Asia’s Real Estate Financing Costs to Stay High

(Bloomberg) — Asia’s real estate funding costs will likely remain high over the next 12 months after rising as much as 700 basis points in the past year, said Sameer Nayar, head of real estate finance at Credit Suisse Group.

Switzerland’s second-biggest bank is still funding property acquisitions amid the credit crunch and selling debt to investors, has lent $6.5 billion over the last 14 months. Financing costs have risen 500 basis points to 700 basis points in China and India, and as much as 300 basis points in other markets, Nayar said. A basis point is 0.01 percentage point.

"High cost of financing is not good for anyone’s business,'’ Nayar, also a managing director at the bank, said in an interview today. "Looking out 6 to 12 months, we don’t see a significant decline in terms of cost of financing. Investors are taking a view to sit back and see where this goes.'’

Global real estate financing evaporated after the collapse of the subprime mortgage market that saddled banks and securities firms with $398 billion of credit losses and writedowns. Smaller real estate investment trusts and private funds are struggling after Morgan Stanley cut as many as 65 employees in its securitization unit, and Merrill Lynch & Co. closed its property financing unit in February.

Higher financing costs have "definitely slowed down the markets,'’ Nayar said. "There aren’t as many transaction activities as last year.'’

`Very Challenging Time’

China’s plan to curb housing prices has slowed sales. That may make homes less affordable by prompting small developers to sit on vacant lots they can’t develop because of a shortage of funds.

"It’s a very challenging time and market'’ for developers in China, Vincent Peng, managing director of real estate Asia at Goldman Sachs Group Inc., said at the Real Estate Investment World Conference in Singapore, adding that banks are holding back loans.

Still, the credit crunch was necessary in markets such as India and China, where prices have gone up too much and too fast, Nayar said. Inflation in markets such as Vietnam is also a concern, he added.

"Inflation is a real threat,'’ said Nayar. "Good part is that inflation also comes with a lot of growth, which is good for real estate.'’

Vietnam’s inflation accelerated to 25.2 percent in May, the fastest since at least 1992, driven by record rice and energy prices. India’s inflation also rose to a 13-year high after record crude-oil prices forced it to raise the regulated cost of fuel.

"Real estate development is a very cash demanding industry,'’ said Remy Chan, regional director and head of China business development at Jones Lang LaSalle, a real estate consulting group. "Property developers are all having problems continuing their projects. Tightening credit market is just deteriorating consumer confidence.'’