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New Funding Options for Domestic Property Firms

Domestic property companies are turning to new funding options as bank loans become increasingly harder to obtain at a time when the government is tightening its monetary policies to rein in rising inflation.

"Domestic property companies still rely heavily on bank loans, which are difficult to get at a time when the government is pursuing a tightening policy," says Shuai Hu, an analyst at Haitong Securities in Shanghai.

Turning to the capital market for funding through IPOs and new share issues seems increasingly viable because of deepening investor apathy following the stock market crash which has brought the leading indicator down more than 50 percent since its peak in October.

Without the enormous interest income from over-subscriptions, issuers are finding the cost of IPOs unbearable relative to other funding sources.

For that reason, industry analysts and experts expect a sharp slowdown in new share issues by property companies in the second half of this year.

In the first six months of 2008, only two real estate companies had raised capital by issuing new shares for sale to the public.

The People's Bank of China, the central bank, has raised banks reserve requirement ratio by 100 basis points in two steps of 50 points each, on June 15 and June 25, which was the fifth such increase this year.

The newly raised reserve requirement ratio requires commercial banks to set aside more deposits as reserves, resulting in a sharp reduction of funds available for lending.

Statistics show that 200 billion yuan will be frozen in for very 50 basis points increase of the reserve requirement ratio.

Under such circumstances, issuing corporate bonds are widely seen as an effective funding source for cash strapped real estate companies hit by dwindling sales and falling prices since late last year.

Since Gemdale Property Co issued the first ever property bond in April, several property companies, including Xinhu Zhongbao Co and Poly Real Estate Co, have followed suit.

Another three property companies have obtained approval from the securities regulator to issue bonds in the coming months.

The cost of raising money directly from investors through the issuing of fixed income instruments is usually lower than bank loans.

For example, interest rates for loans to property companies average at about 10 percent a year, which is substantially higher than the 5.5 percent coupon rate of the bonds issued by Gemdale Property Co.

Analysts and experts say the coupon rates, which indicate the interest cost of issuing bonds, average at 7.5 to 8 percent according to different ratings for issuers.

The coupon rate of the 1.4 billion yuan bonds issued by Xinhu Zhongbao Co was set at as high as 9 percent, which had attracted a large number of investors.

Declining home sales since early this year have also aggravated the difficulties faced by real estate companies.

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