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Trust Loans and Property Developers in China
Seeing how the Chinese government is restricting funding avenues to property developers in China, it would take a very brave investor to invest into the country’s property companies.
The latest emphasis by the regulator is to check on the financing by property developers using trust loans.
Trust loans are usually short-term debt that’s repackaged into investment products and sold to retail investors.
This reminds me of US subprime loans that were repackaged and sold to investors in a different way. In this case, the loans are made by the property developers themselves.
With half of the new debts taken by Chinese developers in the past year being trust loans, we might see a problem if developers are unable to get access to any form of credit for rolling over these loans. They will then be forced to cut their prices to clear their inventory in order to raise cash.
The high gearing of some of these developers doesn’t help.
I can still remember a particular SGX-listed REIT which relied solely on Commercial mortgage-backed security (CMBS) for its financing. When the credit markets were frozen up in 2008, they were unable to get any new CMBS to roll over their debt and had to raise capital urgently.
This article below pretty much sums it up the risks facing China property developers.