Current Status and Developmental Trends of Project Finance in China’s Real Estate Sector

Changes in regulatory policies on project finance in China’s real estate sector

Since 2023, China’s regulatory approach to real estate project financing has continued to follow the policy orientation of supporting financing. The emphasis has been on meeting reasonable financing needs while further reforming financing methods.

Meeting reasonable financing needs

In late 2023 and March 2024, key national meetings, including the Central Financial Work Conference, the Central Economic Work Conference, and the Second Session of the Fourteenth National People’s Congress, reiterated the need to provide equal treatment to all real estate enterprises in addressing their reasonable financing needs. During this period, the People’s Bank of China (PBOC), the National Financial Regulatory Administration (NFRA), and the China Securities Regulatory Commission (CSRC) jointly convened a meeting with financial institutions to emphasise these principles. The meeting urged that “for real estate enterprises that operate normally, the financial sector should not show reluctance to issue, demand early repayment of or terminate the loans.” It also stressed the importance of utilising the “second arrow” (bond financing) to support private real estate enterprises and emphasised that financial institutions “should encourage real estate enterprises to engage in reasonable equity financing through the capital market”, and should “ramp up financial support to ensure deliveries of pre-sold housing projects and promote industry mergers and acquisitions based on market principles and the rule of law.”

In January and June 2024, the Ministry of Housing and Urban-Rural Development, together with the NFRA, issued circulars establishing a co-ordinated mechanism for urban real estate financing. This initiative included a “white list” of projects reviewed and recommended by member units, which was then provided to the lead banks. For projects meeting the requirements, banks were instructed to provide full lending support. By August 2024, commercial banks had approved 5,392 white-listed projects, with total approved financing reaching nearly RMB1.4 trillion.

Reforming financing methods

In March 2023, the China Banking and Insurance Regulatory Commission (CBIRC) introduced the “Notice on Standardizing the Classification of Trust Business of Trust Companies”, categorising trust activities into three main types: asset service trusts, asset management trusts, and charitable trusts. This classification is based on the purpose of the trust, how it is established, and how its assets are managed, with a total of 25 subcategories. By May 2024, under this new classification system, the China Trustee Association reported that trust fund investments in the real estate sector had significantly declined, falling below RMB1 trillion.

In October 2023, the CSRC issued the “Decision to Amend Article 50 of the Guidelines for Publicly Offered Infrastructure Securities Investment Funds (Trial)”, subsequently approving the registration of the first three consumer infrastructure public REITs. This move established a “starting line” for real estate developers transitioning into property management and operational services. In April 2024, the State Council issued the “Several Opinions on Strengthening Regulation, Preventing Risks and Promoting the High-Quality Development of the Capital Market”, which mentioned several times the promotion of high-quality development of the REITs market, further providing policy support and direction for the growth of the REITs market.

On 21 July 2024, the Chinese government proposed reforms to the financing methods for real estate development and the pre-sale system for commercial housing. A shift from the pre-sale system to a direct sale model may be put on the agenda. This indicates a potential transition from real estate developers relying on development loans and other indirect financing to more direct financing methods, marking an important signal for the industry.

Overall, despite the support from these policies, project financing in China’s real estate sector remains sluggish.

According to the National Bureau of Statistics, from January to July 2024, real estate development enterprises secured RMB6.1901 trillion in funds, reflecting a year-on-year decline of 21.3%, which narrowed slightly by 1.3% compared to the first half of the year. Among these, domestic loans saw the smallest year-on-year decline at 6.3%, while the decline in foreign capital utilisation was as high as 45%. Other self-raised funds, deposits and prepayments, and individual mortgage loans also experienced year-on-year decreases.

Main instruments and developmental trends of project finance in China’s real estate sector

Bank loans

Bank loans remain one of the most crucial financing channels for real estate enterprises in China. These loans encompass a variety of categories, including development loans, M&A loans, land reserve loans, working capital loans, commercial property loans, and policy-based loans.

In general, after experiencing fluctuations in 2023, the year-on-year growth rate of real estate development loans showed some signs of improvement in the first half of 2024. This was driven by an improved financing environment for real estate companies, the allocation of RMB350 billion in special loans to ensure deliveries of pre-sold housing projects, the implementation of loan support plans for these projects, and the extension of some existing development loans.

Loan balance data

According to the National Institution for Finance & Development (NIFD) and the PBOC, the real estate loan balance saw the following changes.

2023 trends:

• Q1 – net increase of RMB610 billion.
• Q2 – net decrease of RMB200 billion.
• Q3 – net increase of RMB70 billion.
• Q4 – net decrease of RMB290 billion.

