Chinese cities restrict property firms’ access to escrow funds
Chinese cities restrict property firms' access to escrow funds
Chinese City Governments Tighten Access to Escrow Funds, Posing Risks to Property Developers
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HONG KONG/BEIJING, Aug 2 (ANBLE) – Some Chinese city governments have made it harder for developers to access tens of billions of dollars from property sales held in escrow accounts, people familiar with the matter said, raising risks the cash-strapped companies will be squeezed even more.
Amidst the uncertain future of the Chinese property sector and falling home sales, several city governments in China have implemented measures to limit developers’ access to escrow funds, according to sources. These measures are aimed at ensuring the completion of more unfinished projects at the city level, but they could potentially exacerbate the financial challenges faced by already cash-strapped developers.
The moves by local city governments seem to contradict the central Chinese government’s plan to stabilize the property sector, which has been hit by a prolonged liquidity crunch and declining demand. The tight restrictions imposed on accessing escrow funds have put developers in a Catch-22 situation. While local governments want to ensure the delivery of all housing projects, developers cannot achieve this without adequate liquidity.
Gary Ng, Asia Pacific senior ANBLE at Natixis, likened the situation to a Catch-22 dilemma. He pointed out that while local governments may have good intentions to ensure project completion, it is difficult for developers to accomplish this without access to the necessary funds. This could lead to lower capital usage efficiency for private developers, who have been hit harder by the crisis in the sector, and increase credit risk for smaller developers.
Chinese developers are allowed to sell residential projects before completion, but the funds from these sales are required to be placed in escrow accounts. Local city governments permit developers to withdraw a portion of the funds based on the progress of construction. However, since the debt crisis hit the property sector in mid-2021, and with sales trending downwards since April, some city governments have begun restricting developers’ access to the escrow funds from the second quarter of this year.
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Senior executives at two Chinese developers revealed that over 80% and 90% of their cash, respectively, is now trapped in the escrow accounts. Their efforts to withdraw funds for construction purposes have been blocked by local authorities. This contrasts sharply with the situation before the debt crisis hit, when only around 30% of funds were trapped in escrow accounts. These mounting restrictions are believed to be a result of local authorities wanting to ensure sufficient capital for completing home construction in their respective cities.
An executive at a developer that has defaulted on its debt obligations lamented, “It has become very difficult again in the past few months for us to withdraw money from the escrow accounts. At the end of last year, it had been easier after the government easing.”
This tightening of access to escrow funds comes at a time when developers have heavily relied on such funds for property development. In the first half of this year, nearly 7 trillion yuan ($977 billion) was used by developers for property development, with approximately one-third of that amount originating from down payments and pre-sale funds.
The faltering demand in the Chinese property market is another factor contributing to the current situation. Property sales between May and June recorded the largest monthly drop this year, based on sales by floor area, while investment in property also slumped.
Stricter rules for withdrawing escrow funds have been implemented by local housing authorities. For example, in certain cities in Hunan province, banks are now required to make escrow funds available only to developers who have alternative sources of funding to cover construction costs. Banks are also evaluating an entire firm’s different projects across cities together, allowing pre-sale proceeds from one project to be used for the construction of another development in a different city.
These measures to tighten access to escrow funds have raised concerns about the financial stability of developers who are already struggling in the current economic climate. While ensuring the completion of unfinished projects is a valid objective, the restrictions imposed may further squeeze developers and increase credit risks.
The Chinese government’s housing ministry did not respond to requests for comment regarding these tightening measures. However, it is essential for policymakers to consider the long-term implications and potential consequences of limiting developers’ access to escrow funds, especially as the property sector plays a crucial role in China’s economy.
($1 = 7.1652 Chinese yuan renminbi)
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