Moody’s and S&P Predict 10% China Real Estate Price Drop, Possible Price War

Credit rating agencies Moody’s and S&P (who, for those of us with memories, are experts on economic disasters) see gloomy times ahead for China’s real estate developers. In recent reports from the two agencies both predict credit problems for China’s more than 80,000 real estate developers and neither foresaw any rebound in the real estate market during 2012.

The two agencies track China’s major developers for credit worthiness and what follows are some of the top bullet-pointable for attention-impaired highlights from their reports.

Four Credit Warnings for China’s Real Estate Developers

• Moody’s found that 11 of the 29 China property developers it tracks now have “weak liquidity”, up from four in December 2011
• Of the 30 firms that S&P rates, debt due within the next 12 months soared 57 percent by late 2011 from a year earlier to RMB 156 billion
• During the same period, also according to S&P cash reserves at the same group of developers fell 12 percent to RMB 176 billion
• Moody’s said that among rated developers, short-term debt due for repayment during 2012 was RMB 159 billion, up 23 percent from December

In addition to their gloomy credit findings, the ratings agencies also offered some market predictions for China residential real estate during 2012, and if you are a developer, the news is not very encouraging.

Three Predictions on China’s Housing Market from the Credit Experts

• According to S&P, market observers should expect further drops in housing prices of around 10% during 2012
• In addition to the price drops, S&P raised the possibility of an all-out price war among developers desperate for sales that could see prices drop significantly further
• Both agencies cited Coastal Greenland , Greentown China, and Hopson Development as having the most serious funding issues

Commenting on the declining market prospects detailed in the report, Moody’s Associate Managing Director Peter Choy said, “The deterioration stems specifically from higher levels of short-term debt and lower-than-expected cash balances for end-2011 against the backdrop of slowing sales and rising inventories.”

So if China is going to prevent their hard-landing this year, it will have to be by pumping up other industries than residential real estate. Market watchers should also expect increasing mergers and acquisitions in China’s real estate sector as smaller developers are unable to meet their short-term credit needs and larger developers start shopping for bargain assets.