Chinese developers turn to asset securitisation as traditional finance dries up

The financing squeeze on Chinese developers, part of government efforts to rein in home price inflation, is pushing developers to turn to alternative financing models, including asset securitisation.

Asset securitisation, previously a strange term for developers, has become the talk of the town in Beijing . An average of three to four forums on the topic are now being held every week in the capital, drawing crowds of developers, securities brokers, trusts and law firms.

There is also a sense of urgency among developers as first-tier city governments have increasingly demanded that developers hold a certain portion of acquired land for leasing, running against the mainland developers’ predominant model of selling properties to recover funds quickly. In Beijing, where available land is rare, developers have to heed the government’s request to lease all of the space they promised to “self-hold” as landlords, and lease contracts cannot be longer than 10 years.

Asset-backed securities have therefore became imperative for developers, as they can’t sit idly on their property stock and recoup their investment slowly from ongoing rent payments.

“The self-hold requirement will boost leasable properties, and bolster demand for asset securitisation,” said Jin Wei, an investment banker with Huafu Securities.

In China, though, developers have to deal with the reality that legal and tax constraints have barred Real Estate Investment Trust (reits), a global standard for real estate financing. Instead, they rely on what is called “quasi” reits and commercial mortgage-backed securities (CMBS) for securitisation. In both cases, issuers use securities to transfer expected rental income to investors through a complex web of special-purpose vehicles. Unlike reits, these securities are sold privately to a few institutional investors.