Deepening Finance Access For Residential Real Estate Investment In China

For any financial deepening to be deemed to have occurred, the following objectivesmust be met. First, shift from centralization to decentralization of key areas of financialsystem, second securitization process, and lastly innovation. China is on the way to a maturemarket especially after shifting from a central planned system of operation to a market basedsystem of operation. This saw some banks that had restrictions in offering some financialproducts be entitled to also compete with others that had prior privileges, However there isneed to develop securitization in China at a faster pace. This will allow high liquidity flowsand easier operation of some fixed assets such as real estate. Innovation is also key for theChinese fast growth model, this will be advantageous to the developers of real estates and theentire economy as a whole because ease in access of capital through various means increasesthe volumes of investments across the economy. Innovation also plays a key role inelimination of asymmetric costs caused by lack of information by some players in thefinancial system that could have worked to their disadvantage. Once information asymmetrichas been eliminated, there is high probability of minimizing moral hazards in the financialsystem specifically corruption.The existence of a huge gap between financing needs and availability of financingplatform is a major hurdle hindering the growth path of real estate. Financing of real estateinvestment is highly affected by very limited options to source for funds. Hence, mobilizingcheap long term savings is very critical for this venture to match the long term span thatcharacterizes real asset investment. Real estate investment is a capital intensive venture andthis implies that firms venturing into this sector need to have a strong capital structure tosustain their developments. There is high competition amongst the real developers in quest forfunds from formal and informal sources to meet their financial needs. Currently, many realEstate firms are experiencing a credit fix to expand their real estate portfolio. In the recentmove by the Peoples Bank of China to clamp down lending in the real estate sector; thePeople’s bank of China tightened monetary policy by raising interest rates which in effectlead to increased cost of capital. The central government has also encouraged banks to adoptslow lending to real estate projects. According to the People’s Bank of China (PBOC), theincrease in cumulative loans related to housing projects totaled￥1.3trillion ($198billion) in 2011, down38percent from2010, and new loans to the property sector comprised17.5percent of total loans in2011, down from27percent in2010.This is an intermittent procedurebound to be undertaken by the relevant regulatory commission to effect macroeconomicstability in the country’s economy. Hence, the funds demand side should not always rely onuncertainty in the decisions made by monetary authority that will have either a negative orpositive impact on their financial requirements. The remaining prudent alternative isinnovation for exploitation of other means of acquiring funds for real estate venture that canmatch their financial requirements. Real estate investors need to deepen and broaden theiroptions of financing their activities to avoid credit squeeze that may end up affecting thehorizon of their projects, returns and general viability of their projects.The mentioned variables in our hypothesis in chapter three are the main motivatorsfor seeking more finances for continued real estate investment expansion. On the other hand,the interest rates, Research and Development costs, land costs exhibited negative sign andsignificant coefficients. signifying that that these variables have immense ability to push realestate developers to be innovative at seeking financing options at competitive rates especiallywhen the rates are on the rise and vice versa. Collateral was positive as per our aprioriexpectation but it was statistically insignificant. According to Bester (1985), he states that,operation/risk level in form of financial institution decision to extend loan based on trading-off between collateral and interest rates disparity, they are decided on depending on profitablyof client to default,“Guanxi” was positive and statistically significant at5%level confirmingour apriori expectation that guanxi will influence credit demand. According to Braendle et al.,2005; Wang,2007; Liu et al.,2008, Guanxi (business/personal relationship in businessnecessitate easy flow of information and financial resources, this help to mitigate the problemof costs of transactions, efficiency improvement and resource allocation(Siu and Bao,2008).The amount interest paid on funds borrowed was significant at the5%level and had anegative sign. This is in line with a priori expectations and with the results from Desai&Mellor (1993), Eboh&Akpomedaye (1995), Nwaru (2004) and Essein (2009). Interest is theunit cost for borrowing other parties funds. Ceteris paribus, as the cost increases, creditdemand decreases, the reverse is true.Cost of land was positive and statistically significant at10%level, meaning that highcost of land pushed up credit demand. In china, the raising of funds by the local governmentsto finance their recurrent and capital expenditures is heavily reliant on land sales to propertydevelopers, This has been a key contributing factor towards high land prices approximated atabout50%0f the total developed property cost. The salient feature in land management inchina is that land is a government property and during auction it’s transferred to the highest bidder in the deal. The peculiar nature of the land system in China makes the land become atool of state macro-economic control over real estate market. The supply of land is controlledby the government. Additionally, land for all purposes such as residence, commerce,entertainment, industry, market and tourism is prohibited from transfer by agreement, andshould be sold in a regular way (bidding, auction and listing).On the other hand, the managers training(education) and management experience, wereboth statistically significant at the5%level and exhibited our a priori expectation of positivesign with credit demand. Managers are more amenable to risk taking than non-educated andexperienced ones because they are better equipped to access, evaluate and understandimproved resource allocation techniques. Land size was positive and statistically significant at10%level as per our apriori expectation, the size of land was mostly determined by the cost ofland during bidding process. In china land is always transferred to the highest bidder. Finallyresearch and development costs were positive and significant at10%level in conformity withour hypothesis (Anderson and Reeb,2003; Villalonga and Amit,2006) and realize that R&Dinvestments can help firm generate competitive capabilities (Franko,1989), firms would liketo invest more in R&D activities.The