Potential homebuyers examine a property project model in Nanjing, East China's Jiangsu province, Feb 28, 2016. [Photo/VCG]

Moves are afoot to prevent bubbles from forming in the land market and property development

The China Securities Regulatory Commission has said A-share companies cannot use refinanced capital for purposes other than those for which it was raised.

This decision is likely to make it more difficult for realty developers to raise money from refinancing channels.

Vanke, Gemdale and Poly are among the big realty names in the A-share market.

China Securities News said the CSRC made the point in a training session of underwriters on July 25.

It reportedly said A-share companies must use refinanced capital only for stated purposes. Companies shall not use capital raised from equity offerings for other purposes in disguised forms to supplement liquidity or to repay bank loans.

Typically, listed companies seeking to increase their capital or raise fresh finance for business expansion visit the market with a secondary equity offering known as SEO. They issue new equity in the form of shares sold by existing shareholders or new shares, or a mix of both.

But developers are known to supplement liquidity instead using such low-cost refinancing. This practice is not something that the authorities are pleased with. For, such misuse of refinancing could cause systemic risks in real estate. So, curbing the practice could help prevent bubbles in the land market, experts said.

A statement released after the Party's Political Bureau meeting on July 26 said the country will prevent asset bubbles from forming in the second half of this year.

This was interpreted by market observers as a signal for stricter regulation in the rest of the year.

Yan Yuejin, research director at Shanghai-based E-house Research Center, said that such curbs come after regulators expressed intent to squeeze out the "asset bubbles that hinder healthy, steady and sustainable development of markets".

Yan said, "The realty market has seen a number of developers raising significant money. Some developers spent hugely but blindly on buying new land parcels. From this perspective, the new curb is a way to reduce risks."

In a handful of key cities in China, developers had bid fiercely for new land parcels in the first half of this year.

In Shanghai alone, more than five auctions for land parcels saw 100 percent or higher premium over the starting price in the past quarter. In July, a land parcel in the central urban area of the city has been sold at a price of more than 73,700 yuan ($11,113) per square meter of proposed construction.

Another piece of land in a suburban area was bought at more than 43,600 yuan per square meter, or 300 percent premium over the starting price.

According to data of Centaline Property, as many as 128 pieces of land were auctioned with a premium of more than 100 percent year-to-date. There were 189 deals with a premium of more than 50 percent.

Not just Shanghai, even some second- and lower-tier cities, such as Nanjing, Hefei, Wuhan, and Suzhou, have seen developers spending significantly - some said insanely - to refill their land parcel reserves for future development, as these cities' residential properties sold well in the first half of the year.

Zhou Qi, an analyst with Shanghai Junhui Property, said that curbs on refinancing could help cool the overheated land market, and prevent the realty development market from overheating.

"If capital can be raised at a low cost, developers will not hesitate to use the money, because land supply is limited. But if fundraising is more difficult and costs more, developers would think twice before making such decisions, and consider if 'flour costs more than bread'," said Zhou.

A research note from BOCI (International) Co Ltd said in future, developers' performance is likely to diverge further. Developers that did not have to tap the capital market to fund land parcel purchases but relied on sales revenue and other incomes, are less likely to be exposed to bubble risks.

The research note said that while some cities are facing the risk of overheated markets, lower-tier cities are still under great pressure to reduce inventory due to low investor sentiment.

But aggressive controls or adjustments won't curb investment in realty across China. Property prices won't have a hard landing. But some developers that have a high leverage ratio in financing, may face more pressure, the note said.