Trust sector defaults tipped to rise as developers struggle

The mainland's property trust sector will probably suffer more defaults in the next two years as thousands of small developers will be squeezed out by intensifying competition amid policy tightening by the government, industry analysts said.

A record amount of funds has recently been raised by trust firms to help finance property projects as developers and investors have been encouraged by strong housing demand and rising home prices, despite repeated efforts from the government to cool the market.

However, some badly managed developers have failed to meet their debt obligations after being caught in a cash crunch as sales stalled following fresh tightening measures.

Media reports last month swirled around Sichuan Trust taking small developer Jindu Real Estate to court in Zhejiang province, demanding 121 million yuan (HK$153 million) after the developer failed to repay the debt when it came due in March.

New China Trust also resorted to a court case against another developer, Shandong Torch Real Estate, for the same reason.

"We will continue to hear about such scandals, although a systemic crisis is not likely," said Shuai Guorang, a property trust analyst with User-Trust Studio, a consultancy specialising in the trust industry.

"However, they point us to hidden credit and operating risks that we must not overlook."

The defaults have sounded alarm bells in the industry, prompting many trust companies and other asset managers involved in property financing to check their exposure.

"Our clients do not only want to analyse countrywide risks, they also want us to look into city-specific and company-specific dangers in the real estate market," said a senior consultant at a property information provider and consultancy in Beijing who declined to be named.

A blue book issued late last year by the China Real Estate Association and Rand Consultation in Beijing estimated that at least 30 per cent of Chinese developers will disappear in the three years starting from this year, leaving about 35,000 players by the end of 2015. At its peak, China had 87,881 developers in 2008.

Market consolidation has sped up in the past two years, with the big players becoming even stronger, amid falling profitability for the whole industry as severe government tightening measures increased financing and operating costs.

"Further consolidation will squeeze out medium-sized and small developers. But they will keep about two-thirds of the overall market share in China in the future, down from over 90 per cent now," the blue book said.

Chinese trust firms, with combined assets under management of more than 10 trillion yuan, have been raising record amounts of funds to help finance property firms in recent years. They provide vital lifelines for many mainland developers, particularly the private and small ones that are not on Chinese banks' lending lists.

In this year's third quarter alone, trust firms issued 167.5 billion yuan worth of funds on behalf of developers, up 97 per cent from the same period a year earlier, according to data from the China Trustee Association.

And coupon rates have also gradually crept up since the second half, to about 10 per cent now, in the face of tighter bank lending to the property sector.

Outstanding property trust funds totalled 894.2 billion yuan at the end of September. And fund launches have accelerated in recent weeks. In the week to December 1, 11 new property trust funds were issued, raising a total of seven billion yuan.

The increasing pace also means a rising amount of maturing funds, 197.4 billion yuan this year, up from 157.3 billion yuan last year and 54.4 billion yuan in 2011, according to estimates from User-Trust Studio.