F-value of6.79surpasses its significance at5%level. This confirms that there is asignificant linear relationship between funds demanded and the associated variables.R2is0.41,which indicates that about41%of the total variations in the fund supply side (leverage)can beexplained by the independent variables while59%cannot be explained. The result suggestthat land cost and research and development cost much influence the behavior of funddemand for real estate developers. Thus a unit rise in land cost will lead to about63209.51units rise in funds demanded, on the other hand a unit rise in research and development costswill lead to32175.5units rise in fund demanded.Company size is positive and significant at5%level this confirms of our aprioriexpectation that company age is positively related to debt. Also positive as per hypothesis wasprofitability. It was statistically significant at10%as postulated by trade-off theory whichsuggests that this relationship would be positive. Since profitable firms are less likely to gobankrupt, and hence can avail more debt at cheaper rates of interest. Company age wasnegative and insignificant Findings by DeAngelo and Masulis (1980) are to be relied on,there exists a positive dependence between retained earnings, equity demand. But our findingis that business risk is negative and insignificant. Asset Tangibility is positive as per ourapriori expectation. It is statistically significant at5%level this was also visited byWestgaard et al.2008) who concluded that there a significantly positive relationship between debt and tangibility with similar finding by Bradley et al.(1984) found out that is a positiverelationship between gearing and tangibilityCompany growth was positive opposite our apriori expectation in the hypothesis but itwas statistically insignificant contrary to explanation that faster growing firms normally havea higher probability to undertake asset wealth transfer and substitution to share holders at theexpense of bondholders. This additional agency costs of debt leads to a negative relationshipbetween leverage and growth.Higgins (1977) posit that an in difference exits between long term debt and companygrowth. Since different signs are exhibited depending on whether the debt was long term orshort term. A negative relation between growth and equity; while between growth and shortterm debt, there exists insignificance and between growth and long term debt there existspositive relationship. The coefficient for lending experience was significant at10%and has apositive relationship with credit supply. This conforms with our a priori expectations and thefindings from Nwaru et al.(2004)&Essein (2009). The duration a lender has been involvedin lending may give an indication of the practical knowledge he has gained on how toovercome the problems associated with lending at minimal costs. Such practical knowledgewould help him to handle loan applicants better; critically sorting them for honesty andgenuineness. Nwaru et al.(2004) claims that this leads to a risk reduction of his loan portfolioand an increase in the supply for needed funds.In the credit market, interest is the obligation of the borrower as an opportunity cost to“buyout” the creditor to postpone his current usage of funds and future investmentpossibilities (Nwachukwu,1994) additionaly, to cater for administration cost and possiblymonitoring the loan to maturity (Nwaru,2004). Therefore, interest is the cost of money lent.In our findings,the coefficient for interest amount was positively signed and statisticallysignificant at5%. The implication of this result is that as the rate of interest increases, creditamount supplied will equally increase ceteris paribus. This finding is consistent with a prioriexpectations and that of Nwaru (2004), who pointed out that interest receivable played asignificant and positive role in determining the volume of credit supplied. The F-value of8.012surpasses its significance at5%level. This confirms that there is a significant linearrelationship between capital leverage and the associated variables.R2is0.37, which indicatesthat about37%of the total variations in the fund demand side can be explained by theindependent variables while63%cannot be explained. The result suggest that company sizeand profitability much influence the behavior of fund supply(leverage) for real estatedevelopers. Thus a unit rise in company size will lead to about1093712units rise in funds demanded, on the other hand a unit rise in profitability will lead to159820.75units rise infund supplied (leverage).From our analysis we can note that real estate developers mostly depend on bankadvances to finance construction costs as opposed to other sources of financing options. Thecurrent financing capital structure for the real estate companies are in the following proportiondomestic bank loans stood at of67.5%, own funds accounted for32.5%while46%accountedfor strategic cooperation. About28.6%accounted for informal financing arrangements.Findings on other possible financing options for expansion and development,62%,31%,49.8%,6.7%,33%,54.3%, and29%of the total companies view private equity financing,domestic bank loan, strategic cooperation, foreign bank loans, issuing corporate bond, issuingREITs, and issue CMBS as viable financing alternatives respectively. From the results we candeduce that, private equity financing, domestic bank loan and strategic cooperation are themajor options of the companies; however, some companies also try to choose other newfinancing options such as issuing REITs and CMBS. CHAPTER1: Introduction; This section contains the research back ground of the study,research problem, research questions, research objectives, significance of the study lastlyliterature review.CHAPTER2: China economic structure and real estate. In this section, The thesisexplains a general overview of China economy, the real estate development aspects, thephases of housing changes, types of financing, factors that are key to growth of real estate, thecapital structure, the general financial system of china and comparison of financing models ofchina real estate company to more developed economies such as Canada, Australia and theUSA and the current financing strategies of real estate developers,CHAPTER3: Hypothesis and Variable definition. This section depicts the variousvariables that have been singled out for analysis. It indicates which signs or results areexpected after data analysis,CHAPTER4: Methodology, describing the area and the characteristics of that area ofstudy and the model specification for data analysis, in this case input output model was usedfor analysis.CHAPTER5: Data Analysis and Findings, In this section the collected data was refinedfrom the raw one to a refined one to give a meaningful explanation about the findings of ourresearchCHAPTER6: Discussion and conclusion. This section discusses the general overview ofthe entire study and policies implications. It also suggests some policies that can help improvethe sector based on the research.