Limiting Real Estate Loans

By WANG JUN

Limiting Real Estate Loans

By WANG JUN

China’s banking regulator tightens real estate credit to central enterprises to limit the number of players in the property development market

More than eight months after the Central Government issued an order for central enterprises whose core business was not real estate to withdraw from the property sector, many enterprises in question have been sluggish to adhere to, or have altogether ignored, the government directive. Only 16 central enterprises are authorized to get new property development loans in the future, but 78 additional enterprises have business dealings in the real estate market, according to a recent report inChina Securities Journal.

Commercial banks, the report stated, are not permitted to grant property development loans to other central enterprises whose core business is not real estate. Existing property loans to these unauthorized enterprises should be withdrawn in time.

The reluctance of the 78 non-real estate central enterprises to leave the property sector should come as no surprise. The real estate sector is a major contributor to central enterprises in terms of capital, and the property market in China has great potential to reap substantial pro fi ts for property owners,industrial experts said.

As an added measure, the government issued a “red list” of companies that commercial banks are allowed to grant loans to in order to accelerate the process of barring enterprises from certain sectors.

Uninvited sector guests

Statistics from the State-Owned Assets Supervision and Administration Commission show that the 78 central enterprises ordered to leave the real estate market have 227 real estate subsidiaries. According to market analysts, all central enterprises have combined assets of 660.7 billion yuan ($99.35 billion)in the real estate sector, and the 78 central enterprises in question have 99.1 billion yuan($14.9 billion) worth of assets in the market.

Since the order was issued last March,only seven enterprises, including China Ocean Shipping (Group) Co., China Aerospace Science and Technology Corp., China Petroleum and Chemical Corp. and China National Petroleum Corp., obeyed the government call and sold the shareholders’ rights of their combined 20 real estate subsidiaries. The other 71 enterprises have yet to take any action.

“The real estate industry has a pro fi t rate between 30 and 45 percent, much higher than the average profit rate of 5 percent in manufacturing,” said Zhu Xinyuan, a manager at the Guangzhou Jingweixing Research Center. This profitability provides all the reasoning central enterprises with the need to stay active in the property market.

Central enterprises aren’t the only ones entering the real estate market—some private home appliance companies and businesses involved in manufacturing are developing their own real estate ventures.

“Although some hi-tech industries may have even higher profit rates than the real estate industry, the risks in hi-tech industries are much higher. In contrast, the risks in the real estate industry are smaller and the re-turns are considerably greater,” Zhu said.

LONG HONGQING

Since the real estate market holds such great potential, enterprises leaving rashly could face larger thresholds and costs to reentering the market, industrial insiders said.The real estate market may for the time being remain stagnant because of macro-control measures, but most central enterprises are optimistic about the prospect of the market once government policies ease up.

“Most of the real estate subsidiaries of the 78 enterprises on the list are suffering losses. But for those subsidiaries that are bringing in real profits, what enterprise would be willing to give them up?” said an industrial insider.

On the other hand, some real estate assets are more loss-makers than profit-makers and should be cut loose from enterprises that don’t specialize in the property sector. On November 29, 2010, the property development arm of China National Nuclear Corp. (CNNC) sold all of its shareholders’ rights and debts of its subsidiary in Fuqing, Fujian Province, via the Tianjin Property Exchange. The selling price was 114 million yuan ($17.4 million). The price may have been a bit low, but CNNC was actually ridding itself of a heavy burden since the property development company had been losing money over the previous months.

In the red

With the red list in circulation, commercial banks are requiring their branches to only offer loans for property development to the 16 authorized central enterprises, a bank insider said.

The government regulator clearly prohibits state-owned and state-holding enterprises whose core business is not real estate to participate in commercial property development projects, said the bank insider. The state-owned assets supervisor will strengthen investigation and punishment measures and commercial banks should enhance examination and management of property loans granted to real estate enterprises.

The regulator is also arranging measures to prevent risks to authorized real estate enterprises, according to the bank insider. For those enterprises with high operational risks, such as purchasing land at high prices, concurrently engaging in multiple industries, expanding business operations and operating with excessively high debt ratios, the regulator will pay close attention to their operations, and if there are financial difficulties in these enterprises,commercial banks should adopt measures to ensure the timely withdrawal of the loans.Commercial banks will suspend granting or extending loans to property developers with malpractice records.

Questionable M&As

As the unauthorized enterprises face tremendous pressures for cash, those central enterprises whose core business is real estate will soon bene fi t from a tide of mergers and acquisitions, said industry insiders. For example, a source from China Merchants Property Development Co. Ltd. (CMPD)said the company is paying close attention to the property projects abandoned by other central enterprises, and negotiations with former rivals have already begun.

However, quali fi ed real estate enterprises are not so enthusiastic about reorganizing the property projects of other central enterprises. Among the projects for sale, only a project from China Aerospace Science and Industry Corp. and one from China National Petroleum Corp. have been successfully transacted.

Industrial insiders say central enterprises giving up property projects largely depends on how brisk the market is. A good market leaves little incentive to vacate the property sector. And those central enterprises that are being ordered to leave the real estate market are selling non-profitable or loss-making projects.

“The assets for sale have deteriorating fi nancial statements and a faint future. How can they attract other enterprises to take over and buy them up?” said an industrial insider.

To those subsidiaries with strong pro fi tability and abundant land reserves, their parent companies will certainly be unwilling to sell. What has yet to be seen is the government’s effectiveness in forcing certain central enterprises out, keeping other enterprises a fl oat and ensuring the stability of China’s property market.

The 16 central enterprises include:

● China State Construction Engineering Corp. Ltd.,

● China National Real Estate Development Group Corp. (a subsidiary of China Communications Construction Group),

● China Poly Group Corp.,

● Overseas Chinese Town Enterprises Co.,

● China Railway Group Ltd.,

● China Railway Construction Corp. Ltd.,

● Sinochem Group,

● COFCO Corp.,

● China Metallurgical Group Corp.,

● China Minmetals Corp.,

● Sinohydro Corp.,

● China Gezhouba Group Corp.,

● China National Travel Service (Hong Kong) Group Corp.,

● China Merchants Group,

● China Resources (Holdings) Co. Ltd.,and

● Nam Kwong (Group) Co. Ltd.