Fitch Sees China Home Sales Falling Up to 30% This Year as Confidence Erodes

Fitch Ratings has revised down its 2022 forecast for China home sales to a decline of 25-30 percent as COVID-19 lockdowns, developer defaults and crumbling consumer confidence continue to suppress buyer demand.

Sales in the world’s biggest housing market were hurt by COVID-related social and mobility restrictions put in place after the March outbreak, Fitch said in an analysis released this week. The rating agency had predicted a smaller full-year drop of 10 to 15 percent in its previous projection made last December.

Nationwide property sales fell by 30 percent year-on-year in the first four months of 2022 and by 47 percent year-on-year in April, according to Chinese government statistics. The pace of recovery will hinge on the success of Beijing’s zero-COVID policy, Fitch said, but other lingering issues are expected to hold back sales in the near term.

“We believe a lack of capital will inhibit the capacity to ramp up land acquisitions and project launches, hence a rapid, sharp recovery in sales is unlikely,” the agency said.

Developers Reeling

Fitch noted that new housing sales among China’s largest developers fell steeply in the first quarter, with many down 30 to 45 percent year-on-year, and they continued to weaken in April as lockdown measures hit new launches and sales nationwide.

“Several major developers have reported a sequential month-on-month improvement in sales in May, but declined in excess of 40 percent on a year-on-year basis,” the agency said.

High-profile defaults by nationwide developers, including top-five builders Evergrande and Sunac, are seen as adding uncertainty with regard to project delivery and further weighing on homebuyer confidence.

Despite the negative trend, Fitch expects conditions to moderate over the next few months in light of clearer policy support, lower prime rates and an acceleration of mortgage approvals that began last October.

To sweeten their debt offerings, several developers in recent months have sold bonds with credit enhancement features. Greentown, Excellence and Sino-Ocean issued debt backed by a standby letter of credit from China Zheshang Bank, while Longfor, Country Garden, Midea and Seazen sold bonds with protection mechanisms like credit risk mitigation warrants or credit default swaps.

“However, the financing channels for much of the sector will remain closed in the near to medium term if the issuance of bonds that are backed by default protection features are not extended to smaller or more distressed builders,” Fitch said.

Uncertain Outlook

Fitch blamed the re-emergence of COVID-19 for blunting the effectiveness of the government’s housing support measures, which include relaxed lending rules and lower mortgage costs.

The agency currently rates 64 percent of Chinese developers under its coverage at B+ or lower, indicating a material risk of default, with further negative rating action likely in the absence of a more sustained sales recovery.

Smaller developers will not regain access to capital markets in the near term, Fitch said, while year-to-date cash generation has come in below most developers’ expectations.

Despite the government’s call for asset management firms and other financial institutions to acquire distressed assets, Fitch reckons that most of them lack the expertise to oversee project sales and completion and are eager for industry leaders’ participation.

“Consolidating developers are keen to capture opportunities in higher-tier cities,” the agency said, “but lockdown measures may have disrupted the due diligence process, and sellers are also keen to hold on to stronger assets as they navigate the restructuring process.”