The Leverage Game: From Offshore to Onshore

In the years after China’s housing reforms in 1998, demand for both residential and commercial properties soared, and developers responded by rushing into aggressive land bids and property construction to meet market demand. For most Chinese developers, residential development are always preferred over commercial assets, as residentials have a broader customer base and it is easier to apply a strata-titled sales approach to increase asset turnover and improve profitability. However, during the recent consumption boom, Chinese developers have transformed to include office and retail development in their portfolios. Aggressive project launches translated to high leverages for the Chinese developers. While traditional bank loans remain the main source of funding, in recent years Chinese developers are also adapting a more flexible approach in securing their working capital and lowering their cost of funding. In this chapter, an overview of the main funding mechanisms for Chinese developers is discussed, which includes offshore corporate bonds, onshore corporate bonds, perpetual bonds, trust firms, peer-to-peer (P2P) lending, crowdfunding, commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS), real estate investment trusts (REITs), and joint ventures and strategic alliances.