Rising land prices in China have led to developers increasingly teaming up on construction projects in the past two years through joint ventures, with as many as six joining up to work on one development.
Under international accounting rules, unless a company holds a controlling interest in a joint venture, it can keep details of a joint venture and the debt it takes on off its balance sheet - recording instead just the amount of equity it has invested in the project.
The practice is raising eyebrows now among investors trying to assess a company's credit risk, as they worry they may have underestimated the scale of developers' off-balance sheet debt just as China's economic growth is slowing.
"Transparency is like an umbrella, nobody cares about it until it rains," said Victor Yeung, chief investment officer of Hong Kong based Admiral Investment.
"The market is realizing more the disclosure is inadequate.... and this raises the risk premium of the whole sector," he added.
In February, struggling developer Kaisa Group (>> Kaisa Group Holdings Ltd) stunned investors when it reported its debt had more than doubled to $10.4 billion (6.91 biullion pounds) in just six months. The reasons for the rise are still unclear, though several analysts have suggested borrowings of its joint venture projects could explain part of the jump.
Kaisa, which defaulted on a bond coupon payment on Monday, declined to comment on its joint venture holdings.
Developers contacted by Reuters would not provide details about the amount of debt their joint ventures have, despite them making up a large part of their development portfolios.
Tianjin-based Sunac China Holdings Ltd's (>> Sunac China Holdings Ltd) joint ventures, including ones it has a controlling interest in, contributed half of the company's $13 billion sales last year, according to executive president Mengde Wang. It had at least 17 joint ventures with fellow developer Greentown China (>> Greentown China Holdings Limited) alone.
Sunac declined to comment on the debt of its joint ventures.
"It's hard to say how much additional risk would be from the joint ventures, but if the developers don't provide substantial details, our visibility will be low," said Standard & Poor's property analyst Christopher Yip.
The shake-up of Hong Kong tycoon Li Ka Shing's business empire provides one example of the scale of off-balance sheet joint venture debt.
A new company created to hold Li's group's property interests - Cheung Kong Property Holdings Ltd - says in a stock exchange filing that its adjusted borrowings at the end of 2014 would have been HK$16.8 billion ($2.17 billion).
That's 11 times higher than the combined debt of HK$1.4 billion reported by the property groups of Cheung Kong (>> CK Hutchison Holdings Ltd) and Hutchison Whampoa (>> Hutchison Whampoa Limited), even though Cheung Kong Property Holdings' business was split between those two companies at the time.
The filing says the difference is due to many joint ventures in China co-held by Cheung Kong and Hutchison that had to be consolidated on the new company's books, as once combined they give the new company a controlling interest.
Cheung Kong and Hutchison did not respond to requests for comment.
Growth in China's real estate investment in the first quarter of 2015 was the slowest since 2009, as developers focused on clearing excess inventory.
Now the government is trying to stimulate the housing market with looser credit and tax policies, though market experts said this won't significantly reduce the risks at over-leveraged developers. That's causing many investors to look elsewhere.
"I have seen many investors moving away from China-focused real estate to Pan Asia in the past year," said Admiral Investment's Yeung.
($1 = 6.1957 Chinese yuan renminbi)
($1 = 7.7500 Hong Kong dollars)
(Reporting by Clare Jim; Editing by Rachel Armstrong)
By Clare Jim