2024 trends:

• Q1 – by the end of Q1 2024, the balance of RMB loans for real estate development stood at RMB1.376 trillion, with a year-on-year growth rate of 1.7%, reflecting an increase of RMB609 billion in the first quarter.
• Q2 – by the end of Q2 2024, the balance of real estate development loans was RMB13.77 trillion had risen to RMB13.77 trillion, marking a year-on-year growth of 2.8%. This represented an increase of RMB610.5 billion in loans during the first half of 2024.

Policy focus and challenges in implementation

As of now, the financing policies in the first half of 2024 have primarily focused on the banking credit sector, aiming to expand credit financing channels. The government aims to actively support real estate financing through the establishment of a real estate financing co-ordination mechanism, leveraging the “white list” policy, and introducing new regulations for commercial property loans. These efforts are intended to ensure the credit sector meets the reasonable financing and debt repayment needs of real estate development projects.

The Supreme People’s Court of China also supported the financing effort by stating that accounts and funds of new loans provided by financial institutions to support the construction of white-listed projects must not be frozen or seized for reasons unrelated to the continuation of the project. This policy helps ensure the completion of delayed projects and protects banks and other financial institutions from further losses.

Looking ahead, the author anticipates that the “white list” policy within the real estate financing co-ordination mechanism will continue to play a vital role in regulatory and co-ordination efforts. However, several issues emerging from the policy’s implementation need further attention and study. For instance, the “white list” policy tends to prioritise local real estate enterprises and urban investment companies, with reported projects mostly coming from provincial capitals and higher-tier cities. Additionally, there is a significant disparity between the funding needs of the projects on the “white list” and the actual amount of loans provided, among other issues.

Overall, bank loans continue to play a key role in financing the real estate sector. The government’s co-ordination mechanism and the “white list” policy are positively impacting the financing environment. However, the new issues arising during the implementation of these policies and their long-term effects need to be closely monitored.

Debenture bonds

Debenture bonds typically refer to bonds issued by entities other than governments, with fixed principal and interest repayment terms. For real estate companies, common types include corporate bonds, company bonds, short-term financing bonds, medium-term notes, and private placement instruments.

In general, the debenture bond financing market in the real estate sector has shown a reduction in scale, shortened issuance terms, and high concentration among issuers. This reflects the market’s cautious attitude towards the financing environment in the real estate industry, as well as the financing challenges faced by mixed-ownership and private enterprises.

Issuance trends

According to China Index Academy, in the first half of 2024, the real estate sector issued RMB182.73 billion in debenture bonds, representing a 21.9% year-on-year decline. Debenture bonds accounted for 65.5% of total bond financing, up 4.2 percentage points compared to the same period last year, making them a key financing channel. The average bond maturity shortened to 2.9 years, 0.3 years less than in the first half of 2023. Bonds with maturities under 1 year and over 3 years increased to 22.2% and 43.7%, respectively. Central and local state-owned enterprises dominated issuance, with their share exceeding 90%, an increase from 2023.

Default risks and market impact

According to data from Lianhe Credit Research Center, in the first half of 2024, five new issuers in China’s bond market defaulted, involving seven maturing bonds, with a total default amount of approximately RMB4.915 billion. The number of new defaulting issuers increased compared to the four in the first half of 2023 and remained the same as the second half of 2023. The default amount increased compared to RMB3.378 billion in the first half of 2023 but was lower than the RMB14.753 billion in the second half of 2023.

According to publicly available information, Sino-Ocean Holding Group (China) Limited is the first central state-owned real estate enterprise to experience a substantial default among debenture bond defaults in the first half of 2024. However, given that Sino-Ocean Holding had previously faced offshore bond defaults and initiated an offshore debt restructuring process in the second half of 2023, and that its domestic bonds had already been extended multiple times, the impact of this substantial default on the market has been relatively limited.

The author expects that the real estate market will continue to benefit to some extent from the easing and optimisation of regulatory policies in the future. However, real estate companies will still face significant liquidity challenges. Regarding debenture bonds, particular attention needs to be paid to private real estate companies with weaker financial conditions, as well as those that have already experienced debt extensions or offshore debt defaults, due to their associated credit risks.

Real estate trust

In real estate trusts, the trustor provides funds to the trust company (the trustee), and the trust company, as the trustee under the trust plan, offers trust funds to real estate developers or project companies in accordance with the trust documents and contract terms. In return, the financing party provides security measures such as property collateral, equity pledges, or third-party guarantees to the trust company and pays the investment returns on time. Upon the maturity of the trust, the trust company distributes the returns to the trustor.

