Moody’s outlook for the Chinese property sector is stable in 2019, despite expectations that nationwide contracted sales will fall. However, slowing domestic economic growth, tight funding access, and rising financing costs will weigh on the property developers’ profit margins and liquidity.
We anticipate nationwide sales, on a 12-month moving average basis, should fall by around 5% year-on-year by late 2019, due to continued tight regulatory controls on home purchases, restricted access to credit for developers and homebuyers, and weaker sentiment among homebuyers, amid slowing economic growth.
Furthermore, our research indicates that the developers’ profit margins will weaken because of rising land and funding costs, and housing price caps in many cities. We also believe that while the overall funding environment will remain restricted, financially healthy developers will maintain access to funding, but at a higher cost.
Nevertheless, the forecast 5% decline in contracted sales will still fall within our parameters for a stable sector outlook.
Nationwide sales set to decline
Sources: National Bureau of Statistics of China, Moody's Investors Service Estimates
REGULATORY RESTRICTIONS
Through various regulatory restrictions, the mainland China authorities aim to maintain the long-term stability of the property market, but a further dramatic tightening of current controls is unlikely in the next 6-12 months. Instead, the authorities in mainland China aim to fine-tune measures based on local market conditions.
In our opinion, controls over mortgage loans to homebuyers and lending to developers will continue to constrain cash collections and weaken developers’ liquidity, with the banks maintaining their preference for lending to developers with good credit quality. The banks are also likely to support first-time homebuyers, while restrictions on purchases will stay in place for purchasers of second homes.
During 2019, we estimate that the growth in property selling prices in second and lower-tier cities is likely to slow because of weaker sales and price caps in cities with strong price growth. But a substantial decline in selling prices is unlikely, given healthy inventory levels, which will stay below the peaks seen in March 2015.
Inventory levels could edge up as sales slow, but we believe that a material increase is also unlikely because developers are taking a more cautious approach to expansion and the tight credit environment will constrain new housing starts.
In addition, industry consolidation is likely to continue. We believe mid and large-sized developers with strong sales execution and financial discipline possess stronger financial capabilities to gain market share from their smaller peers in a down market.
The contracted sales performance of Moody’s-rated developers is likely to generally outperform the broader residential property market because of their stronger branding and solid sales execution, and broader access to funding.
Property price growth will slow
Source: National Bureau of Statistics of China
OFFSHORE FUNDING COSTS
Meanwhile, the offshore funding costs for Moody’s-rated Chinese property developers are rising, but Moody’s does not anticipate that their earnings before interest and tax (EBIT)/interest coverage will materially weaken.
Interest costs for offshore bonds issued by Chinese high-yield developers rose sharply in November, and our analysts expect costs to remain high, but the overall impact on EBIT/interest coverage will be limited because of revenue and EBIT booked from strong contracted sales made during the past few years.
Offshore bonds account for just 10% of the developers’ total debt. During November, seven rated developers issued offshore bonds, with their funding costs generally increasing over the past one to two years and their bond tenors shortening.
The high refinancing needs in 2019 are putting pressure on the liquidity of rated Chinese property developers. In November, Moody’s Asian Liquidity Stress Indicator reflected tight liquidity for these companies, driven by their high refinancing needs.
DOWNSIDE AND UPSIDE RISKS IN 2019
Downside risks which could lead to a negative outlook for the industry include nationwide contracted sales falling more than 5%-10% year-on-year over the coming 12 months; dramatic regulatory tightening that significantly reduces contracted sales; further tightening of funding markets, which will materially weaken the developers’ liquidity levels; or inventory to contracted sales ratios returning to their March 2015 peaks.
On the other hand, developments which could lead to a positive outlook include nationwide contracted sales growing 10% year-on-year on a sustained basis; both onshore and offshore funding conditions becoming supportive; and inventory to contracted sales ratios improving further from current healthy levels.
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