China property developers weigh legal risks in crowdfunding
Beijing yet to issue regulations governing crowdfunding, prompting big developers to seek legal advice as they explore new form of fundraising
As a rising number of mainland developers embrace crowdfunding as an innovative form of fundraising, they need to carefully keep an eye on legal risks, industry experts warn.
Pioneering developers including Country Garden and Dalian Wanda Group have tried to fund their projects by raising money from a large number of people, beyond the current regulatory limit of 200 investors, typically via the internet.
However, the mainland authorities have yet to license any crowdfunding platform and regulations governing such activities are still in the making, even though the government led by Premier Li Keqiang has generally been supportive.
"We have a group of lawyers to help us. This is something we must do to avoid legal risks," Wu Jianbin, chief financial officer of Country Garden, China's sixth-largest developer, told the South China Morning Post. "Legal risk is the biggest risk."
Country Garden announced on May 29 it would test crowdfunding in its first residential project in Shanghai. Wu said it was making similar preparations in other cities soon, including Beijing.
Through a platform of its second-largest shareholder, Ping An Insurance, Country Garden sells homes to investors and the money raised will be used to finance construction of the project.
That will help Country Garden boost its cash collection from sales. Meanwhile, investors, mostly potential home buyers, will have a bigger say in how big a home they would like to buy as well as the detailed layout.
That will enable developers to sell their projects much earlier than in their traditional practice, where government licences are needed to start the sales process. Marketing expenses will also be reduced and inventories will be less likely to build up.
"If it works, developers will actually be using individual investors' money to do their businesses," Wu said. The downside was that some profit margin would need to be sacrificed to make pricing attractive so that investors would be willing to hand in cash much earlier than before.
But developers would enjoy a higher internal rate of return and much higher capital turnover to expand their business scale, he added.
Dalian Wanda Group has raised 5 billion yuan (HK$6.2 billion) to fund the construction of five plazas through a crowdfunding product named "Stable Earner No1", via a subsidiary 99Bill. China's biggest commercial property developer said it would provide investors with an annualised return of more than 12 per cent, including rental income and property appreciation. It is closing a second phase of the fundraising today. Meanwhile, the company is also testing a system to make such investment units tradable.
"The sharp fluctuation in the current Chinese stock market has also spurred many investors to make adjustments to their individual asset allocation," Wanda said in a statement last Wednesday. "Wanda's commercial properties have maintained an average annual occupancy rate and rental collection rate of over 99 per cent for many years, which is also a sufficient guarantee for a stable return to investors."
Other developers to have tested crowdfunding include China Vanke and Sino-Ocean Land.