are finished, which sharply lowered our capital turnover rate,” another real estate industry insider told Yuan Talks. “Most developers are facing double challenges of a halt of capital market financing and difficulties to get operational cash flow back.”

Yi Zhong li, a real estate financing research at the China Academy of Social Sciences, a top government think tank, wrote in a recent article that tightening regulations on developers’ pre-sale funds is an effective measures to protect home buyers’ rights and it will become a bigger trend.

In China, property developers are allowed to sell properties before the projects are finished and buyers will pay a portion of the amount on contract to developers, which are deposited in a special escort bank account. Most Chinese property developers are heavily dependent on pre-sales to secure their cash flows. The pre-sale system had been adopted since early 90s and has been running smoothly thanks to the largely upward trend of the property market and a relatively fragmented industry structure, which meant limited systemic risk.