Increasing investor pessimism about China’s real estate market has put a scare into at least one of the world’s largest credit agencies, as Moody’s Investor Service this week downgraded the country’s property sector from stable to negative.
In a report explaining the new and more gloomy forecast, Moody’s said that it expects a significant slowdown in residential property sales growth, high levels of inventory, and weakening liquidity over the coming year.
“We expect modest 0%-5% year-over-year growth (on a 12-month trailing basis) over the next 12 months. This growth rate is materially lower than the 26.6% year-on-year rise in nationwide cumulative contracted sales in full year 2013,” noted Moody’s Assistant Vice President Franco Leung.
Despite the downbeat overall outlook, the credit agency was quick to add that better managed, larger developers can be expected to withstand the expected downturn.
Tighter Liquidity Putting the Brakes on Sales
Moody’s forecast is contained in the agency’s recently released industry outlook report for the sector, entitled “Negative Outlook Reflects Sales Slowdown, High Inventory Levels and Weaker Liquidity”.
The credit agency found the industry to be suffering from weaker sales growth this year, driven mainly by tighter onshore liquidity, increased mortgage rates, buyer expectations of further easing of property prices and slower GDP growth in China.
Excessive new housing starts in recent years have increased developers’ unsold inventory levels, which are now creating downward pressure on pricing as sales decline.
According to the report, average inventories in the eight first- and second-tier cities surveyed by Moody’s was about 14 months at the end of April, approaching the previous high of about 16 months in February 2012. Such high inventory levels will weaken developers’ pricing power as well as stretching their working capital and profit margins during the upcoming year.
“We also expect developers’ liquidity to weaken as collection of sales proceeds slows,” Leung said.
Credit Shortages to Test Developers
The studied showed that banks in China are taking longer to approve and disburse mortgage loans in recent months, which is deterring consumer demand and decreasing developer cashflow. Given that many of these companies have projects still in the development pipeline which will require ongoing construction spending and payments for land and offshore bond maturities, many companies may face cash shortages in the period, according to the agency’s forecast.
“The liquidity of developers with relatively weak credit quality will be more vulnerable in 2014, and their refinancing risk will increase as banks became more selective in credit extension following recent defaults in China,” Leung added.
PBOC Attempting to Rekindle Financing
A recent push from the People’s Bank of China to jump start mortgage financing and the reopening of domestic equity issuance for developers has indicated that the government may start to provide policy support for the sector in the coming months. However, despite this thaw in government attitudes, Moody’s remains pessimistic for the industry as a whole.
Before the turn to a negative rating this month, the agency’s outlook for the industry outlook had been stable since November 2012.