By staff reporter Ci Bing

(Caijing Magazine) A dry spell for capital access turned most Chinese real estate developers skittish in early 2009.

But by June, developer boldness was back. That was clear on June 30 when Franshion Properties (HKSE: 00817) agreed to pay 4.06 billion yuan for a 15-hectare plot in eastern Beijing for a residential-commercial complex.

A credit easing has emboldened Franshion and other developers. According to the National Statistics Bureau (NBS), real estate development loans around the country rose 32.6 percent in the first six months this year compared with the same period 2008 to 538.1 billion yuan. Retail mortgage loans totaled 282.9 billion yuan, up 63 percent year-on-year.

And as capital flowed more freely, real estate sales volume and prices have risen. For example, average prices for residential housing in Guangzhou recently reached highs not seen since 2007. Buyers in June were paying 9,676 yuan (US$ 1,444) per square meter for new housing, and 8,000 yuan (US$1,194) per square meter for previously owned units.

Better access to capital has encouraged home buyers as well as property investors such as Franshion, owned by state-owned industrial conglomerate Sinochem, reflecting banker reaction to the central government's loose monetary policy.

The policy paved the way for banks to issue 7.37 trillion yuan in new loans in the first half 2009, up 4.92 trillion yuan from the same period last year. Most of the new credit was issued to state-owned enterprises, including developers such as Franshion.

Second-Home Loans

CBRC's notices, the first of which appeared in April, repeated previously issued policies about mortgages for second-home. Then a CBRC notice June 2 called for "strengthening" mortgage loan risk management, and said commercial banks would be required to conduct strict credit reviews as part of their mortgage-writing procedures.

Central government regulators decided to tighten lending policies for second homes to send specific signals to the market, said Li Wenjie, northern regional general manager of Zhongyuan Real Estate. For example, policymakers were concerned that some local governments apply to second mortgages the same favorable policies they use to promote initial housing purchases.

For many commercial banks, however, property developer loans are safer and more profitable than manufacturing company loans. An official with ICBC's finance department told Caijing that issuing credit to developers can help banks encourage all kinds of related business, in areas ranging from wealth management to credit cards.

Liquid Developers

So far this year, developers China Greentown (HKSE: 03900), SOHO China, Shimao Property (HKSE: 00813), Capital Land, and Shui On Group have each obtained more than 10 billion yuan in bank loans. Meanwhile, regulators with the China Securities Regulatory Commission (CSRC) have approved cash-raising stock offerings proposed by Poly Real Estate (SHSE: 600048), Capital Development (SHSE: 600376) and Gold Land (SHSE: 600383).

This flurry of activity followed a recent State Council notice calling for healthy development of the real estate market. The property sector is not on the central government's list of 10 targets for industrial adjustment under the economic stimulus program launched last fall. But the State Council's interest has prompted local governments and financial institutions to write relevant guidelines into their programs designed to promote the market.

For example, the Beijing municipal government is encouraging commercial banks to provide credit for the construction of low-income residential housing. The policy also allows developers to postpone land lease payments to the local government. And some financial institutions have offered loan payment extensions to property developers.

State-owned Enterprise Support

In recent months, state-owned real estate companies have been the major land buyers in China's biggest cities including Beijing, Shanghai, Guangzhou and Shenzhen.

Among the most active at land auctions were Poly Real Estate and CR Land (HKSE: 01109), each of which is connected to the state. State-owned MCC, China Railway and China Electronics Technology Group Corp. joined auctions as well.

Franshion emerged as a new property king almost overnight. The developer, listed on the Hong Kong exchange since August 2007, owns several well-known properties including Shanghai's Jin Mao Tower and the Beijing World Trade Center.

Franshion's annual report said the company had HK$ 5 billion in cash at the end of 2008. Early this year, it raised HK$ 2.7 billion through an equity allotment, and obtained 24.5 billion yuan in bank credit. Sinochem owns a 69 percent stake in Franshion.

Challenges Ahead

But better cash flow and the strengthening of state-owned real estate companies tell only part of the story. China's real estate sector this year is also facing challenges. One is overcapacity.

For example, China's export manufacturers are grappling with excess production space, which means state-owned enterprises are not likely to build more factories, said Pan Shiyi, chairman of SOHO China. But they still have large pools of capital, which some choose to invest in real estate and through land purchases.

Yet the pace of land buying has slowed in the past year. NBS data indicates that, during the first six months this year, real estate developers bought 136 million square meters of land, down 26.5 percent year-on-year. NBS also tallied a total 479 million square meters of new construction for the period, down 10.4 percent year-on-year.

Wang Cheng, a consultant with real estate adviser DTZ Rockwood, said the declines in land purchases and new construction reflect market expectations for the real estate sector. If supplies continue to fall, though, property prices will rise.

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