Real estate enterprises’ key points of ABS practice

For real estate enterprises and construction enterprises, resolving financing difficulties remains a major challenge in their continuing operations. Under tighter monetary policies and regulation, there is a certain demand in the market for financing through asset-backed securitization (ABS), the development of which is currently on the rise.

In the past, a significant number of real estate enterprises could raise financing through IPOs, bond offerings, etc. For example, a significant number of enterprises sought financing through listings between 2007 and 2009, and from 2012 to 2013, real estate enterprises sought financing through medium-term notes and short-term financing. However, these methods remain within the scope of simple equity or debt financing, adding to the enterprise’s overall debt burden or reducing the enterprise’s overall rights and interests. In comparison, while ABS does increase an enterprise’s debt, it also gradually increases the enterprise’s quality assets.

What makes such a result possible is the design of the structure of the ABS transaction. In the course of the ABS process, the enterprise will establish a special purpose vehicle (SPV) to which the underlying assets (e.g., the real estate or construction enterprise’s purchase balance receivables, property management fees and accounts receivable) are transferred. These types of cash assets will be recovered in future and become earnings. Accordingly, through such a method, the enterprise splits off certain assets to make them liquid, giving it access to present value earnings, and thus making existing assets of the enterprise liquid, and improving them.

Jeffrey Quan is a senior partner at ETR Law Firm. He can be contacted on +86 130 0517 0192 or by email at qzh@etrlawfirm.com