China’s $147B Real Estate Bailout Fund May Not Help Developers Says S&P

Investors hoping that a state bailout fund which could reach RMB 1 trillion ($147 billion) will help save some of the country’s beleaguered developers or rescue bond investors may have to adjust their expectations according to a report this past week which sees the cash going to local governments rather than onto builder balance sheets.

“The likelihood of these funds bailing out developers or refunding homeowners is low,” S&P Global Ratings said Thursday in a statement led by senior director Harry Hu.

“The main purpose is to fund the completion of the stalled residential projects and relieve uncertainty for the homeowners who pre-purchased them,” S&P added. “The fund will replenish liquidity needed for labor and materials to finish the homes, rather than help developers repay debt.”

The fund, which was approved by China’s State Council this month, is being rolled out as mortgage boycotts by homeowners frustrated with project delays have now spread to more than 100 cities across the country. Policy makers have also been stepping up other measures to reassure the market as home sales have fallen 28.2 percent over the first seven months of this year compared to 2021 levels.

40% of Developers in Distress

S&P estimates that around 40 percent of mainland property developers are now in financial distress but said that, while the fund is still in the developing stages, payouts will be managed directly by local governments, rather than having financing provided directly to builders.

“Regional governments will coordinate the set-up of local real-estate funds,” S&P said. The firm’s analysts added that, “While it is possible to derive profits, we expect these to be thin. These funds act similar to administrators, taking over or outsourcing the management of individual projects.”

The credit rating agency said it is less likely that the government-backed rescue vehicles will be used to bail out developers or even refund homebuyers as the state’s top priority is on replenishing liquidity to bring stalled residential projects to the finish line, rather than helping property builders repay debt.

Banks Seen Participating

“The vehicles are likely to operate on a fund-of-funds structure with multiple exposures to stalled projects,” S&P said. “In our view, these real estate funds serve as a market signal to calm negative sentiment.”

It expects the real estate fund will be used to provide much-needed cash to pay for labor and materials needed to complete delayed projects, with regional governments in charge of setting up local funds while national-level vehicles may step in to plug any funding gaps.

S&P said it does not rule out the possibility of asset injections by local governments but expects cash inflow will mostly come from banks, especially those which are already exposed to stalled projects.

Although profits from the funds are likely to be limited, it said commercial rationales like maximizing repayment and the benefits of a recovery in the market, and for troubled developers, can provide additional motivation for banks to participate. Sales of discounted assets and the opportunity to commence sales for residential projects still in the early stages can generate additional cash flow.

S&P added that, “We expect the real estate funds to recover mismanaged escrow funds from developers, or what is left of them.”

Presale Model Probed

The lifeline package marks the Chinese government’s latest step to rescue its troubled property sector as economists from Goldman Sachs this past week cut their forecast for GDP growth in Asia’s largest economy from 3.3 percent to 3.0 percent as challenges mount.

A report by Reuters late last month stated that the nation’s central bank, the People’s Bank of China, is kicking off the bailout plan with RMB 200 billion in credit to be supplied to state commercial banks to be used alongside the banks’ own funds to refinance delayed real estate projects.

Reuters had earlier reported a plan to launch a separate fund dedicated to buying out and completing unfinished rental housing projects seeded with an initial RMB 80 billion from the central bank.

State-backed developer Zhengzhou Real Estate was the first to set up a local rescue fund last month through a tie-up with Henan Asset Management.

S&P predicts that China may also introduce tighter oversight over the sector’s presale model, which has allowed developers to begin spending money collected from buyers of units in projects in progress on other ventures, as it probes bank exposure to the real estate market.