Developers look outside China for financing

Mainland property firms increasingly went offshore for their funding needs in the first half of this year, attracted by lower interest rates

PUBLISHED : Monday, 15 July, 2013, 12:00am
UPDATED : Monday, 15 July, 2013, 5:43am

The mainland's large and medium-sized developers turned to offshore markets for financing in the first half of this year, taking advantage of lower funding costs and strong liquidity.

The trend is expected to continue in the second half, said analysts, although developers could face a more challenging loan market next year as the US Federal Reserve weighs an end to its bond-buying programme - a move that will tighten liquidity in financial markets and trigger a rise in interest rates.

Offshore loans registered to Hong Kong borrowers reached US$26.1 billion in the first six months, up 17 per cent on the same period last year despite the fact that many local borrowers, including developers, tapped the bond market for their financing, according to data provider Thomson Reuters.

In a separate survey, property data provider China Real Estate Information Corp said major mainland developers' syndicated borrowings denominated in both Hong Kong and US dollars jumped to the equivalent of about HK$40 billion in the first six months, up about 16 per cent when compared with the same period last year.

Steve Chiu, the chief financial officer and company secretary of small developer Yuzhou Properties, said borrowing offshore had become more attractive since the beginning of the year because of strong liquidity.

"Two years ago, only big players such as China Overseas Land or China Resources could get syndicated loans overseas," said Chiu. But since the beginning of the year, smaller developers with BBB ratings from international ratings agencies were also able to obtain loans from banks due to strong liquidity.

In April, Fujian-based Yuzhou announced a US$101.8 million equivalent three-year dual currency transferable term loan facility carrying an interest margin of Hibor plus 5.75 percentage points per annum. Small player CIFI last week also announced a US$156.5 million three-year syndicated loan to strengthen its war chest for future business development.

Bigger player Longfor Properties signed a HK$7.67 billion equivalent, four-year club loan agreement last week, at an annual interest rate of Hibor plus 310 basis points.

The cost of funding on the offshore loans is lower than construction loans arranged on the mainland, where such loans are presently payable at a rate of 6 to 7 per cent. But the proceeds are limited for use in construction and may not be used for land purchases.

Apart from syndicated loans, developers were active in issuing bonds at maturities ranging from five to 10 years.

Interest payable on bond facilities was higher than on loans, said Chiu, but bonds were repayable over a longer maturity period than syndicated loans, which were generally repayable in about three years.

Borrowers are now concerned about the impact on capital markets of the Federal Reserve's caution that it is weighing an end to its asset purchase programme. The statement saw a jump of about 100 basis points in the 10-year long-term Treasury bond rate to about 2.7 per cent.

"But the rate has since shown signs of stabilising," said Chiu, who added that he expected more loan deals by other developers in the second half.

Lee Wee Liat, the regional head of property research at BNP Paribas, said the medium-term outlook for financial markets was not promising.

"We are at a turning point. Interest rates are going to experience a structural increase and next year, smaller developers will find it difficult to raise syndicated loans," Lee said.

If that were to happen, it was likely to put a squeeze on real estate firms, warned Alfred Lau, a property analyst at Bocom International, since rapid economic development in China would require them to raise more finance.