BEIJING (Reuters) - Capital-hungry Chinese developers are turning to real estate private equity funds this year as big domestic banks tighten lending to help Beijing curb property prices, a top concern for most Chinese.
Foreign banks and buyout funds have been in active discussions with private equity specialist lawyers to form property funds since the start of the year, and some multi-hundred-million dollar funds are ready to go, according to people involved in these fund-raising plans.
"Private equity players believe the more bank loans are tightened, the bigger the opportunity for them to invest in Chinese properties," said a lawyer working for a U.S. client, which is forming a real estate fund with a China focus.
"When developers find it difficult to get loans from banks, they have to seek alternatives, and private equity funds will be a good option," said the lawyer. The legal and financial sources interviewed by Reuters for this story declined to be identified because they were not authorised to speak to the media.
Citigroup Inc"s (C.N) private bank joined hands with state-owned conglomerate China Resources Group to raise about $500 million for real estate funds to invest in Chinese shopping malls, Reuters reported last month.
Last week, Franklin Templeton"s real estate arm said it aims to raise $300 million for its second Asian real estate fund, which includes China as a market focus.
Developers used to turn to the stock market for fund-raising via IPOs. Most investors, however, are no longer big fans of property stocks this year.
Nine Chinese property companies listed in Hong Kong last year, raising a combined $5 billion, according to Reuters calculations. The flood of real estate IPOs has put pressure on developers" fund-raising plans via stock markets.
As a result, many developers now are more keen to seek money from private equity funds because they need medium-term capital to finance their new projects.
NEW PROPERTY FUNDS
Palm Spring is in talks to sell a stake worth between $100 million and $200 million to a private equity fund after the luxury developer failed to launch its planned IPO worth up to $1 billion in Hong Kong last year, sources told Reuters.
"If you can"t do an IPO immediately, and you have trouble getting loans from banks, then what else can you do? Naturally you will think of private equity, though the financing cost could be higher," said one of the sources.
"And that"s also why you see suddenly many new property funds are in the making," he added.
In recent months, some Chinese developers were forced to give up the land they won via public auctions due to a lack of capital to kick off construction. In the event, they lost some guarantee money to the land auctioners, local media reported.
Even among Chinese banks, which have been guided by the banking regulator to slow down lending to developers and raise downpayments for second or third home buyers, some are keen to help raise property funds to finance developers indirectly.
The China Banking Regulatory Commission has warned some major state lenders to slow lending after they approved loans at a record pace at the start of the year.
Part of the loans were mortgages, which some analysts said have helped boost property prices in major cities since the second half of last year.
Property inflation has become one of the biggest complaints among ordinary Chinese, raising concerns among policymakers in Beijing that it could eventually strain social stability.
"On the one hand, we will continue to support people"s reasonable demands in housing consumption," said Yang Kaisheng, president of Industrial and Commercial Bank of China (1398.HK) (601398.SS), the world"s largest bank by market value.
"Secondly, we also need to avoid risks that may appear in housing market lending," Yang told reporters this week.
At least two Chinese banks -- Merchants Bank Co Ltd (600036.SS)(3968.HK), China"s No. 6 lender by assets, and Minsheng Banking Corp (600016.SS) (1988.HK), China"s No. 7 lender -- are working with third parties separately to launch property funds, said sources with direct knowledge of the plans.
Chinese banks are not allowed to invest directly in properties but many of them have set up private equity-like investment units in recent years, which can invest in third-party funds as institutional investors, also known as limited partners.
Merchants Bank and Minsheng declined to comment on their property fund plans.
For related Asian private equity news, Reuters 3000 Xtra users can double click on: LEN-RTRS-ASIA-PVE
(Additional reporting by Michael Wei and Samuel Shen in BEIJING, Kennix Chim in HONG KONG and Saeed Azhar in SINGAPORE; Editing by Ken Wills and Muralikumar Anantharaman)
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