KUALA LUMPUR: Moody's Investors Service'' has revised downwards its outlook for the China property sector to negative from stable.
It said on Thursday, April 14 the change reflected its expectations for the fundamental credit conditions of the sector over the next 12 to 18 months.
"China's property developers face a tough operating environment, driven by tightening regulatory measures, rising interest rates, reduced bank lending, and increasing supply,' said Peter Choy, a senior vice president at Moody's office in Hong Kong.
'We believe this will inevitably lead to slowing sales, and pressure on profit margins and on balance sheet liquidity for some," he added.
Choy, who is the lead author of the report, also pointed out that 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," he said.
Choy said the impact on individual developers will vary, depending on the quality of products, location and number of new projects to be launched in 2011. However, he expected those in third- and fourth-tier cities will be less exposed to the tightening measures.
He also anticipated 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."
Tighter domestic credit this year has led to a spate of offshore fundraising by property developers with offshore listings.
A second author of the report, Kaven Tsang, an assistant vice president at Moody's, says that "the Chinese property developers accumulated large cash holdings from strong sales in 2010. However, we expect their liquidity to weaken this year, due to slowing receipts of presale proceeds and a sizeable cash outflow to cover unsettled bills for acquired lands, larger developments, and maturing trust financing and bank loans."
"In 2011, a greater supply of new properties -- both from developers and from the planned introduction of 10 million low-income housing units by the government -- will hinder further price increases and lead to a mild correction in cities that experienced the sharpest price rises in the past 12 to 18 months," Tsang added.
"Higher input costs to build homes will also weigh on margins, as will the need to produce better-quality products to compete for buyers in a reduced demand market."
The report cites that the liquidity of 10 developers -- Hopson, Powerlong, Greentown, Glorious, Shanghai Zendai, SRE Group, Shimao, Central China, Zhong An and Coastal Greenland -- will be more vulnerable if their overall sales fall by 25% from the previous year.
It said on Thursday, April 14 the change reflected its expectations for the fundamental credit conditions of the sector over the next 12 to 18 months.
"China's property developers face a tough operating environment, driven by tightening regulatory measures, rising interest rates, reduced bank lending, and increasing supply,' said Peter Choy, a senior vice president at Moody's office in Hong Kong.
'We believe this will inevitably lead to slowing sales, and pressure on profit margins and on balance sheet liquidity for some," he added.
Choy, who is the lead author of the report, also pointed out that 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," he said.
Choy said the impact on individual developers will vary, depending on the quality of products, location and number of new projects to be launched in 2011. However, he expected those in third- and fourth-tier cities will be less exposed to the tightening measures.
He also anticipated 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."
Tighter domestic credit this year has led to a spate of offshore fundraising by property developers with offshore listings.
A second author of the report, Kaven Tsang, an assistant vice president at Moody's, says that "the Chinese property developers accumulated large cash holdings from strong sales in 2010. However, we expect their liquidity to weaken this year, due to slowing receipts of presale proceeds and a sizeable cash outflow to cover unsettled bills for acquired lands, larger developments, and maturing trust financing and bank loans."
"In 2011, a greater supply of new properties -- both from developers and from the planned introduction of 10 million low-income housing units by the government -- will hinder further price increases and lead to a mild correction in cities that experienced the sharpest price rises in the past 12 to 18 months," Tsang added.
"Higher input costs to build homes will also weigh on margins, as will the need to produce better-quality products to compete for buyers in a reduced demand market."
The report cites that the liquidity of 10 developers -- Hopson, Powerlong, Greentown, Glorious, Shanghai Zendai, SRE Group, Shimao, Central China, Zhong An and Coastal Greenland -- will be more vulnerable if their overall sales fall by 25% from the previous year.
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