China’s property trust funds risk default as housing market cools

04 June 2014   Category: News, Asia, China, Global   By Derek Au

Chinese property trust funds that poured investments into projects by smaller developers could go into default, as the real estate market shows further signs of cooling down, according to a top executive at a Mainland securities firm.

Yu Kun, vice president, at Guoyuan Securities (Hong Kong), the offshore arm of state-owned Guoyuan Securities, told Asia Asset Management: “For the small developers, funds available from banks are relatively limited. They may see liquidity being affected, coupled with slower property sales, so they may not have enough liquidity to repay debts.” He added that the risk of default also depended on the collateral and guarantee arrangements of the funds in question, as well as the lands involved in the project.

According to data from the Mainland’s second largest asset manager, Haitong Securities, this year Chinese property trust funds must repay debts amounting to 633.5 billion RMB (US$101.28 billion), up 50% from 2013. This has prompted worries that a wave of defaults that could incur huge losses for investors.

The increased risk of default has encouraged the government to keep a closer eye on the issuance of property trust funds. Data from website Usetrust.com showed that that the number of new property trust funds being set up slumped by 75% year-on-year in May this year, indicating that their heyday may be over.