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A Research on the Diversification of Financing
Modes of Real Estate Enterprises in China
Weiwei Zhang*
School of Management Science and Engineering
Shandong Institute of Business and Technology
Yantai, China
zwwc507@163.com
*Corresponding author
Hengliang Wu
School of Management Science and Engineering
Shandong Institute of Business and Technology
Yantai, China
Abstract— In recent years, the government has implemented a
series of severe macro-economic regulation policy, especially
monetary policy, on the real estate industry. It is more and
more difficult to acquire bank loans for most real estate
enterprises. Financing difficulties become the critical problem
that limits the development of real estate industry. Single
financing mode will not meet the need of funds. This research
tries to find some innovative and diverse financing modes for
the sustainable development of the real estate industry.
Keywords- low-income housing; innovative modes; capital-
intensive; project finance; welfare lottery; real estate
I. INTRODUCTION
Real estate is a typical capital-dependent industry, so a
plentiful and stable financial support is crucial to its
development. And the macroeconomic changes and the
guidance of fiscal and monetary policy exercise a great
influence on the scale and mode of the real estate financing
[1]. With the reform of Chinese type of finance & investment
and the adjustment of state macro industry policy, fund
chains of real estate enterprises are confronted with
unprecedented challenge. How to solve the capital bottle-
neck is becoming the critical question to real estate industry.
At present, real estate firms’ excessive dependence on the
loans of the commercial bank has lead to that the financing
channel is too single. So the fluctuation within macro-
economic conditions, especially from monetary policy
viewpoint, will influence and limit the development of the
real estate industry [2]. Therefore, the research about the
diversification of real estate financing models is necessary
and urgent for the real estate industry.
According to the market participants’ differences, China's
real estate market falls into two parts: commercial housing
market and low-income housing market. Most of previous
studies about real estate firms financing focus only on
financing for commercial housing development. In fact, the
low-income housing problem has attracted increasing amount
of social attention, and government has implemented low-
income housing projects on a large scale. As national
financial pressures are expected to grow, we will need
broader source of funding. So this paper takes into account
these two sub-topics. Based on the analysis of traditional
financing models for housing financing market, the paper
makes theoretical discussion in innovative financing models
and discusses the feasibility of diverse financing channels.
II. TRADITIONAL FINANCING MODES FOR HOUSING
FINANCING
Real estate market in China starts relatively late, and the
financing market is imperfect, so most real estate enterprises
especially small businesses depend on traditional financing
models. The traditional financing models which are being
used now include bank loans, equity financing, financing by
listing, corporate bond, etc. They will be introduced briefly in
following:
A. Bank loans
Bank loan is the most traditional financing mode, also
most important channel for most real estate enterprises so far.
According to statistics, real estate projects sourced about
60% of the fund directly or indirectly from banks. Strong
dependence on bank loans for financing real estate increase
both real estate market risk and commercial banks credit risk.
Main forms of bank loan include real estate project
development loans, circulating fund loans, individual
mortgage loans, credit loans, etc.
From statistics data of real estate project development
loans, we can see that tight regulation of the real estate credit
policies has reduced the proportion of domestic loans in the
fund of real estate enterprises (see Fig. 1).
FIGURE I. DOMESTIC LOANS AND PROPORTION IN REAL
ESTATE DEVELOPMENT FUND
① Data source: Wind Database.
②Data source: China Real Estate Development Report;
China's National Bureau
International Conference on Global Economy, Commerce and Service Science (GECSS 2014)
© 2014. The authors - Published by Atlantis Press
30
B. Equity Financing
Equity financing can lower debt burden and financing
risk, but in order to get financed, the developers have to give
out a large part of profits and power [3]. Especially for good
projects, many real estate enterprises are not willing to attract
funds through capital and equity increase.
