Research firm, China Securities Research, has revealed that issuance of real asset securities tripled during the first seven months of 2017 compared to the same time last year. Some of China’s biggest real estate developers such as Vanke China, Country Garden and Beijing Capital Land have issued securities or are in the midst of making plans to launch them as a new mode of financing.
Bank loans, corporate bonds and senior notes are the traditional primary funding sources for Chinese developers, according to Joe Zhou, JLL’s Head of Research in China. He goes on to say that while bank loans will continue to remain the main source of capital as they provide an easier and quicker way of acquiring the needed capital, recent credit tightening policies have made this harder. As a result, developers are starting to explore asset securitization as a way to get around regulations.
Securities are usually non-recourse loans, providing off-balance sheet financing and resulting in lowering the debt-to-equity level of the parent company – which makes them particularly attractive to developers.
Securities also allow borrowers to tap into larger pools of capital with potentially lower interest rates.
“Asset securitization also unlocks the potential value of the underlying asset, as future cash flows and a portion of the asset appreciation for a specific time period are often bundled into the financial product – developers are likely to receive more money through asset securitization than from bank loans for the same underlying asset,” says Zhou.
On the uptick
But risks remain. Banks could overvalue the underlying assets or give a better credit rating to bond issuers to lower interest rates as China currently has no guidelines or regulations on reasonable-basis suitability analysis, an appraisal that accesses the risks embodied in structured products.
Still, it’s early days – regulations were only relaxed about two years ago and China is in the initial stages of commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS) and asset-backed securities (ABS) issuance.
Zhou expects that the market for securities will evolve to be more mature and regulated as asset securitization will continue to be popular with developers given the Chinese government’s determination to curb speculate investment. “China’s regulatory authorities will likely roll out policies to regulate the asset securitization business, making clear guidelines on asset assessments, credit ratings and market participants.”
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