Moody’s Says China Home Sales Growth to Dip Under 5% in 2016

While China’s government has made reviving the housing market a primary goal for 2016, one of the agencies charged with rating the credit-worthiness of companies in the sector believes that the mainland could still be in for a tough year.

Moody’s Investors Service says that nationwide property sales growth in China will slow to a modest 0-5 percent in 2016, compared to 16.6 percent last year, as the company’s analysts believe that government stimulus measures have largely run their course in terms of market impact.

The prediction by the credit rating agency comes despite China’s leadership having prioritised destocking in the country’s lower tier cities at a top-level conference in late December.

Moody’s Bets on Financial Management

“Financial discipline will be a key consideration in assessing rated developers in China as operating conditions become more challenging in 2016, given slowing economic growth, as well as the developers’ still high debt leverage, margin pressures and high inventory levels in low-tier cities,” said Kaven Tsang, a senior credit office with Moody’s.

The company Vice President added that, “We believe financially disciplined Chinese developers that focus on restricting debt growth and lower funding costs – amid strong sales and cash collections as well as improved domestic bond market access – will be in a better position to withstand these challenges.”

According to Moody’s, many rated developers bought land aggressively in 2013 and early 2014, resulting in high debt leverage and weakened financial metrics.

“Although their pace of growth slowed in 2015, the overall leverage of our rated developers remains high, which increases their vulnerability to a down-cycle,” Tsang noted. Moody’s and other ratings agencies have previously pointed out that Evergrande Real Estate and other acquisition-happy Chinese developers have taken on high levels of risk in expanding their credit-driven holdings.

2014’s Slide Helps Make 2015 Look Good

The ratings agency points out that many rated developers reported significant expansion in sales in 2015, as shown by the 16.1 percent year-on-year growth in the contracted sales of the 20 top developers tracked by Moody’s. However, this growth came after a weaker than expected performance in 2014.

The developers also benefited from the mainland government reopening access to onshore bonds and China’s interest rate cuts, which has lowered funding costs for builders struggling with declining margins.

Despite the relatively strong sales in late 2015, however, Moody’s says developers’ credit risks will significantly increase if they further lever up their balance sheets to expand their businesses.