摘要：在国家加大宏观调控力度、紧缩房地产信贷规模的背景下，房地产企业面临严峻的资金压力，融资能力成为决定房地产持续发展的决定因素。国内房地产企业的融资方式较多，本文深入浅出地介绍了常见的十种模式，简单地分析了各种模式的优缺点，并结合工作实际，推荐和较详细地介绍了三种融资模式：个人委托贷款、信托融资、资产证券化。
Abstract: Against the background that the central government is strengthening macro control and tightening credit scale of real estate businesses, financing capacity becomes the determinant for a real estate enterprise’s development. Domestic enterprises have many ways of financing, and this paper describes ten common models, simply analyses the advantages and disadvantages of each model, while explains and recommends three financing models with practical examples: individual entrusted loan, trust financing and assets securitization.
关键词：房地产企业；企业融资；个人委托贷款；信托融资；资产证券化；股权融资
Keywords: real estate enterprise, enterprise financing, individual entrusted loan, trust financing, assets securitization, equity financing
I Introduction
Real estate industry features in capital intensive, long development cycle, great input, high risk and so on. Traditional financing ways for real estate enterprises mainly include se0lf-funded plus bank loans. Since the People’s Bank of China issued No. 121 Paper, financial institutions tightened cash flows, enterprises solely dependent on commercial banks for financing get into difficulties, meaning financing capacity has become a determinant for the sustainable development of a real estate enterprise.
The financial system in China is not mature, so real estate enterprises should not only be confined to bank loans, but also seek for more financing channels and fully play the diversified financing functions of the society, for survival and further development. Only enterprises with timely innovation in financing and plenty of capital can survive and develop. Therefore, it is necessary and meaningful to study and analyze various financing ways.
II Common financing model for real estate enterprises
Domestic real estate enterprises have different financing models, each with advantages and disadvantages, and they are summarized as follows:
a. Bank loans
This is a traditional financing method. According to statistics, before No. 121 Paper from the People’s Bank of China, real estate projects sourced about 60% of the fund directly or indirectly from banks. Bank loans include credit loans, mortgage loans, etc. Some enterprises used to mortgage the land they take for loans, arrear part of land transferring fees, stage the project development, subcontract the project with advance capital and forward sale, etc. to rapidly recover funds. Nowadays, these ways are not workable.
b. Institutional investments+ bank loans
Institutional investments plus bank loans, this model is also referred as bridge loans. When real estate enterprises are not able to self-fund for land grant fee, etc., institutional investors provide short-term capital support (bridging), to keep the project moving (crossing bridge). When the projects have cash inflow, Banks began to loan. For enterprises targeting at further development, this model only ease the cash tightness for a while, not a guarantee for long-term financial support.
c. Equity financing
Equity financing model is broadly adopted in real estate industry. In order to get financed, many real estate project developers are willing to attract funds through capital and equity increase. The largest shortcoming of this model is that the developers have to give out a large part of profits, which is not quite acceptable for companies with good projects. In addition, as equity financing involves management and administrative power, enterprises for longterm development would not prefer this method.
d. Corporate bonds
This method is often used for new projects, with a higher interest rate than that of banks of the same period. Large enterprises generally
ssue more bonds, while general real estate projects seldom can get a chance to issue bonds. The requirements on the bond-issuer are strict, only exclusivelystate-owned companies, public companies, and limited liability companies established by two state-owned investment subjects are qualified. Meanwhile, the bond-issue should be entrusted to a security company, and there are strict requirements for the enterprise asset-liability ratio, capital fund and guarantee. The procedure is complicate and rigorous, and because of the limited size and activities of China bond market, both ssuing and holding bonds are risky.
e. Financing by listing
Financing through listing in the stock market is a well known financng method. Besides domestic security markets, listing in overseas especially in Hong Kong stock markets are preferred by domestic enterprises.
