China banks withdraw from offering apartment-backed loans

Some Chinese banks have halted lending to individual borrowers planning to use apartments built on commercial or office landas collateral, and dropped preferential interest rates for first-time home buyers, according to banking sources.

Making such apartments ineligible as collateral – further squeezing the value of the previously popular product after banning its sale to individuals – is the latest move in a series of efforts to crack down on their demand, and meet the China banking regulator’s call to stem property-related financial risk.

Several sources with different banks told the South China Morning Post they had recently been told to halt such apartment-backed lending to individuals.

Beijing banned the sale of flats converted from commercial or office space

One credit officer with Minsheng Bank of China, who declined to be named, said it started the move a week ago, and it is not just limited to Beijing, where local officials have declared war on the selling of such apartments in late March, but being implemented right across China.

Another credit officer with the Shanghai branch of Industrial and Commercial Bank, the nation’s largest lender, said the bank had not stop apartment-backed loans, but has already halted lending for buyers of converted apartments.

Shanghai has not imposed any official policies, like Beijing, banning bank from lending to buyers of converted apartments.

Beijing officials launched a prolonged clampdown on converted apartment sales, which previously made up 60 per cent of new home sales, on March 26.

Under tough restrictions, any new supply cannot now be sold to individuals, and spaces are not being allowed to be divided into units smaller than 500 square metres to prevent individuals buying the units under the name of corporations.

For existing apartments, only people with a Beijing hukous – and non-hukou holders who have paid social security for five consecutive years and do not already own a home – can buy them.

Additionally, banks are banned from extending loans for the purchase of such apartments, which means buyers will only be able to use their own cash.

Agents are also banned from listing such apartments, making it difficult for owners of existing apartments to sell them. Some 38 estate agency branches across the city have already been shut down for listing such apartments.

Losing collateral status will be a further blow to the value of these types of property as even though owners can’t sell them, they can still pledge them to borrow more money, to buy ordinary homes or other investment. Now the only way to cash in is rent.

Turnover of such units has been in free fall, tumbling from 2,265 units in the pre-curb week to just 62 units in the first week after the curb (March 27-April 2), and 53 units in the second week, according to Centaline data. Average transaction prices slumped to 34,828 yuan per sq m from 47,727 yuan per sq m in the latest week.

In Shanghai, banks are quietly even raising borrowing costs for first-time home buyers, a group that are widely deemed as buying homes mainly for living rather than speculation.

Bank of Communications, one of the major big-five state-owned banks, raised its borrowing cost for first-time home buyers this week and is no longer offering a 10 per cent discount on mortgage rates, which used to be standard for major banks for first-time home buyers. Instead, new home buyers are entitled to a discount of 2 to 9 per cent.

The lowest preferential rates are available to those who borrow at least 2 million yuan from the lender, said the bank’s credit officer.

China Merchants Bank, too, has raised borrowing cost for first-time home buyers, who are entitled to a 5 per cent discount since last week, instead of the previous 10 per cent.

ICBC is also poised to squeeze preferential rates for first-time home buyers, one of its credit officers confirmed.

BoCom, ICBC and Merchants Bank would not comment on Friday.

China banking regulator urges lenders their risks

“It won’t be a surprise to me to see an across-the-board tightening on mortgage policies in tier-one cities in future,” said Li Weiyi, a mortgage analyst at financial data provider Rong360.

“More banks might follow suit, either raising minimum payments or borrowing costs for first-time home buyers in the latest round of tightening.”

In a document released by the China Banking Regulatory Commission, property-related risk is listed as one of the ten risks that banks should be monitoring most closely.

Lenders are being asked to keep an eye on all kinds of property-related loans, including developers loans, mortgages, bonds and property-backed loans.

Liao Zhiming, a banking analyst with Tianfeng Securities, said the document is a general guideline and more concrete implementation methods are expected to be rolled out in coming months, which would really impact banks.