Moody’s Predicts Continued Slide in China Housing Sales for Q2

Credit ratings agency Moody’s predicts continued revenue struggles for China’s property developers in the second quarter of 2014, after the industry’s sales dropped an average of 7.7 percent in the first three months of the year.

“The weak contracted sales will continue into Q2 2014 resulting from tight bank liquidity and weakened market sentiment in the China property market after news of price cuts in certain cities and an expectation of weaker economic growth,” says Franco Leung, a Moody’s Assistant Vice President and Analyst.

Leung was speaking on the release of Moody’s monthly China Property Focus report, which still managed to find some bright spots for the nation’s real estate sector

Contracted Sales Down 7.7 Percent in Q1

For Q1 2014, total contracted sales in China’s residential property market declined 7.7% year-on-year to RMB1.1 trillion. The overall sales decline was partly because of the high base in the same period in 2013, when contracted sales rebounded strongly after the down cycle during 2H 2011 and 1H 2012.

Nevertheless, contracted sales for Moody’s 20 tracked developers rose 13.2% year-on-year to RMB268.6 billion in Q1 2014 because of the strong sales performance of a few major developers.

Country Garden Holdings Co. Ltd (Ba2 stable) and Guangzhou R&F Properties Co., Ltd. (Ba2 stable) achieved 73% and 75% year-on-year growth in contracted sales in Q1 2014, respectively.

Moody’s expects contracted sales of many of its rated Chinese property developers will continue to outperform the market due to their favorable market positions and strong sales execution.

“We expect growth in property prices across China’s 70 major cities to moderate over the next 12 months,” added Leung.

Price growth in China has moderated, as the number of cities recording more than 10% year-on-year price gains decreased to 9 in March 2014 from 14 in February 2014.

Credit Ratings Start to Slip

Meanwhile, the 2013 financial results for Moody’s rated property developers in China showed weakened credit trends, as leverage was up and interest coverage and margins were down in 2013 for the majority of its rated property developers.

Between 21 March 2014 and 23 April 2014, Moody’s took two negative rating actions — the first negative rating actions for its rated China property developers since September 2013.

Moody’s downgraded Zhong An Real Estate Limited’s corporate family rating to B3 from B2 and Renhe Commercial Holdings Company Limited’s corporate family and senior unsecured debt ratings to Caa3 from Caa1.

Despite these negative rating actions, 43 of the 50 rated developers, or 86% of the rated portfolio, had stable rating outlooks as of 24 April 2014.