Guarding against compliance risks in real estate enterprise financing

In recent years, as the central government has intensified regulation and control, signs of adjustment have appeared in the real estate industry, with property enterprises facing such phenomena as weak sales, increase in inventory, tight cashflow, etc. The real estate industry is essentially capital intensive, naturally reliant on a demand for funding, and, particularly at the moment, the demand of real estate enterprises for financing is extremely pressing. Real estate enterprises are also characterised by a large demand for financing, tying up the proceeds for a long period of time, etc.

In order to guard against financing compliance risks in the course of the financing process, a real estate enterprise will first select a compliant financing channel. When seeking financing, a real estate enterprise should opt for a financial institution – bank, trust company, insurance company, fund, securities brokerage, etc.

At present, the extension of project development loans by Chinese commercial banks to real estate enterprises remains the principal channel of financing. As credit has become tighter, real estate trust financing has become a main channel of financing, and with gradual policy relaxation, investment of insurance capital in immovable property is becoming more important. Instances of real estate enterprises seeking financing through such means as private equity (PE) and asset management plans have also become common.

The selection of an entity other than a financial institution for financing could lead to such risks as the invalidity of the financing agreement, and the inability to itemise such financing costs as project development costs.