China's real estate developers have been chasing after capital since banks tightened lending, but experts say it will take a long time before the country's property development market is properly financed.

"Legal and institutional barriers must be resolved before China can develop its real estate financing market," said Ray Huang, manager of the investment department of CB Richard Ellis' Beijing Branch.

CB Richard Ellis is a world-leading property service, consultant and financing company.

Real estate developers' thirst for capital began a few weeks ago, after the People's Bank of China (PBOC), the nation's central bank, released a tighter housing loan policy.

Under the new policy, interest rates on loans for luxury apartments, office buildings and villas will be increased and mortgages will be limited to finished housing.

Purchasers of unfinished homes will not qualify for a mortgage.

Meanwhile, commercial banks are permitted to lend money only to real estate developers with good credit histories, and only when developers provide at least 30 per cent of the capital.

PBOC officials have said the policy is designed to control the increasing number of bad loans, but the policy might also cut off the capital flow to most of China's developers.

An estimated 70 per cent of capital for real estate development in China comes from bank loans.

Gu Yunchang, secretary-general of the China Real Estate Association, was recently quoted by China Central Television (CCTV) as saying many small real estate developers have used up their capital reserves, and their developments might soon be acquired by big developers with sufficient capital.

Real estate developers, however, will find it almost impossible meeting the industry's huge demand for capital.

Some 381.7 billion yuan (US$46.1 billion) was invested in China's booming real estate sector in the year's first half. That marked a 34-per-cent increase, year-on-year.

When PBOC released the policy, Dai Genyou, director of the bank's monetary department, said the central bank would support real estate development, and would help the sector diversify its financing channels.

Besides bank loans, real estate developments in other nations are commonly financed by property funds, real estate development trusts, securitization of mortgages and corporate bonds issued by developers.

Except sporadic trials, such financing options do not exist in China.

A recent survey of real estate developers by CCTV indicated 57.5 per cent of respondents felt some level of financial difficulty, while 80 per cent preferred the establishment of a real estate development fund to solve their capital crises.

China Housing Industry Association (CHIA) is in the process of establishing the China Housing Industry Elite Fund (CHIEF). More than US$200 million is expected to be invested in the fund, which will be China's first Sino-foreign real estate fund.

The fund, of which most of the money will come from Hong Kong, will be accessible by year's end, said CHIA Vice-President Ivan Ko.

The number of developers applying for financing via the fund has risen since PBOC issued the policy, Ko told China Business Weekly.

Analysts, however, suggest the lack of specialized industry fund laws in China could pose a problem. Funds in China are mainly invested in the stock markets.

Despite the lack of legislation, foreign funds have been used to finance real estate development in recent years, Huang told China Business Weekly.

The lack of legal stipulations, in effect, means managers of these funds must be registered as real estate developers, which limits development their businesses.

On the other hand, lack of industry fund laws prevent domestic capital from entering the real estate market through funds.

Financing through real estate trusts, then, appears to be a reasonable option.

Beijing-based BA Investment Consulting, the city's leading real estate service provider, recently allied with Chongqing International Trust and Investment Co to offer real estate financing products.

Real estate trusts were launched last year, when Beijing's central business district (CBD) implemented a trust plan worth 1.5 billion yuan (US$181.1 million) through Beijing International Trust and Investment Co.

Before the central bank's recently released policy, market response to real estate trusts had been lukewarm, due to the higher interest rates.

Yet, real estate financing through trusts is also limited by an industry regulation that prohibits trust projects from receiving money from more than 200 consigners, said Zhang Xiaojin, president of BA Property Management Co Ltd, a branch of BA Investment Consulting.

The lengthy and strict ratification process also creates some difficulties for real estate developers trying to finance by listing in stock markets or by issuing corporate bonds.

Despite the lack of industry fund laws, CHIEF can still be operated in the Chinese mainland market, in accordance with current laws, Ko said.

Even if regulations are eased for industry funds and real estate trusts, financing will still be affected by China's lack of skilled talents and specialized institutes, Huang said.

"It will take a long time to develop talents and institutes able to bridge money and real estate development," Huang said.

(Business Weekly 08/26/2003 page9)