Due to numerous restrictions on real estate enterprises to go public, back-door listing is the dominant way for them to complete the plan. If they can technically make use of back-listng, enterprises will get financed easily. Long process, complex procedure, high cost, and strict qualification requirements, all these would fail most real estate companies.
f. Joint financing within the ndustry
Enterprises in the industry join together, collect idle capital in other fields and put it into enterprises or projects in need of funds, while the later pay for the utilization. With this mutual and self financial assistance, enterprises can boost the project development, improve surrounding environment, and optimize the use of funds. But this model is confined to a small range and projects with small amount of capital needs, and s not suitable for relatively large projects with great investments.
g. Project financing
This model is used for specific projects. Project undertaker (meaning shareholders) sets up a project company for a specific project, applies for loans with the project company as the borrower, repay the loans with the cash flow and earnings of the company, and mortgages assets of the company as oan collateral. Project financing raising capital relies on the project initiators’credit or assets, while loan banks qualify the repayment ability through assets of the project and future cash flow.
This mode is commonly used for power generation, road, bridge and other large infrastructure projects with stable cash flow, and now large petrochemical projects are included.
h. Individual entrusted loan
This model is to finance specific areas and groups through cooperation between real estate enterprises and banks and other financial institutions. Individual investors entrust banks to loan idle capital to real estate enterprises, to get a fixed return much higher than bank deposit interests of the same period, while real estate companies get loans special for real estate development projects, and take the responsibility of repaying capital and interests on schedule.
i. Trust financing
Compared with bank loans, real estate trust financing can not only reduce the overall operation cost of real estate industry and cut financial costs, but also be good for continuous use of real estate funds and the development of real estate enterprises. With trust financing, real estate companies can get direct loans, equity investment, and asset securitization and so on, via trust investment companies’ system arrangement, innovation design and implementation. Trust has unique systemic advantage, vast innovation potential and great flexibility, and can serve real estate companies of different levels and different grades.
j. Asset securitization
Asset securitization means turning commodity apartments into financial products to be sold with vouchers. Real estate securitization refers to representing investments in real estate projects in the form of securitization, which turns the direct property rights between investors and investees into securities. Overseas practices prove that real estate securitization can not only expand the capital sources financial institutions involving in real estate mortgage loan business, but also greatly enhance the liquidity of mortgage loans by financial institutions to real estate industrial players. From an investor’s point of view, investment in real estate securities can reduce survey costs for investors into individual cases, and will be helpful for various investors to get in.
For a long-term development, domestic real estate enterprises need to develop various financing models, and real estate securitization is the trend.
III Comparison and selection of real estate enterprise financing models
Besides trust financing, there are many other financing models like corporate bonds, issuing stocks and listing, bank loans, equity investment, industrial funds, etc. In fact, most financing methods have disadvantages. Here we will select and explain three practical or potential financing models in detail, in hope of being helpful to Changqing Property Group Co., Ltd. in the financing and sustainable development.
a. Individual entrusted loan
Xi’an Changqing Property Group Co., Ltd. tried a low cost financing method in 2004 -- individual entrusted loan, which had a good result. After several months’ operation, the company has attracted an accumulative fund of 60 million RMB, cutting financing cost by 1.20 million RMB. Judging from current results, this method is practical for Changqing.
At present the procedure for individual entrusted loan is: the principal(depositor) deposits capital in a specific branch of China Construction Bank, and signs relevant legal documents with Changqing, entrusting the bank to make loans to Changqing. The loan is one-year term, with an interest rate of 4.03%, meaning the principle will have a net return of 3.8%, deducting stamp duty, interest tax and so on.
Individual entrusted loan adds a new way for employees to make investments, and also a try by Changqing in market financing, which can accelerate housing projects development, meeting oilfield workers’ demand of a home in cities. Changqing should keep on this practical financing model, and gradually expand the range.
b. Trust financing
In 2004, trust products including 3rd Ring Road fund trust, Shaanxi Power fund trust, Shaanxi Natural Gas
fund trust caused a buying wave in Xian.
Take the supporting residential project of Science and Technology Park of Xian Jiaotong University for example, under several principles’ entrust, trustee utilize the collected trust funds in the residential project based on the principles’ will, and under the condition that the risk is under effective control. Taking advantage of the skills and abundant experiences in financing, trustee can provide professional financial services, and obtain trust returns. The trust plan involved an amount of 160 million RMB, providing one-year, two-year and three-year contracts, and the yield for three-year investment was 4.5%.
