On the evening of November 28, the China Securities Regulatory Commission (CSRC) announced that it would adjust and optimize five measures in equity financing to support the stable and healthy development of the real estate market, which was interpreted by all parties as the "third arrow" to support the financing of real estate enterprises.
This caused waves in the capital market on the 29th. On that day, the A-share real estate stocks set off a wave of daily limit, and the sector was red across the board, with nearly 40 shares closed at the daily limit. Real estate stocks rose almost all at the open, and many individual stocks closed the limit at the open. By the close, the real estate sector index rose about 7.62%, hitting a new high in nearly seven months. Some insiders roughly calculated that the market value of the real estate sector soared by RMB 120 billion a day. The "third arrow" has started to show its force.
The so-called "three arrows" policy combination refers to supporting enterprises to expand financing through three financing channels, namely credit, bonds, and equity. Previously, the People's Bank of China (PBoC) and the China Banking and Insurance Regulatory Commission (CBIRC) jointly issued the 16-Point Plan to promote the "stable and healthy development" of the property sector, providing trillion-level credit lines to high-quality housing enterprises, which is regarded as the "first arrow" to facilitate bank funding for developers. The practice of the Association of Dealers to encourage private housing enterprises to issue bonds is considered the "second arrow". The recent disclosure of the share allocation plan by two real estate companies in Hong Kong by Agile and Country Garden has been interpreted by some market participants as a precursor to the landing of the "third arrow" in the Chinese market. The latest five optimization measures mark such an official landing, i.e., equity financing.
From the perspective of policy combination, the first and the second arrows have provided financial support for real estate enterprises through credit and bonds, respectively, but also restricted the financing of some high-quality enterprises that do not meet the conditions for bond issuance and credit. The third arrow has been well compensated and improved through equity financing, with larger coverage and more diverse means. This includes listing and issuance, mergers and acquisitions, refinancing, private equity financing, REITs, etc. For the property sector, the greatest policy support is undoubtedly the current "third arrow". Because real estate enterprises, whether it is credit financing or bond financing, need to repay the principal and interest after maturity, only equity financing usually distributes shares. Compared with the first two arrows, the biggest advantage of the "third arrow" is that it will not directly increase the scale of debt of housing enterprises, and at the same time can provide sufficient and more formal channels for financing housing enterprises. In the long run, equity financing has a good leverage effect, and can be conducive to the subsequent development of debt financing by housing enterprises.
The equity financing policy of China's domestic real estate industry began to be tightened since 2010, and intensity continued to increase in 2013 and 2016, after which the listing, refinancing and major asset restructuring of real estate-related enterprises basically stopped, and equity financing entered a six-year "freezing period". In this regard, many views have long pointed out that the prohibition of equity financing of real estate enterprises lacks justifiability. For example, if the real estate industry is determined to be too risky, then the most important thing to prohibit is that banks lend to the real estate industry. When housing enterprises cannot carry out equity financing, the greater hidden danger is that they have lost the opportunity to accept open market supervision, promote corporate governance and more transparent financial statements. All these have caused them to rely on shadow banking financing, private financing, supplier financing, and even employee fundraising and other off-balance sheet financing methods for a long time. In addition, they might also issue a large number of high-interest overseas bonds, under high leverage, secretly forming hidden dangers within the industry, that when exposed could very well affect the financial institutions, suppliers, home buyers, and other parties.
Looking at the five specific measures, the relaxation of equity financing is aiming at some of the problems that need to be solved urgently for the benign development of the China's real estate industry.
Guaranteeing the handover of buildings is the focus of real estate policy at this stage, which will help alleviate residents' worries, thereby promoting the stability of the real estate market. Among the five measures, the restrictions on "resuming the refinancing of listed housing enterprises and listed companies involved in housing" can be seen that the direction of investment of such funds is clear, that is, the funds raised by housing enterprises through equity financing are mainly used to ensure the delivery of buildings, supplement liquidity funds, and repay debts, and cannot be used for land auctions and the development of new buildings. This also delineates a red line for the flow of funds of housing enterprises and helps the implementation of the "guaranteed handover of buildings" policy.
Currently, the capital market still lacks confidence in the real estate industry. With the acceleration of financing support for high-quality private enterprises, the market's confidence in these enterprises is expected to be repaired. Through equity financing, relevant listed real estate enterprises can not only issue shares to purchase housing-related assets, but also raise supporting funds when issuing shares to purchase assets, which will also greatly promote the activity of A-share and even H-share real estate enterprises, and the overall sector valuation is expected to fall into a reasonable range.
Under the backdrop of the urgent need for the real estate industry to be cleared of the problems facing, among the five measures, "resuming the mergers and acquisitions and restructuring of listed companies involved in housing and supporting financing" has received special attention. This has, in fact, clarifies that the policy for the restructuring and listing of real estate enterprises will be relaxed. The convenience provided by it enables enterprises with problems to straighten out debt relations through such restructuring and listing work. High-quality real estate enterprises too will have the opportunity to acquire or control such enterprises, accelerate the restructuring of listed real estate enterprises with insurance, and resolve the risks of the industry, so as to remove its hidden risks. This will help to prevent the further spread of the risk of the collapse of housing enterprises.
With the successive landing of the "three arrows", this has shown the current domestic real estate relief idea has been expanded from "rescue projects" to "stable housing enterprises", but it does not mean that a comprehensive rescue will be carried out, let alone the return of the past era of "high leverage, high debt, and high turnover". Industry insiders generally believe that the issuance of these policies does not mean a shift in property market policies, but under the premise of "housing is not for speculation", the financial management department will implement and detail a package of policies and measures to stabilize the property market and promote development and support rigid and improved housing demand.
For some insolvent, chaotic management, and small real estate enterprises, it is expected that they will not benefit from the above series of policies, except for some that will become the target of mergers and acquisitions of listed real estate enterprises. The rest, as things stand, will still be accelerated out of the market. In terms of the industry cycle, the situation of the real estate industry in China today is caused by long-term factors. For the industry to get out of the current predicament, merely relying on the financial aspect is far from sufficient. The relaxation of the financing end cannot replace the recovery of the market mechanism. In the end, this will depend on the sales side. The "three arrows" will not directly bring about an immediate, significant improvement in the market, as the restoration of the real estate demand side and the recovery of consumer confidence may take a while. The downward trend of the real estate market too will be difficult to reverse.
Final analysis conclusion:
China's real estate industry has successively received policy support in credit, bond, and equity financing. This is conducive to the effective improvement of the capital level of high-quality housing enterprises, the steady progress of "guaranteed handover of buildings", and the smooth liquidation process of the industry. In addition, this is also beneficial for the promotion of its internal restructuring, and the reduction of the risk of continuous thunderstorms of housing enterprises. That being said, this does not mean there will be a comprehensive rescue of housing enterprises and a shift in property market policies. It remains difficult for the relaxation of financing to directly bring about market improvement, and the real estate market may continue to slide to the bottom.
