Property boost for China loans

Hong Kong

A SLEW of Chinese commercial property acquisitions is providing welcome cross-border lending opportunities for international banks in a market hit by the US-China trade war and lower outbound M&A activity.

International buyers are raising around US$1.9 billion of syndicated loans to buy commercial real estate, mainly office buildings, after China's credit tightening and clampdown on property speculation forced some domestic developers to deleverage and sell assets.

Syndicated loan volume in China fell to US$35.7 billion in the first six months of this year, down 26 per cent from US$48.4 billion in the same period of 2018, reflecting the challenges facing a slowing economy.

"Sponsor-backed real estate financings still make up a significant portion of our loan pipeline, while other sectors continue to stay dry," said a Hong Kong-based banker specialising in leveraged and acquisition financing.

Loans currently in syndication include a 4.52 billion yuan (S$88.6 million) borrowing for Munich-headquartered Allianz SE and Shanghai-based D&J China and a US$390 million-equivalent facility for a consortium comprising Boston-based AEW and Beijing-headquartered Hony Capital.

A US$381 million-equivalent financing for Hong Kong-listed Shui On Land, Toronto-listed Manulife Financial and state-owned China Life Insurance (Group) closed last week.

The Allianz-D&J combo is buying office and retail properties in Beijing, while the AEW-Hony consortium is purchasing an office tower in the Chinese capital. The Shui On Land-led group is acquiring an office building in Shanghai.

Earlier this month, UK developer Chelsfield teamed up with a group of Hong Kong and Malaysian investors to purchase four office buildings in Shanghai for 1.5 billion yuan. A loan of 880.38 million yuan-equivalent will back the consortium's purchase.

Brookfield Asset Management is expected to raise a secured loan of about US$1 billion-equivalent to back its proposed acquisition of Greenland Huangpu Center in Shanghai.

The Canadian asset manager agreed in late March to purchase the mixed-used property project from Chinese developer Greenland Hong Kong Holdings.

Some domestic and international lenders are finding the loans appealing and the risk manageable as the deals carry collateral in the form of quality commercial properties in China's biggest cities.

"These investments are mainly made in prime locations in first-tier cities such as Beijing and Shanghai, targeting offices with stable rental income, which are more resistant to a market slump," said a second loans banker.

Recent activity adds to US$10 billion of property-related lending in the first half of the year, 18 per cent higher than the US$8.5 billion raised in the same period of 2018, according to Refinitiv LPC data.

Chinese property loans are also gaining attention among non-bank investors. In March, Singaporean developer CapitaLand launched its first China discretionary debt fund with a target capital size of US$750 million.

The Credo I China fund, set to be one of the largest property debt funds in China, will invest in offshore US dollar-denominated subordinated instruments for real estate in the country's first and second-tier cities.

It will focus on loans and securities of high-quality real estate covering commercial, retail, residential, logistics and industrial properties.

In the first quarter of 2019, foreign investors accounted for about half of the 53 million yuan in acquisition value of China's commercial properties, according to data from real estate services specialist CBRE.

The recent flow of commercial property acquisition loans is a boon for domestic lenders after China's increasingly tightening curbs on real estate speculation in the past couple of months prompted a flight to quality.

In early August, China's banking and insurance regulator launched a nationwide bank inspection to determine if loans had been used illegally to fund property investment, Reuters reported.

In July, the government moved to curb real estate investments through some trust companies by asking them not to provide new financing to real estate firms.

Regulatory curbs on the real estate market, the country's economic slowdown and lower overseas M&A activity are pulling Chinese loan volume lower.

The announced value of outbound M&A from China declined 49.5 per cent year-on-year to US$10.8 billion in the first quarter of 2019, according to a May 6 research report from accounting firm Ernst & Young.

Some lenders facing sector limits have been trying to reduce existing loan exposure to highly leveraged Chinese developers so that they can participate in the new loans for international buyers.

"We often get calls from other banks asking if we are interested in buying real estate related loans to Chinese developers, but in fact, we are also trying to trim our exposure," said another Hong Kong-based banker. REUTERS