(FT) -- The outlook for the Chinese property development sector was downgraded to negative by Standard & Poor's on Wednesday, as the rating agency pointed to worsening credit conditions and the likelihood of a fall in transaction volumes.
The downgrade comes as analysts warn of a potential impending "price war" among property developers starved of cash by Beijing's efforts to rein in the red-hot residential property sector
"In the near term, what worries us most is the liquidity position of developers, who are facing very tight lending controls," said Bei Fu, an analyst at S&P in Hong Kong. "In this situation developers really need to rely on their own sales but this is a highly uncertain prospect given government attempts to suppress the market and the fact sales volumes have already started to come down."
Residential property sales in China grew 17.7 per cent in May from a year earlier, in terms of total area sold, after falling more than 10 per cent in April from a year earlier, according to government figures.
But analysts said the apparent rebound in sales in May was mainly due to a very low base in May 2010, the month after Beijing first announced a range of restrictions on housing sales aimed at slowing rapid price increases.
Most analysts expect volumes to decline further in the coming months, forcing developers to cut prices to maintain sales in the face of cash shortages.
"Developers will start cutting prices more aggressively in the second half and we expect this to cause sales volumes to dry up further as people don't want to catch a falling knife," said Du Jinsong, a real estate analyst at Credit Suisse. "We believe the worst is yet to come for China's property sector."
Moody's rating agency cut its outlook for China's property developers from stable to negative in April because of worsening credit conditions, falling sales and predicted oversupply of residential housing.
"China's property developers face a tough operating environment, driven by tightening regulatory measures, rising interest rates, reduced bank lending, and increasing supply. We believe this will inevitably lead to slowing sales, and pressure on profit margins and on balance sheet liquidity for some," said Peter Choy, an analyst at Moody's in Hong Kong.
Moody's is predicting a 25-30 per cent fall in contracted sales volume for first-tier and most second-tier cities in China this year but most developers plan to increase their contract sales this year by 20-40 per cent.
With oversupply in a cooling market an increasingly likely scenario, some analysts believe cash-strapped developers are poised for a price war that could prompt steep drops in property prices across the country.
"We believe the prospect of a price war is currently limited, but the situation could change quickly due to uncertain credit conditions and property sales," S&P said on Wednesday.
An average property price drop of more than 30 per cent could be devastating for the Chinese economy because of the importance of land sales to local government finances and of housing construction to the overall economy.
Most analysts believe the government has the motivation and the tools at its disposal to avoid such a scenario by lifting its restrictions on the property sector and allowing credit to flow again.
As part of the government's attempts to cool the property sector regulators have ordered China's state-controlled banks to drastically reduce their exposure to developers, forcing many of these companies to turn to offshore debt markets for funding.
Since January 2011 offshore bond issues by Chinese developers rated by S&P have totalled $8bn, compared with $8.8bn in the whole of 2010, which marked a previous peak for the sector.
Source: CNN
http://edition.cnn.com
The downgrade comes as analysts warn of a potential impending "price war" among property developers starved of cash by Beijing's efforts to rein in the red-hot residential property sector
"In the near term, what worries us most is the liquidity position of developers, who are facing very tight lending controls," said Bei Fu, an analyst at S&P in Hong Kong. "In this situation developers really need to rely on their own sales but this is a highly uncertain prospect given government attempts to suppress the market and the fact sales volumes have already started to come down."
Residential property sales in China grew 17.7 per cent in May from a year earlier, in terms of total area sold, after falling more than 10 per cent in April from a year earlier, according to government figures.
But analysts said the apparent rebound in sales in May was mainly due to a very low base in May 2010, the month after Beijing first announced a range of restrictions on housing sales aimed at slowing rapid price increases.
Most analysts expect volumes to decline further in the coming months, forcing developers to cut prices to maintain sales in the face of cash shortages.
"Developers will start cutting prices more aggressively in the second half and we expect this to cause sales volumes to dry up further as people don't want to catch a falling knife," said Du Jinsong, a real estate analyst at Credit Suisse. "We believe the worst is yet to come for China's property sector."
Moody's rating agency cut its outlook for China's property developers from stable to negative in April because of worsening credit conditions, falling sales and predicted oversupply of residential housing.
"China's property developers face a tough operating environment, driven by tightening regulatory measures, rising interest rates, reduced bank lending, and increasing supply. We believe this will inevitably lead to slowing sales, and pressure on profit margins and on balance sheet liquidity for some," said Peter Choy, an analyst at Moody's in Hong Kong.
Moody's is predicting a 25-30 per cent fall in contracted sales volume for first-tier and most second-tier cities in China this year but most developers plan to increase their contract sales this year by 20-40 per cent.
With oversupply in a cooling market an increasingly likely scenario, some analysts believe cash-strapped developers are poised for a price war that could prompt steep drops in property prices across the country.
"We believe the prospect of a price war is currently limited, but the situation could change quickly due to uncertain credit conditions and property sales," S&P said on Wednesday.
An average property price drop of more than 30 per cent could be devastating for the Chinese economy because of the importance of land sales to local government finances and of housing construction to the overall economy.
Most analysts believe the government has the motivation and the tools at its disposal to avoid such a scenario by lifting its restrictions on the property sector and allowing credit to flow again.
As part of the government's attempts to cool the property sector regulators have ordered China's state-controlled banks to drastically reduce their exposure to developers, forcing many of these companies to turn to offshore debt markets for funding.
Since January 2011 offshore bond issues by Chinese developers rated by S&P have totalled $8bn, compared with $8.8bn in the whole of 2010, which marked a previous peak for the sector.
Source: CNN
http://edition.cnn.com
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