China's fledgling real estate investment fund market could see a surge of activity in 2012, as property developers launch their own vehicles in a desperate bid to bridge an estimated $111 billion financing gap in the year ahead.
A government-led clampdown on bank, bond, equity and trust market financing for real estate has left developers with little choice other than to set up their own funds, which have raised barely 10 percent of the sum in the past two years that needs to be found to refinance maturing debt in 2012.
On the upside, China's high net-worth families still favor property investment, and funds give them an alternative to buying the physical asset while retaining exposure to the sector.
"Of course it will take time, but in the next decade, you will see the Chinese property market become more institutionalized," Frank Marriott, Savills' senior director of real estate capital markets for the Asia-Pacific region, told Reuters.
Time is not on the developers' side. Slowing sales and falling prices are hitting just as refinancing pressures are soaring. Analysts widely expect industry consolidation to accelerate in 2012 and some players, even big ones, will have to sell assets and quit the market.
About $2.2 billion in syndicated property loans and club deals will become due this year, according to Thomson Reuters data, while a further 117 billion yuan ($18.6 billion) needs to be found to repay maturing real estate trusts.
Add in the other credit lines that need repaying and developers need to find more than 700 billion yuan this year, according to China Times, a Beijing-based Chinese-language business newspaper.
Major developers such as China Overseas Land & Investment Ltd and Gemdale Corp are among the first firms to have launched their own funds.
Others including China Vanke Co Ltd, the country's biggest listed property company by sales, chose to set up funds jointly with their peers to help each other survive tough times.
And more will follow.
"We must make more friends and widen our financing sources. That will help our future growth," Zhu Tong, chairman of Sun Real Estate Inc, a mid-sized developer in Beijing, told an industry forum in Beijing.
A total of 29 property funds raised $4.1 billion in 2011, a big improvement on the $2.9 billion raised by 28 vehicles in 2010, according to the consultancy Zero2IPO.
Industry analysts expect that more than $6 billion will be raised in 2012 and that the property fund market will expand at an annual rate of 40 to 50 percent over the next few years.
The funds target wealthy entrepreneurs, with an investment threshold of 10 million yuan and above and are expected to offer annual returns of at least 25 percent, said Fu Zhe, a Zero2IPO analyst in Beijing.
"Private investors still have a strong interest in the property sector as there are really not many other options for them," said Su Xin, chairman of Go-high Investment, which invests in commercial real estate.
His company's recent survey in Wenzhou, Zhejiang province, Ordos in the Inner Mongolia autonomous region and some coal-rich cities in northwestern Shaanxi province - places with some of the biggest speculative property bubbles in the last decade - shows that investment interest in property remains robust.
That's lucky for Chinese developers, given the funding constraints in the wake of government pledges to pull home prices back to a reasonable level after a decade of rocketing real estate inflation that saw prices surge 10-fold in 10 years in key cities across China.
Not only have the major State-backed banks been told to cut credit lines, the government has also halted all financial innovations to channel money into its targeted property sector.
But it's going to take more than luck for developers to survive the financing drought.
Banks have prolonged mortgage loan approvals, forcing developers into a hand-to-mouth existence of surviving on downpayments and then seeing the bulk of the cash from sales going directly to the accounts of contractors and suppliers.
"That means even after you've sold residential units at a cheaper price, the cash in your hand still does not increase," said Ren Zhiqiang, the outspoken chairman of Huayuan Property Co Ltd.