Chinese real estate developers are turning to the securitization market as an alternative in light of the current challenging environment for bond financing in both the onshore and offshore markets.

The Shanghai Stock Exchange approved 10 billion yuan (US$1.49 billion) asset backed securities (ABS) financing from China Evergrande on July 5. The proceeds will be used for home rental projects. ABS issuance from Country Garden, Poly Real Estate, and Yuexiu Property have also been approved recently.

A total of 80 billion yuan in ABS has been issued with rental housing as the underlying assets so far in 2018. However, a large financing gap still remains.

A report by Haitong Securities shows that as of June 8, Chinese real estate developers have withdrawn applications for  151 billion yuan worth of corporate bond financing.

On April 25, the China Securities Regulatory Commission and Ministry of Urban-Rural Development issued a circular, which encourages real estate developers to issue property-backed securities and real estate investment trusts (REITs) for their new home rental projects.

In a bid to slow down the overheating real estate sector, Chinese regulators have been encouraging real estate developers to shift some of their business to the rental housing market. At the same time, real estate developers also view the rental housing market as the growth area.

“For real estate developers, it is important to increase the size of their businesses as fast as possible in order to get financing,” says a land acquiring manager at a Chinese state owned real estate developer in an interview with The Asset. “It is only if you are among the top 30 developers in China that you can now can get financing.”

China's National Development and Reform Commission (NDRC) issued a circular on June 27, tightening the use of overseas bond proceeds from real estate developers. According to the NDRC, the proceeds of overseas debt issued by real estate developers are allowed only in cases when there is a need to roll over existing debt to avoid default.

“The profitability of Chinese real estate developers has been impacted a lot and it is not likely there will be a relaxation of the current regulation soon,” says the manager. “Big fish will eat small fish in this industry and some smaller players are now facing liquidity issues.”