Skyscraper frenzy brings loan risks to new heights

With the approval of the local government, Board Group, a Chinese construction firm, announced on June 5 that it plans to build an 838-meter tall skyscraper in Changsha, Hunan Province. When construction finishes, the tower will be the world's tallest building, standing 10 meters taller than Dubai's Burj Khalifa, the current holder of that distinction.

Although China already has nine of the world's 15 tallest buildings, the country is still infatuated with skyscrapers - defined as a building with a height of 100 meters or more.

While the skyscraper boom may be a good driver of local economic growth at the moment, it also poses a threat to State-owned commercial lenders, many of which are being put at risk by financing these astronomically expensive and increasingly unprofitable projects at the behest of local governments.

For most skyscraper developers, the first step in a new building project is approaching banks for financing to cover initial expenses. In order for construction to begin, skyscraper builders typically turn to property developers for the steady cash stream needed to complete the project. But, since property developers are struggling to pay back loans of their own as the industry chills, skyscraper projects could rack up bad loans for banks once developers overextend themselves by backing these towers.

Meanwhile, skyscraper developers have to spend more on special material and facilities that other developers normally don't have to worry about - including, piling works, specially constructed elevators, additional space for emergencies and evacuations - pushing up the cost of construction. For example, the above-mentioned Changsha-based building will have 104 elevators.

Considering how expensive it is to build a skyscraper, it's no wonder that CITIC Group, a major Chinese property developer, backed out of its plan last year to erect Beijing's tallest building after spending 6.3 billion yuan ($991.24 million) on a plot of land where the project was slated for construction. Lack of funds has also derailed construction on a planned 600-meter building in Guangzhou recently.

But, even if a developer can find the funds to complete a skyscraper, the slowdown in China's property market has driven up vacancy rates at skyscrapers. As spaces in these buildings remain untenanted, a lack of incoming rental or leasing revenues for developers could ratchet up the risk of loan default for banks. Even the Shanghai World Financial Center, the world's third tallest building, has been plagued with high vacancy rate, despite its prime location.

The more skyscraper projects local governments approve, the more hazards commercial lenders will face, which will inevitably cut into their abilities to extend a helping hand to companies and enterprises that drive the real economy.