Trust products can flexibly adapt to and deal with various real estate economic and legal relations, overcoming difficulties other methods fail to solve. Trust is flexible in delivery, and can be designed into custom fund trust products according to the enterprise’s operation requirements and the project, thus expanding choices for both the supply and the demand.
In view of current operation modes, there are three modes for real estate enterprises using trust for financing:
(1) Conventional Mode of Loaning
This is the same with conventional commercial bank loans, and the operation includes five steps:
First, property developers and trust investment companies negotiate on the project financing and sign agreement;
Second, trust company applies to the relevant governmental departments for approval for the design and distribution for the trust products;
Third, the trust company issues trust vouchers publicly to investors;
Fourth, the trust company puts the funds raised from issuing vouchers into the real estate projects as credit loans;
Fifth, developers complete construction and sale of the project, and trust company gets the funds repaid.
This model is easy to manage, and has a stable financing costs, but it has to meet the requirements of 200 vouchers with each no less than 50,000 RMB. This model has limitations in the amount (100 million RMB or so) and the scope of the funds.
(2) Staged Equity Financing
In this mode, trust companies inject capital into real estate enterprises through taking equities in it. When raise funds, the trust companies invest in real estate companies through capital increase, and hold some equities in it. Real estate enterprises promise to buy back the equities in two years at a premium price. This mode takes advantages of trust, and can function where a bank can’t (as banks are not allowed for industrial investments).
This procedure is:
First, trust investment companies raise capital from fund holders by issuing trust products;
Second, trust investment companies inject funds in real estate companies through equity investment;
Third, trust investment companies obtain equity in the real estate companies (such equity is similar to preferred stock, meaning having no rights to make decisions on routine operation, personnel appointments, but have rights to know, veto, make suggestions and so on);
Fourth, trust investment companies entrust holding equity to original shareholders, and sign equity repurchase agreements with the original shareholders and affiliated parties (in order to ensure the buyback, both sides need to have guarantees);
Fifth, real estate companies operate the development projects, and obtain cash flows.
Sixth, affiliated parties (or the original shareholders) get funds from real estate companies, and repurchase equity. The trust financing process is over.
This mode can increase real estate enterprises’ capital fund, helping them meet the requirements of bank financing. Trust companies’ equity financing only requires a reasonable return in the set time period, not a share of profits, so that real estate companies can solve financial problems, while keep control of the project.
(3) Transactional trust products
This trust plan can bring a return as high as 6% to investors, but with more intermediate operations and low liquidity, which matters most.
Judging from future development, the diversification of trust investment products is vital to trust products, and also is an important trend for real estate trust financing. There is great potential for China real estate trust financing.
c. Asset Securitization
Asset securitization is the financing method with the most potential.
Real estate securitization as an innovative financing method emerged in 1950s in the United States. In late 1960s, real estate securitization mode in the United States and other developed countries gradually matured. In 1968, the United States Federal National Mortgage Association was renamed to Federal Housing Loan Mortgage Company, and set up Government National Mortgage Association. Based on these two institutions, the United States creatively carried out residential mortgage loan securitization: the two institutions mentioned above undertake all the mortgage loans by financial institutions for residential purchase, then through legal ways issue bonds to turn the creditor’s rights on the loans into cash, repay the financial institutions by buying rights on the loans, to accelerate relevant financial institutions’ capital flow to provide new loans to homebuyers.
IV Conclusion
Under the background that national economy maintains high growth rate, social reform speeds up and industries have a promising future, Real estate enterprises are facing opportunities for development and various financing choices, each with advantages and disadvantages. For most real estate enterprises, bank loans are still a conventional choice, so it should not be given up; individual entrusted loan has potential to expand the scale, so it is worth trying; trust financing is getting popular in recent years and has developed many flexible financing modes, so it should be paid more attention; asset securitization with a promising future should be watched and investigated as soon as possible.
Author: From Xi’an Chang Qing Properties Group Co., Ltd., Xi’an Shaanxi, 710006