Agencies Warn of China Developer Risks Amid Credit Scares

Slower sales and rising land prices are adding to the risks facing China’s real estate developers this year according to recent reports by credit agencies Standard & Poor’s and Moody’s.

The warnings from the ratings agencies happened in the same week that China saw its first default of a corporate bond as the country’s leaders attempt to wean businesses from their addiction to cheap credit.

A report last week by Standard & Poor’s predicts five percent average growth in sale prices and 10 percent average increases in sales volumes for the nation’s developers this year, down from eight percent price growth and 18 percent volume increases in 2013.

At the same time, land prices have been reaching record levels as developers compete to secure the sites necessary to sustain their project pipelines (and future cashflow).

S&P singled out the refinancing of maturing debts for developer China Properties this year as being potentially problematic.

Moody’s Sees Risks Following Chaori Default

In another report last week, competing ratings firm Moody’s also saw risk to China’s real estate developers related to the Chaori default, should the incident cause investors to shy away from the mainland wealth management market.

Moody’s revealed that 61 per cent of rated developers had trust loans outstanding and that these developers could face difficulties should these loans be difficult or more expensive to refinance.

Moody’s pointed to underperforming companies Hopson Development, Coastal Greenland and Glorious Property as having the greatest risk in case of further credit tightening. Glorious had already been struggling this year in the face of falling sales and a failed buyout attempt by former chairman Zhang Zhirong.

Shanghai Chaori Solar Energy Science and Technology last week was only able to make interest payments of RMB 4 million towards a RMB 89.8 million interest payment to bondholders, becoming China’s first default on a domestic bond. The event has raised widespread concern of the impact of further potential defaults, particularly on the heavily leveraged real estate industry.