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Construction continues on an apartment complex on the outskirts of Beijing. Moody's predicts the proceeds from contracted sales of residential homes will decline by an average 25 to 30 percent in first and second-tier cities this year. Keith Bedford / Bloomberg

Ratings agency turns 'negative' as tough tightening measures spook the sector

Moody's Investors Service downgraded its outlook on the mainland property sector to "negative" from "stable" on what it says are gloomy fundamentals for developers over the next 12 to 18 months.

Under a tough operating environment driven by tightening regulatory measures, rising interest rates, reduced bank lending and increasing supply, mainland developers will inevitably encounter slowing sales, shrinking profit margins and liquidity pressure, according to the rating agency.

It also anticipates that the proceeds from contracted sales of residential homes will decline by an average 25 to 30 percent in first and second-tier cities this year.

However, third and fourth-tier cities are less exposed to the tightening measures.

Greater local enforcement of central directives to control home prices and purchase will put a dent on both prices and the number of transactions across mainland cities, Peter Choy, senior vice president of corporate finance group with the rating agency told a media briefing on Thursday.

"During the next six to 12 months, mainland property developers will face challenges in securing debt financing, as the government enforces its strategy of slowing monetary growth to reduce the risk of accelerating inflation and to manage domestic banks' exposure to the property sector," said Choy.

According to a Moody's liquidity stress test on 38 mainland developers, 10 of them - all of which are listed in Hong Kong including Shimao Property Holdings Ltd and Central China Real Estate Ltd - will become "vulnerable" in terms of balance sheet liquidity if their contracted sales decline 25 percent this year compared with 2010.

A spate of mainland developers have been tapping the offshore debt market for funds in the past few months. Choy said he believes that fundraising activities by these developers will slow down in the coming months due to adverse market conditions.

He expects the developers to adjust their business models to accommodate the changing environment, which may also result in some business consolidation on the mainland.

Du Jinsong, head of China property research at Credit Suisse, told China Daily he agrees the finding of Moody's, adding that Credit Suisse has been underweight mainland property since October 2010.

Although mainland developers have accumulated large cash holdings from strong sales in 2010, they may still encounter liquidity issues as many of them have enhanced expenditure to construct more apartments amid gloomy property market conditions this year, according to Du.

"Expenditure of many mainland developers in the first few months in 2011 has even exceeded that of last year, as they've poured money into construction on the land banks they hoarded in the past and expect it to turn into real money. However, among dismal market sentiment, it puts a double squeeze on these developers," said Du.

The investment bank expects mainland home prices to slide 5 to 10 percent this year with trading volume to drop 10 to 15 percent.

China Daily

(HK Edition 04/15/2011 page2)