C. Financing by Listing
Another attractive way to acquire equity capital is IPO
(initial public offering), which is a fast financing method
through listing in the stock market to raise large amount of
funds. But the threshold of IPO in domestic stock market is
too high for most enterprises, so some enterprises prefer
listing in overseas market. In addition, back-door listing is
the next choice for some enterprises, though attractive shell
resource is not easy to obtain [4]. Due to high threshold and
numerous restrictions, listing constitutes only a modest
proportion of real estate funds.
D. Corporate Bond
This is also a financing method through the stock market
to raise funds, which is often used for higher return rate
projects. According to Securities Law, the requirements on
issuing bond are rather strict, which limits the application of
this mode and denies the chance of many small enterprises.
Besides, complex procedure and high cost of issuing
corporate bond stop the advance of many enterprises.
III. INNOVATIVE FINANCING MODES FOR HOUSING
FINANCING
The lack of financial products limits the development of
real estate industry, and the market calls for more steady
suitable funding solutions. Especially, as the quasi-public
goods, most of the low-income housing projects are low-
profit ones, which mainly rely on government financing
funds. So there is increasing pressure and a growing gap in
financial funds. To raise funds from multiple sources for both
commercial housing and low-income housing projects and
actively explore innovative financing modes has become the
urgent issue for the development of real estate market.
A. Innovative Financing Modes for Commercial Housing
Financing
1) Project financing: Project financing is fund
arrangement in which the repayment is derived primarily
from the project's cash flow, not the revenue of other
business or assets of sponsor. But the project's assets, rights,
and interests are usually held as collateral. This model will be
workable for those real estate enterprises who has high return
rate projects, but whose asset-liability ratio is too high to
acquire new credit loan. If the developer has more than one
project at the same time or more than one developer sponsor
projects together, project financing model is a prior choice,
as shown in Fig. 2. Under such circumstances project
financing is an effective way to lower the risk and cost of
funding, and the fund is easy to withdraw when projects are
completed. But if such projects may not generate enough or
stable cash flow for either the principal or interest payments
as predicted, fund providers would have to accept higher risk
than expectation. So when this mode applied, accurate
feasibility study is critical for all participants.
FIGURE II. SCHEME OF PROJECT FINANCE
2) Assets securitization: Assets securitization is a
financial innovation tool, which develops fast within global
finance field in recent years. Though many studies of
domestic finance scholars have made great achievements,
there are no signs of large scale expansion. Due to the
imperfection of domestic financing market, there are a lot of
obstacles in practice.
Assets securitization falls into two categories: credit asset
securitization and revenue assets securitization, both of
which can be applied in housing financing. Credit asset
securitization can motivate and improve the capacity of bank
lending by issuing securities backed on the credit assets of
real estate project development loan, which can increase the
availability of funds for real estate enterprises. By contrast,
revenue assets securitization is a more direct model to
finance real estate projects, as shown in Fig. 3. Many entities
take part in the process of assets securitization and it’s a
complicated financing structure, which limits the application
of this innovative method. With the development of domestic
financing market, assets securitization will boom in China.
FIGURE III. MODE OF REVENUE ASSETS SECURITIZATION
B. Innovative Financing Modes for Low-Income Housing
Financing
As the important component of China housing market,
low-income housing’ construction and development has
become a significant issue in national housing policy. China’
low-income housing market is facing huge demand and
serious pressure on the funding gap, and the situation will
last in next few years [5]. In the system of domestic low-
Contractor/builder
SPC
Commercial
bank (financier)
Project A-1
Sponsor A
Repay the loan
Development loan
Project payment
Sponsor B
Project B-1
Construction
Construction
Project earnings
Manager
Profits
Fund for repayment
Investors
Underwriter
SPC
Credit
evaluation
Credit
enhancement
Projects
Agent
Development funds
Future earning right
Issuing income
Design of security structure
Issuing
Subscription
Cash flow
Payment of principal and interest
Bankruptcy
isolation
Cash flow
Service
Organization
31
income housing (see Fig. 4), this paper focus on public rental
housing and low-rent housing.
