Capital is the key to a company's growth, and real estate developers in China are constantly faced with the problem of how to get it, given the limited financing channel and high thresholds that characterize the Chinese financial industry.  Hengda Real Estate Group has thus reached out to three international strategic investors, Merril Lynch & Co., Deutsche Bank, and Temasek Holdings, which have invested US$400 million in the company.  This move further encourages the industry to seek overseas and private funding rather than apply for developer loans at commercial banks in China.

How to obtain sufficient financing for property development projects has been a major problem for mainland developers since May 29, 2006, when nine government ministries, including the Ministry of Construction, raised the threshold for property development loans.  Contrary to market estimations, property developers began to seek listing, RETT's, trust products, and private capital in order to deal with their new problem.

"Macro controls have squeezed developers' financing channels, and thus forced them to seek more diverse channels and to attract strategic and non-strategic funding to support their companies and projects," said Professor Zhang Dong of the School of Finance at Zhongnan University of Economics and Law.  "Those property developers  who can secure diverse financing and strong capital support from strategic partners are the ones surviving in the market."

China Vanke, the country's top property developer in terms of market value, mainly secures its funding through the stock market.  In December, reports said that Vanke had been approved to distribute 700 million A-shares, and the company raised 420 million Yuan (US$53.846 million).  Vanke also finances itself through acquisitions; after acquiring Nandu Property Group and Hengda Real Estate, Vanke expects its sales volume to reach 20 billion Yuan (US$2.56 billion) in the Yangtze Delta by 2008.  Vanke also works in cooperation with overseas funds like Singapore GIC and Germany's HIPO.

"Seeking diverse financing is obligatory," says Zhang Jiadong of the Wuhan Property Development Industry Association.  "Although many mainland property firms seek listings in Hong Kong, Shenzhen and Shanghai, the new land tax regulations will lead to greater fluctuations in their stocks.  This means that investors will retain a high sensitivity to property stocks and thus create instability for property developers.  A developer who is funded by sufficient channels, on the other hand, can secure investor confidence."

Indeed, the future of the real estate market depends on capital, as capital determines how much of the market property developers can cultivate.  According to Vanke, the 420 million Yuan (US$53.846 billion) it raised last year will be allocated towards investment in eight projects in Xiamen, Foshan, Beijing, Hangzhou, Wuhan, Shanghai, and Chengdu.  These eight projects are primarily residential, and will require a total of 8.93 billion Yuan (US$1.145 billion).

Zhang Dong commented that the continued influx of foreign capital has brought changes to the mainland's capital structure.  The increased participation of foreign investors will further integrate the financing of Chinese property development with the international capital market.

Zhang Jiadong added that foreign investors are optimistic about the outlook of China's real estate sector.  However, this also increases the problems macro controls encounter trying to curb it.