CBRE: Crowd Sourcing for Real Estate Funding Unlikely to Replace Traditional Lending in the Near Future
August 13, 2015, Beijing – Real estate bank lending in Asia Pacific significantly moderated after the GFC. According to CBRE’s latest research Asia Pacific Real Estate Debt Market – Tighter Regulation Brings Opportunities, the increase in regulations and restrictions has caused the real estate bank lending in Asia Pacific to decelerate from 15% per annum in the period between 2005 and 2008 to 7% between 2011 and 2014. As banks turn more conservative towards providing development finance, the funding gap being left by banking market is posing a challenge for property developers, leading to an increased demand for alternative sources of real estate funding.
Johnny Shao, Executive Director, Head of Investment Properties, CBRE China, commented: “The non-bank lending industry in Asia Pacific has grown rapidly in recent years, standing around US$5 trillion as of the end of 2013, with China the largest market. According to the Global Shadow Banking Monitoring Report 2014, China’s non-bank lending industry is approximately US$3 trillion (end of 2013), up 14 times compared to 2008 of US$190 billion. We believe that for the short term, the further regulatory reforms in the financial systems are expected to press down shadow banking; however, for the longer term, as investors become more sophisticated, the non-bank lending market in China will grow and the demand will expand significantly.”
The
tighter lending environment encourages growth of non-bank lending industry
In China, banking
financing and proceeds from pre-sales have been the two key funding sources for
real estate development.
Following the Chinese government’s legislations in 2010 to cool down the property market, banks have turned very selective and prudent and a general slowdown in bank lending for real estate has been observed across the board. While most listed real estate groups can continue to secure funding from the banks, the slowdown has hit the small and medium-sized developers particularly hard. According to CBRE Research, CEIC and various central banks, the annual growth of bank lending for real estate in China declined to 13% during 2011-2014 period from 18% during 2005-2008 period. Smaller real estate groups who largely depend on pre-sales revenue as their major source of funding are now facing a big funding issue because pre-sales are diminished significantly by the government’s curbing measures.
As a result, investors and property companies, particularly small and medium-sized developers, are shifting to alternative funding sources in public and private debt markets.
Chart: Average Annual Growth of Bank Lending to Real Estate in Asia Pacific
Source: CBRE Research, CEIC and
various central banks, June 2015
CBRE’s special report Asia Pacific Real Estate Debt Market – Tighter Regulation Brings Opportunities has discussed two major non-bank lending models currently utilized to finance real estate projects in China, ie 1) real estate funds act as pure debt providers to receive high interest rates from financing development projects 2) investors structure lending deals with options to convert interest to equity.
While domestic financial institutions, particularly trust investment companies, are the major non-bank lending providers as described in the first model, more foreign funds are going into this space. In early 2015, InfraRed Capital Partners invested US$20 million of secured notes issued by Cheung Wo International Holdings with a guaranteed return of 20% per annum for financing development projects in China.
The second model is designed to capture upside potential when investors invest in quality assets or projects. Notable examples include Brookfield Property Partners, which invested US$500 million convertible perpetual debt into China Xintiandi, a wholly owned entity of Shui On, which owns the high-end Shanghai Xintiandi entertainment district in Shanghai. The bond yield is 8.5% for the first five years and will be converted into Xintiandi shares upon being listed on the stock market.
Crowd
sourcing for real estate funding is emerging as a new trend but will not
replace traditional lending
Challenges in sourcing
funding are driving investors to identify and develop new financing models, and
crowd sourcing for funding is emerging as a new trend. According to World Bank’s
recent report on global crowd funding, the market has been growing very rapidly
since 2009, from initially only US$530 million of capital financed to US$2.7
billion in 2012, recording an outstanding compound annual growth rate of 63%.
In 2012, Fundrise, a
website based in US, was the first to introduce crowd sourcing to the real
estate industry, the so-called “crowd sourcing for real estate funding”. Under
this new financial model, real estate developers utilize the Internet as a
platform to raise capital from investors for their development projects.
Investors can choose to invest across multiple projects at smaller scope of to
diversify investment risks while real estate companies can get the funding from
multiple sources.
Since the take-off of
the Internet+ at the start of 2015, “crowd sourcing for real estate funding”
has quickly become a much talked-about concept in China. As a way to turn
around the business, many Chinese property developers are now looking to the
Internet to identify funding via crowd sourcing to support their projects.
Cross-border collaboration among different industries such as the Internet,
finance and real estate is rapidly taking its shape. On 29th May,
China established the country’s first industry association on crowd sourcing
for real estate. On 2nd July, Wanda launched the first Internet-based
crowd sourcing project for real estate in China.
Frank
Chen, Executive Director, Head of CBRE Research, CBRE China, commented:” China’s
real estate industry is going through a period of consolidations. Going
forward, more and more developers are expected to move to online lending via
crowd sourcing. However, for the near future, Internet-based finance will not
replace traditional funding as a mainstream channel.”
ABOUT CBRE GROUP, INC.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2014 revenue). The Company has more than 52,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 370 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2014 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.
