Developers turn to HK after mainland lending restrictions

The mainland's biggest developers are borrowing record amounts in Hong Kong, taking advantage of lower interest rates to circumvent a lending crackdown at home.

While banks demand at least 5.2 per cent in annual interest for three- to five-year money on the mainland, the cost of credit in Hong Kong dollars has fallen to the lowest since November 2004.

China Overseas Land (SEHK: 0688) & Investment agreed to an HK$8 billion loan in February that pays 1.45 per cent at current market levels, Bloomberg data shows.

"For property developers to keep growing in what is an extremely fragmented and competitive market, they have to go offshore" for funds, said Brayan Lai, a credit analyst at Credit Agricole CIB in Hong Kong. "It's one way to circumvent tight onshore credit."

Syndicated borrowing by mainland developers in Hong Kong dollars jumped to HK$37.3 billion this year, the most since Bloomberg began compiling the data in 1999, from HK$3 billion in the same period last year.

Total lending in the city rose sixfold to HK$63 billion from HK$8.7 billion as mainland banks' share of the market fell to 21 per cent from 29 per cent. Yuan-denominated lending to mainland developers dropped 25 per cent.

China Resources (SEHK: 0291) Land said last week that it agreed to four loans with banks totalling HK$6.2 billion. Agile Property Holdings (SEHK: 3383) borrowed US$125 million in January from a Bank of America Corp unit in Hong Kong.

Shimao Property Holdings (SEHK: 0813) is seeking a US$400 million loan from the Hong Kong units of banks including HSBC Holdings (SEHK: 0005, announcements, news) and Standard Chartered. The loan may pay 3.1 percentage points more than the London interbank offered rate, according to Annisa Lee, a credit analyst at Nomura Holdings.

"Companies are going to the syndicated loan market in Hong Kong because liquidity is strong and pricing is competitive," Lee said. For loans, "property companies don't have to pledge their projects as security, so there's more flexibility with regards to the use of proceeds".

Shimao's US$350 million of 8 per cent bonds due 2016 last traded at a yield of 6.58 percentage points more than Treasuries, according to BNP Paribas prices. The company said on April 13 that 2009 profit more than quadrupled to 3.51 billion yuan (HK$4 billion).

Premier Wen Jiabao's government has staked its "credibility in economic management" on measures to cool the property market, Credit Suisse Group said on April 29, after the state raised mortgage rates and down-payment ratios, barred lending for third homes and tightened scrutiny of developers' financing to restrain speculation. Fuelled by a 4 trillion yuan stimulus package and US$1.4 trillion of new loans last year, property prices jumped 11.7 per cent in March.

The China Securities Regulatory Commission sent financing requests from 41 real estate companies to the Ministry of Land and Resources for review. Companies with property businesses that plan to repay bank loans or boost operating capital must also submit equity financing plans.