BEIJING - China's major property developers have been stepping up their efforts to raise funds overseas in response to a gradually tightened cash flow, as the government's tightening real estate measures are expected to lead to a big drop in transactions.

According to a report by Royal Bank of Scotland, Chinese property developers' off-shore debt financing this year has totaled 28 billion yuan ($4.25 billion), accounting for 40 percent of last year's total value.

Evergrande Real Estate Group Ltd sold 9.25 billion yuan of synthetic offshore renminbi bonds in mid-January, while Hopson is pricing its $300 million bond with a 11.75 percent yield.

Country Garden Holdings Co Ltd announced on Feb 7 a proposed issuance of senior notes with a seven year maturity to fund existing and new property projects (including construction costs and land premiums) and fund general corporate expenses.

"Such intensive offshore financing measures reflect property developers' preparation for the market change this year, given the industry's already high debt ratio," said Deng Jingjing, real estate analyst with Guotai and Junan Securities. "The expectation of a stronger yuan also makes the cost of offshore financing lower."

The credit rating company Standard & Poor's warned on Tuesday that the surge in bond sales has weakened Chinese developers' profiles.

Several property developers could be "caught out" if market conditions turn quickly, credit analyst Bei Fu said in a report. Debt issuance is likely to weaken the credit ratios of Evergrande and Country Garden, it said, according to Bloomberg.

The country's leading property developers recorded robust sales in January, but the government's latest round of tightening measures in late January are expected to result later in plummeting sales.

"We proactively did promotions during the holidays, but February's sales are still likely to drop sharply from January," said Tan Huajie, the board secretary of Vanke Co Ltd. The Shenzhen-based Vanke, China's largest property developer, saw its revenue rise 221 percent last month from a year earlier, making it the nation's first residential property developer with monthly sales in excess of 20 billion yuan, But those sales came before the government extended property curbs to rein rising housing prices.

Last month, China raised the minimum down payment for second-home purchases, told local governments to set price targets on new properties, and introduced taxes for residential properties in Shanghai and Chongqing. The central bank also raised interest rates last week for the third time since mid-October.

"While residential real estate prices have yet to go down in response to any of the government's efforts to date, the increasing number of measures being employed can be expected to reduce investor confidence in the near term. The primary consequence of this will most likely be a rapid decrease in the number of new transactions taking place," said Michael Cole, research director of Colliers East China.

According to Wang Gehong, president of Beijing Grand China Real Estate Fund, the cash flow of many smaller property developers has greatly deteriorated in the past few months.

"Now we receive many projects from banks as they further strengthen risk management over the real estate sector," said Wang

While Chinese property developers seek overseas capital, the world's leading private equity firms and real estate funds have also kicked off a new round of fundraising.

During an earnings call with investors on Feb 3, Blackstone Group president and chief operating officer Tony James said the firm would begin fundraising for Blackstone Real Estate Partners (BREP) VII on a scale similar to BREP VI, which raised $10.9 billion.

China Daily

(China Daily 02/17/2011 page14)