Moody’s just changed the outlook on China Property Sector from Stable to Negative.
The key themes are nothing new, which I have mentioned elsewhere. In essence, the continuous monetary tightening and administrative measures to curb home prices will slow transactions and lower prices. While household leverage is low in China, real estate developers are more vulnerable. As I have mentioned that because of the tightening of liquidity in China, larger real estate developers raised financing in Hong Kong over the past year or so (with an unintended consequence of squeezing liquidity in Hong Kong as well). As I mentioned before:
… for those smaller and weaker companies (including some privately-held companies which we know nothing about them), the risk here is that some of them will fail even before real estate prices correct, while the others will have to cut prices aggressively to keep cash flowing in.
According to its news releases (emphasis mine):
"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," says Peter Choy, a Senior Vice President at Moody’s office in Hong Kong and lead author of the report.
"Greater local enforcement of central directives to control residential property prices and purchase will put downward pressure on both prices and volumes of transactions as an increasing number of cities across China more effectively implement national regulations."
"We anticipate that proceeds from contracted sales of residential properties will decline by an average of 25%-30% in China’s first-tier and most of the second-tier cities, where local governments have implemented measures to stabilize property prices and prohibit the private ownership of more than two properties per family," adds Choy.
"However, the impact on individual developers will vary, depending on the quality of products, location and number of new projects to be launched in 2011. Those in third- and fourth-tier cities will be less exposed to the tightening measures."
Choy further notes that "during the next 6 -12 months, Chinese property developers will face challenges in securing onshore 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."
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China Economy Predictions for 2011
This article originally appeared here: Moody’s Downgrades China Property Sector
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