S&P: China’s real estate developers will face more liquidity problems19 March, 2012, 15:00. Posted by Zarathustra
Tags: Property, Real Estate
National Bureau of Statistics published the statistics for 70-city home prices, showing home prices only rise in 3 cities in February. Although the weakening is slowing down, the downward trend should remains going forward. The chart below, via Michael McDonough of Bloomberg Brief, shows that the fall in home prices slow nation wide.
Meanwhile, Bei Fu of Standard and Poor’s said China developers will face more liquidity risk.
From her earlier report (7 March 2012):
China: Negative Outlook
Over the next few months, we’re likely to fine-tune our base-case and stress scenarios for the China market. For now, the assumptions outlined below are unchanged.
More price cuts are likely, even for top developers
We expect property prices to decline by 10% between June 2011 and June 2012. According to the National Statistics Bureau, average selling prices fell by 3.5% across the country from July to December 2011. Sales volume is likely to remain flat or slip in full-year 2012. Discounting is becoming increasingly common, even among leading developers. For some developers and in some cities, prices have already slumped–particularly for new launches.
Modest price discounting may not stimulate sales significantly while policies to restrict home purchases remain in place in many Chinese cities and mortgage rates are much higher than a year or two ago. Overall, we believe profit margins are likely to decline from 2011 levels as the price cuts start to bite.
Fine-tuning of regulations will continue The central government isn’t likely to reverse its policy direction in 2012, but it could relax some of its tightened measures for the property sector. A positive policy surprise could appear in the second half of 2012 to ease the pain
if: (1) the domestic economy is weaker than expected, due in part to the crisis in Europe and weak export demand;
or (2) inflationary pressure continues to ease.
Ahead of a political leadership change this year, the central government is likely to maintain its goal to control inflation, cool property prices, and complete its "social housing" program–i.e., to provide more affordable accommodation. Inflation and property prices have shown signs of easing in recent months. In response, early signs are emerging that the government is prepared to loosen the leash. Some banks have lowered the mortgage rates for first-time home buyers, and the central bank has urged lending to this segment. Recently, the central bank lowered the required reserve ratio–or the amount of deposits banks must hold in cash–for commercial banks. This move may signal that the tight credit conditions could have bottomed.
Refinancing risks will grow
For Chinese developers, we expect heightened refinancing risks due to weaker property sales, high funding costs, and tightened liquidity. Property sales have continued to drop sharply in the first quarter of this year and the fourth quarter of 2011. Smaller developers with high geographic and project concentration will be more vulnerable to policy risks than geographically diversified players, which are cushioned against the uneven implementation of policy across China. Our recent negative rating actions on the following developers in the past month reflect the heightened risks from policy measures: Yanlord Land Group Ltd. (BB-/Negative/–; cnBB/–), Coastal Greenland Ltd. (CCC+/Negative/–; cnCCC+/–), Yuzhou Properties Co. Ltd. (B+/Negative/–; cnBB-/–), and Zhong An Real Estate Ltd. (B/Negative/–; cnB+/—).
In the offshore market, developers face materially higher borrowing costs in the bank loan market and high-yield bond market than a year ago. Most Chinese property bonds have yields above 12%, apart from those issued by companies with an established reputation that we rate from ‘BB+’ to ‘BB-’ or at investment grades. In addition, developers’ appetite for equity issuance remains limited; the share placement of Country Garden Holdings Co. Ltd. (BB/Stable/–; cnBBB-/–) last week bucked that trend. Overall, share prices remain low compared with the historical peak, and controlling shareholders have resisted diluting their holdings.
Negative rating actions are in the cards
The negative credit trends could lead to more downgrades and outlook revisions this year. Continued tight regulations, growing refinancing risks, and a deepening market correction will take their toll on developers. In support of ratings, many companies have adopted less-aggressive strategies and maintain better cash positions than during the last big downturn in 2008.
Indicators that could make us materially lower our base case
The following indicators could revise our prognosis for the sector:
• prices decline by more than 20% for six to 12 months and show no signs of recovery;
• the economy weakens more than we expect, i.e. real GDP is less than our forecast of about 8%;
• the government introduces further tightening measures on bank lending, other financing, and administrative
controls to further control inflation; and
• share prices decline materially, which may accelerate loan repayments if companies pledged shares as collateral.