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Chinese Developers Face Pinch
By DINNY MCMAHON And ESTHER FUNG
BEIJINGHounded by loan sharks, the once-highflying real-estate king of Baotou, a boom city of about two million people in Inner Mongolia, finally reached his breaking point.
Last month, Wei Gang checked into a hotel and hanged himself, according to local police.
China Real Time Report
China Indomitable Developers Passing the Debt Parcel
Mr. Wei's suicide comes as China's smaller property developers face mounting financial distress.
Standard & Poor's Ratings Services says China's more than 80,000 developers could face a battle for survival as a wave of short-term property loans fall due this year.
The risk is that these businesses could become so desperate they will either default, leaving behind half-finished projects at a time economic growth already is slowing, or start offering steep discounts, triggering a price war.
Some developers, like Mr. Wei, turned to loan sharks who illegally charge interest rates of up to 5% a month.
We're drinking from a fire hose. We can't handle the volume. Greg Peng, president of property investment fund AT Investment Management
But the greater problem lies with developers who rely for funding on trust companies, a type of wealth-management firm that took over as the main source of legal new lending to the property sector after Beijing reined in banks last year. In recent months, China's banking regulator has all but stopped trust companies from rolling over loans to developers.
Securities brokerage China International Capital Corp. estimates that about 223 billion yuan ($35 billion) of trust loans are due to mature this year, almost half of which reach maturity between July and September, with a further 282 billion yuan due next year. Combined, that represents almost 75% of all outstanding trust financing to the property sector at the end of 2011.
Traditionally, Chinese banks have been reluctant to force anyone into bankruptcy. But China's trust companies are different, demanding that developers back loans with big amounts of collateral, sometimes up to three times the actual value of the loan, as insurance against default. Still, trusts prefer the developers to make repayments on time, despite the potential windfall default would bring, as they need to deliver a return to investors promptly at the maturity of the loans.
In recent months, some of China's better-financed developers, those with better access to bank loans and bond markets, have waded back into the land market to replenish low inventories and take advantage of prices that are well off their 2010 peaks. But with property sales between January and May down 9% from a year earlier, many developers don't have the income to repay maturing trust loans and are looking for cash elsewhere.
Developers are seeking financing from a crop of newly formed real-estate investment funds, as well as the asset-management corporations, also known as "bad banks," that originally were set up more than a decade ago to dispose of nonperforming loans at China's banks.
"We're drinking from a fire hose. We can't handle the volume," said Greg Peng, president of property investment fund AT Investment Management, about the number of developers that have approached him for capital.
Mr. Peng, who used to run Merrill Lynch's property investments in China, closed the first part of his fund in the third quarter of last year, raising one billion yuan from domestic investors, and plans to have invested three billion yuan by the middle of next year. His fund expects to return investors at least 25% annually, significantly higher than trusts, which typically range between 10% and 20%. The fund targets projects near completion and demands developers put up large amounts of collateral to ensure the fund a hefty return even if property values fall sharply.
Mr. Peng says that last year developers "were still somewhat resistant to our rates." He adds: "Now they don't see a light at the end of the tunnel."
Trust-company managers, fund executives and analysts say China's four asset-management corporations have emerged as by far the biggest players in the distressed property market, and without their involvement trusts would be short the cash they need to repay investors by a lot. China's trust companies are mainly controlled by banks, other major state-owned firms or local governments, although some foreign financial institutions hold minority stakes. At the end of March they had 5.3 trillion yuan of assets under management, more than double the amount two years ago.
The "bad banks"China Cinda Asset Management Co., China Huarong Asset Management Corp., China Orient Asset Management Corp. and China Great Wall Asset Management Corp.were set up at the turn of the century, but where similar institutions overseas have been shut down after disposing of bad loans, China's "bad banks" have evolved into some of the biggest, most diversified financial institutions in the economy.
One of the ways the bad banks get involved is by stepping in before a developer defaults, effectively taking over the trust loan, albeit with higher returns and a longer life. They also can step in and buy a developer's other outstanding debtssuch as accounts payablewhile demanding collateral in return, which similarly frees up the developer to repay its trust loan.
Still, the asset-management firms are unlikely to have the appetite to bail out every trust loan. "Our aim is not to help develop property, but to resolve the short-term liquidity squeeze," said Li Xin, a vice president at China Orient.
Mr. Wei's story highlights the desperation of smaller property developers. The chairman of what domestic real-estate agents said was the biggest developer in the northern Chinese city of Baotou, he struck it rich in 1996 by helping rebuild the city following an earthquake. His flagship development was a five-phase mid- to high-end residential project that was slated for completion next year.
But he borrowed heavily from loan sharks, and started to run into repayment difficulties this year, according to a friend of Mr. Wei's and people in Baotou's real-estate industry. One beating from the loans sharks left him in the hospital for a month, according to the friend.
On June 6, Mr. Wei's body was found hanging in his room at the Jintuo Hotel in Donghe, according to police. "I was astonished to learn about Wei's death," the friend said. "I could never imagine he would choose to kill himself."
In a recent report, Standard & Poor's said it expects developers with large trust loans to meet their debts by aggressively cutting prices or selling assets, tipping average prices down 10%.