FIGURE IV. SYSTEM OF DOMESTIC LOW-INCOME HOUSING
1) BT financing mode: BT (Building-Transfer) is a
derivative form of BOT. This mode can resolve the fiscal
difficulty in funding to carry on the project construction
at early stage. When transferred, housing projects can be
launched to the market immediately and the fund would
withdraw from low-income housing projects to pay the bills
to BT contractor. The key point in this mode is the selection
of an excellent contractor and the price contract. This mode
can be applied to affordable housing and capped-price
housing projects, but not to low-rent housing or public rental
housing.
2) REITS mode:Real Estate Investment Trusts (REITS)
originated in US, and has emerged as a globally popular
investment product. REITS were introduced into China in
recent years, and become a new investment tool of financing
market. Meanwhile, REITS will become a helpful vehicle to
fund for real-estate industry in China [6]. Contrast to
commercial housing projects, this mode is more suitable for
public rental housing and low-rent housing projects with
stable cash flow, but low risk. REITS will enable the
government to pool large-scale organization funds and civil
funds to the housing system to meet growing needs of low-
income groups [7].
3) PPP financing mode: PPP is acronym of Public-
Private-Partnership, which has been widely applied in some
developed countries, but a newly rising way in domestic
market. The main participants in this mode include two
parts ：government's public department and private
department, the former represents public interests Recent
years, some infrastructure constructions have begun the
application of PPP mode. Considering the characteristics of
low-income housing projects, we can apply PPP in such
project construction. In PPP mode, Partner Company can
construct new houses or purchase existing houses, and then
operate these houses to earn profits in limited concession
period, and at the end, Partner Company will deliver the
projects to government. Fig. 5 shows the example of PPP’s
operation procedure in financing public rental housing
projects. PPP would be proved one of the suitable modes for
low-income housing projects.
FIGURE V. OPERATION PROCEDURE OF PPP IN PUBLIC RENTAL
HOUSING PROJECTS
IV. CONCLUSION
Domestic real estate market is going through difficult
times, and capital is a determining factor for the survival of
any enterprise, which must explore new financing ways. Any
single mode can not support long-term and sustainable
development of enterprises. Diversification of financing
vehicle is necessary. Other channels can also provide funds
for current housing market, e.g. housing accumulation fund,
pension funds, endowments and fund collected through the
issuance of welfare lottery, etc. Given capital source stability
and current situation of housing, these channels are feasible
theoretically, but the specific implementation methods need
further research.
ACKNOWLEDGMENTS
The author would like to thank the grant of the Shandong
Province Social Science Planning and Research Project
(No.12DGLJ07), Shandong Province Higher Educational
Humanities and Social Sciences Research Project
(No.J10WG64), and all collaborators who provided the data
sources for my previous and current studies.
REFERENCES
[1] Terrence Claurefie, “Stacy Sermons Real estate finance theory and
practice”, New York: Prentice Hall, 1999.
[2] Alan Rabinowitz, “The Real Estate Gamble: Lessons from 50 years
of Boom and Burst”, 1980.1
[3] Hancock D, “Wilcox J A bank capital, nonblank finance, and real
estate activity”, Journal of Housing Research., pp.75-105, 1997.8(1).
[4] Su keqiang, “On Financing Models of Real Estate Enterprise” ,
China’s Foreign Trade, pp.56-58, 2011.11.
[5] Peter Werwath, “Financing Mechanisms for Affordable Housing”,
Enterprise Community Partners, Inc, 2007.
[6] Ernst&Young PLL，“The Future of REITs in China”, pp.9-15,2011.3.
[7] “The Investor Guide to REITs”, National Association of Real Estate
Investment Trusts, NAREIT, 2009.
Turn over
Operate Develop
Organize
Private secto
r
G
overnment Public rental housin
g
p
ro
j
ects
PPP
p
ro
j
ect com
p
anies
Co-decision
Concession
System of
domestic
low-income
housing
Affordable housing
Capped-price housing
Low-rent housing
Public rental housing
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