A growing number of cities in China have tightened supervision over the use of presold property proceeds, a move likely to deepen the cash crunch at many of the nation’s real-estate developers that have relied on the inflows as a key source of funding.
Major cities, including Beijing, Tianjin and Shijiazhuang, as well as smaller municipalities like Suzhou and Nantong in Jiangsu Province, and Luohe in Henan Province, have issued rules tightening oversight of the proceeds, a China Business News report and government statements said.
The measures are designed to ensure the timely completion and delivery of property projects as the number of suspended projects rises amid a severe downturn in the nation’s real-estate market, the report cited Yan Yuejin (嚴躍進), research director at Shanghai-based E-house China Research and Development Institute, as saying.
However, the policies are set to worsen the cash shortage for some developers and make it more challenging for them to repay debts, because the companies would have less access to those proceeds at project levels, the report cited unidentified industry sources as saying.
Official data show presale proceeds generally account for almost half of developers’ cash inflows.
“The new regulations have directly affected the sales rhythm of real-estate enterprises and further slowed their capital turnover, and that might intensify pressure on their working capital,” said Chen Wenjing (陳文靜), associate research director at China Index Academy.
China’s property industry has been suffering from a nationwide government crackdown on speculation and leverage following years of debt-fueled expansion.
A widening crisis at China Evergrande Group (恆大集團), which is saddled with more than US$300 billion in liabilities, is now spreading to other developers.
Foreign central banks are signaling concern.
The US Federal Reserve said in a report on Monday that the fragility in China’s real-estate sector could spread to the US if it deteriorated dramatically.
The Hong Kong Monetary Authority told banks that it would require them to disclose more details about their exposure to the industry, the Hong Kong Economic Journal reported yesterday.
For the Chinese government, a top priority is to ensure social stability. To safeguard the interests of homebuyers, authorities want to make sure developers use presale proceeds to complete the projects rather than for starting new ones or for other purposes, the China Business News report said.
At Evergrande, 1.6 million homebuyers are waiting for their properties to be finished.
The housing authority in Shijiazhuang, near Beijing, stipulates that from yesterday, developers would be banned from starting presales of any of their projects in the city until after entire structure is completed, an official statement said.
Previously, developers there were allowed to commence presales when construction reaches one-third of the total number of floors designed for the project.
A district government in the city of Nantong said in a statement on Monday that it has set minimum amounts of presale proceeds that developers must deposit into government-supervised bank accounts for certain housing projects.
Builders can only access the proceeds after the thresholds are met, it added.
In Beijing, developers that wish to open supervisory accounts for presale proceeds can only choose from banks selected by local authorities, a revised regulation released last week by the capital’s housing department said.
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