Chinese Developers Face Pinch - WSJ.com
By DINNY MCMAHON And ESTHER FUNG
BEIJINGHounded by loan sharks, the once-highflying real-estate king of Baotou, a boom city of about two million people in Inner Mongolia, finally reached his breaking point.
Last month, Wei Gang checked into a hotel and hanged himself, according to local police.
China Real Time Report
China Indomitable Developers Passing the Debt Parcel
Mr. Wei's suicide comes as China's smaller property developers face mounting financial distress.
Standard & Poor's Ratings Services says China's more than 80,000 developers could face a battle for survival as a wave of short-term property loans fall due this year.
The risk is that these businesses could become so desperate they will either default, leaving behind half-finished projects at a time economic growth already is slowing, or start offering steep discounts, triggering a price war.
Some developers, like Mr. Wei, turned to loan sharks who illegally charge interest rates of up to 5% a month.
We're drinking from a fire hose. We can't handle the volume. Greg Peng, president of property investment fund AT Investment Management
But the greater problem lies with developers who rely for funding on trust companies, a type of wealth-management firm that took over as the main source of legal new lending to the property sector after Beijing reined in banks last year. In recent months, China's banking regulator has all but stopped trust companies from rolling over loans to developers.
Securities brokerage China International Capital Corp. estimates that about 223 billion yuan ($35 billion) of trust loans are due to mature this year, almost half of which reach maturity between July and September, with a further 282 billion yuan due next year. Combined, that represents almost 75% of all outstanding trust financing to the property sector at the end of 2011.
Traditionally, Chinese banks have been reluctant to force anyone into bankruptcy. But China's trust companies are different, demanding that developers back loans with big amounts of collateral, sometimes up to three times the actual value of the loan, as insurance against default. Still, trusts prefer the developers to make repayments on time, despite the potential windfall default would bring, as they need to deliver a return to investors promptly at the maturity of the loans.
In recent months, some of China's better-financed developers, those with better access to bank loans and bond markets, have waded back into the land market to replenish low inventories and take advantage of prices that are well off their 2010 peaks. But with property sales between January and May down 9% from a year earlier, many developers don't have the income to repay maturing trust loans and are looking for cash elsewhere.
Developers are seeking financing from a crop of newly formed real-estate investment funds, as well as the asset-management corporations, also known as "bad banks," that originally were set up more than a decade ago to dispose of nonperforming loans at China's banks.
"We're drinking from a fire hose. We can't handle the volume," said Greg Peng, president of property investment fund AT Investment Management, about the number of developers that have approached him for capital.
Mr. Peng, who used to run Merrill Lynch's property investments in China, closed the first part of his fund in the third quarter of last year, raising one billion yuan from domestic investors, and plans to have invested three billion yuan by the middle of next year. His fund expects to return investors at least 25% annually, significantly higher than trusts, which typically range between 10% and 20%. The fund targets projects near completion and demands developers put up large amounts of collateral to ensure the fund a hefty return even if property values fall sharply.
Mr. Peng says that last year developers "were still somewhat resistant to our rates." He adds: "Now they don't see a light at the end of the tunnel."
Trust-company managers, fund executives and analysts say China's four asset-management corporations have emerged as by far the biggest players in the distressed property market, and without their involvement trusts would be short the cash they need to repay investors by a lot. China's trust companies are mainly controlled by banks, other major state-owned firms or local governments, although some foreign financial institutions hold minority stakes. At the end of March they had 5.3 trillion yuan of assets under management, more than double the amount two years ago.
The "bad banks"China Cinda Asset Management Co., China Huarong Asset Management Corp., China Orient Asset Management Corp. and China Great Wall Asset Management Corp.were set up at the turn of the century, but where similar institutions overseas have been shut down after disposing of bad loans, China's "bad banks" have evolved into some of the biggest, most diversified financial institutions in the economy.
One of the ways the bad banks get involved is by stepping in before a developer defaults, effectively taking over the trust loan, albeit with higher returns and a longer life. They also can step in and buy a developer's other outstanding debtssuch as accounts payablewhile demanding collateral in return, which similarly frees up the developer to repay its trust loan.
Still, the asset-management firms are unlikely to have the appetite to bail out every trust loan. "Our aim is not to help develop property, but to resolve the short-term liquidity squeeze," said Li Xin, a vice president at China Orient.
Mr. Wei's story highlights the desperation of smaller property developers. The chairman of what domestic real-estate agents said was the biggest developer in the northern Chinese city of Baotou, he struck it rich in 1996 by helping rebuild the city following an earthquake. His flagship development was a five-phase mid- to high-end residential project that was slated for completion next year.
But he borrowed heavily from loan sharks, and started to run into repayment difficulties this year, according to a friend of Mr. Wei's and people in Baotou's real-estate industry. One beating from the loans sharks left him in the hospital for a month, according to the friend.
On June 6, Mr. Wei's body was found hanging in his room at the Jintuo Hotel in Donghe, according to police. "I was astonished to learn about Wei's death," the friend said. "I could never imagine he would choose to kill himself."
In a recent report, Standard & Poor's said it expects developers with large trust loans to meet their debts by aggressively cutting prices or selling assets, tipping average prices down 10%.
Chinese Developers Face Pinch - WSJ.com