Decline in real estate trust financing

According to data from the China Trustee Association, both the scale and proportion of trust funds directed towards the real estate sector saw a significant decline in 2023 compared to historical peaks. By the end of Q4 2023, the scale of real estate trusts fell to RMB973.861 billion, a decrease of RMB47.149 billion from the previous quarter (a decline of 4.62% quarter-on-quarter). Real estate trust funds accounted for 5.6% of total trust assets, a decrease of 0.6 percentage points from the previous quarter. Compared to the fourth quarter of 2022, the scale decreased by RMB250 billion, a year-on-year decline of 20.43%, with the proportion dropping by 2.53 percentage points.

Some believe that the era of traditional real estate trust business as the mainstay of the trust industry has ended.

Default trends in real estate trusts

While real estate trusts experienced significant defaults in recent years, the peak of defaults has passed, with both the scale and frequency of defaults declining. According to data from Shanghai Securities News, in 2021, the total amount of defaults in real estate trusts reached RMB91.711 billion; in 2022, it amounted to RMB93.025 billion; and in 2023, the amount decreased to RMB48.642 billion.

According to publicly available information, in 2024, the default of the “Funing No. 615 Trust Plan” managed by Ping An Trust, a leading trust company, drew attention. On 29 March 2024, Ping An Trust announced the default, following which they took swift legal action, suing the repurchasing parties and securing a first-instance victory. On 3 June the counterparty of the “Funing No. 615 Trust Plan” allocated RMB20 million from the underlying “Zhenhua Mansion” project company to the trust plan. The first-instance victory and initial repayment have stabilised the default incident, preventing it from having a broader impact.

In November 2023, the NFRA issued the “Interim Measures for the Supervisory Rating and Categorized Supervision of Trust Companies”, requiring trust companies to be rated based on risk management and operational stability. In April 2024, the State Council released “Several Opinions on Strengthening Regulation, Preventing Risks and Promoting the High-Quality Development of the Capital Market” encouraging trust companies to increase their participation in the capital market and expand equity investments.

In summary, based on national policy direction and market performance, the author expects that the proportion of traditional real estate trust business within the trust industry and the scale of real estate trust financing will continue to decline in the future.

Commercial acceptance bills

Commercial acceptance bills are negotiable instruments issued by the drawer and accepted by a non-bank payee, requiring unconditional payment on a specified date. Common in real estate to ease cash flow, their use has increased risks as companies face rising debt, leading to more overdue rejections and delayed payments.

According to data from CRIC, while the number of real estate project companies facing overdue commercial acceptance bills has gradually decreased in 2023, the proportion of real estate special purpose vehicles (SPVs) with overdue bills consistently remains above 50%. The Shanghai Commercial Paper Exchange Corporation Ltd reported that, from 1 February 2024, to 31 July 2024, there were 1,509 acceptors with more than three instances of overdue bills, or who had overdue balances at the end of the month or overdue bill occurrences during the month. The construction industry accounted for the largest share of overdue balances at 30.10%.

Despite a reduction in the number of SPVs with overdue bills, this trend does not indicate improved industry conditions or reduced market pressure. Frequent defaults and overdue commercial bills among real estate companies have significantly decreased suppliers’ willingness to accept new commercial bills. As a result, large-scale financing through commercial acceptance bills has been restricted, weakening ties between real estate companies and suppliers. Many listed companies have publicly announced that they will no longer accept commercial bills from certain real estate firms. According to statistics, in 2023, the scale of notes payable via commercial bills in the real estate sector dropped by 37% year-over-year, reaching a historic low.

Moreover, due to some real estate companies’ failure to settle matured commercial bills, domestic accounting standards require that unpaid commercial acceptance bills be transferred from “bills payable” to “accounts payable” based on their book value. As a result, in general, despite the significant reduction in the scale of bills payable, the issue of real estate companies tying up funds from upstream suppliers persists.

Factoring

Factoring (accounts receivable financing) involves a creditor transferring its current or future receivables to a bank or qualified factor, which provides services like debt collection, receivables management, and protection against bad debts. Following the introduction of policies such as the “three red lines” in the real estate industry, factoring has grown as a counter-cyclical financing option. It allows companies to bypass certain regulatory restrictions and offers tax benefits, fueling its rapid expansion.

According to the Commercial Factoring Expertise Committee (CFEC), the volume of commercial factoring transactions in China reached RMB2.7 trillion in 2023, a 20.5% increase from 2022. In commercial factoring asset-backed securities (ABS), engineering-related receivables were the most commonly used underlying assets for commercial factoring ABS products in the first half of 2024, accounting for 51.32% of the issuance. Other real estate-related receivables made up 34.31%, with the two categories together exceeding 85%.

The author anticipates that, against the backdrop of a general slowdown in the real estate industry, tighter regulations, and increased risks, factoring finance in the real estate sector will continue to grow in the coming years, benefiting from its counter-cyclical and other characteristics.

Asset-Backed Security (ABS) and Real Estate Investment Trusts (REITs)

Asset-Backed Security (ABS)

Asset-backed securities (ABS) are financing instruments that bundle accounts receivable or other assets with stable cash flows to issue bonds to investors. In real estate, ABS products include house-purchase balance payment ABS, supply chain ABS, property fee ABS, Commercial Mortgage-Backed Securities (CMBS), Commercial Mortgage-Backed Notes (CMBN), and quasi-REITs.

According to China Index Academy, real estate ABS financing in 2023 amounted to RMB247.29 billion, down 6.8% year-on-year, but making up 34.2% of the total financing scale, an increase of 3.0 percentage points. CMBS/CMBN, and supply chain ABS dominated, accounting for 38.6% and 37.8%, respectively, while the proportion of quasi-REITs rose rapidly, increasing by 7.6 percentage points to 17.4%.

Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs), like asset securitisation, are financing tools based on assets with stable cash flow expectations. Amid the backdrop of reduced lending willingness due to policies such as the “three red lines”, and a slowdown in economic growth leading to decreased national infrastructure investment budgets, REITs continue to stand out as a critical financing tool in the real estate sector.

In July 2024, the National Development and Reform Commission (NDRC) issued the “Notice on Comprehensively Promoting the Normalized Issuance of Real Estate Investment Trusts (REITs) Projects in the Infrastructure Sector” (“Notice”), marking the start of a new phase of regular issuance for publicly offered REITs in China. The Notice further expands the scope of industries and asset types, adding new categories such as energy storage, coal-fired power generation, market-based rental housing, and retirement care. It also extends consumer infrastructure to commercial districts, business complexes, and professional markets. The Notice allows for the inclusion of supporting hotels, commercial offices, and ground-floor retail spaces in industrial parks and consumer infrastructure into the scheme, while continuing to focus on project compliance during the review process.

According to data from CRIC, as of 24 July 2024, 11 publicly offered REITs have completed their listings this year, raising a total of RMB27.988 billion, exceeding the total amount raised in 2023. Meanwhile, the booming market for publicly offered REITs has accelerated the development of pre-REITs. Investor enthusiasm for publicly offered REITs has led to record low allocation ratios, increasing the difficulty of subscriptions and pushing up subscription prices. Consequently, more investors are focusing on the pre-issuance stage of publicly offered REITs, seeking to acquire suitable infrastructure projects through pre-REITs to reduce competition and secure more investment opportunities and returns.

Overall, the author expects REITs to continue being a standout financing tool in the real estate sector. With publicly offered REITs entering a new phase of regular issuance, the opportunity to acquire suitable infrastructure projects through pre-REITs is a notable market trend.

M&A and bankruptcy reorganisation

Mergers and acquisitions

Mergers and acquisitions (M&A) allow distressed real estate companies to sell assets or equity to raise funds, while investors acquire project assets or equity and continue funding development. Since the issuance of the “16-point financial measures” in November 2022, AMCs (asset management companies) have played an increasing role in real estate M&A, helping struggling firms. Leading real estate companies have also used M&A to expand market share and acquire prime land.

According to CRIC data, real estate companies remain cautious about mergers and acquisitions during the market adjustment period. From January to July 2024, 129 M&A deals were disclosed, totalling RMB104.72 billion, a 35% year-on-year decline.

Bankruptcy reorganisation

For insolvent projects with no buyers, real estate companies can use “bankruptcy reorganisation” to limit losses and seek relief. According to the National Enterprise Bankruptcy Information Disclosure Platform, as of 10 September 2024, there were 12,705 bankrupt enterprises nationwide, including 1,190 in real estate, making up about 9.37%. However, the proportion of large-scale bankruptcies among real estate companies remains relatively low.

According to publicly available information, on 23 April 2024, Jinke Property announced its entry into bankruptcy reorganisation following nearly a year of pre-reorganisation. It is the first large real estate company in China to enter bankruptcy reorganisation since 2021. On 25 July 2024, Jinke Property held its first creditors’ meeting, where the “Management Plan for the Debtor’s Property” and other motions were approved. The reorganisation is expected to be completed in the fourth quarter of 2024 or early 2025.

Although several bond-issuing real estate companies had previously entered pre-reorganisation, Jinke Property is the first to successfully complete pre-reorganisation and move into bankruptcy reorganisation, setting a significant precedent for other distressed real estate firms in addressing their debt risks.

In summary, the author anticipates that mergers and acquisitions in the real estate sector will remain subdued, while the number of bankruptcy and restructuring cases is expected to increase.