China Developer Liquidity Still Stable Says Moody’s

Moody’s Investors Service says that the rated Chinese property developers will achieve positive but smaller growth in sales revenues over the next 12 months, while maintaining adequate liquidity. The announcement came recently after the collapse of a Ningbo real estate company, and China’s first default on a commercial bond.

While the US-based credit agency does not foresee widespread failures in China’s real estate industry following the RMB 3.5 billion in debts left behind by Zhejiang Xingrun, a statement from the company indicated that it does anticipate increased caution from banks regarding their exposure to the nation’s property sector.

“The bankruptcy appears to be an isolated incident, but it highlights the vulnerability of small, highly levered developers with weak sales execution abilities and high refinancing needs,” says Kaven Tsang, a Moody’s Vice President and Senior Analyst.

Tsang was speaking on the release of Moody’s latest monthly China Property Focus.

Banks to Further Tighten Real Estate Lending

Moody’s believes that, given the recent difficulties in the China’s real estate sector, and the tighter credit markets in general, financiers and investors will become more selective and favor borrowers with relatively strong credit quality, thereby further pressuring the liquidity of financially weak developers.

Nevertheless, Moody’s expects the impact on its rated developers will be manageable, as most have multiple funding channels, sound liquidity buffers, and geographic diversification.

“Our liquidity index for Chinese property developers — which measures the number of rated developers that had inadequate liquidity or were placed in the SGL-4 category — remained stable at 18.4% in February 2014, the same level as at end-December 2013,” says Tsang.

In total, the liquidity of nine rated developers — mostly rated B2 or below — was weak in February 2014.

“Slow sales and/or heavy refinancing requirements are the main drivers stressing the low-rated developers’ liquidity levels, while their ability to access the offshore bond market is constrained by their weak credit profile,” adds Tsang.

Offshore Market for Real Estate Debt Still Thriving

Meanwhile, the offshore debt capital markets continued their strong momentum at the beginning of the year as developers lock in interest rates, extend debt maturities and raise fund for land payments.

From 1 January to 20 March 2014, 21 rated developers issued a total of $9.2 billion in bonds, compared with $5.5 billion raised in 4Q 2013.

These new bond issues will also help mitigate rated developers’ refinancing risks, given part of the proceeds will be applied for the repayment of offshore bonds.

Real Estate Sales Continue to Decline

Moody’s report further states that contracted sales in China’s residential property market declined 5% year-on-year to RMB598 billion — the first year-on-year decline in monthly sales since June 2012.

The decline was partly because of the high base in the same period in 2013, when contracted sales rebounded strongly after the down cycle during 2H2011 and 1H2012.

Nevertheless, contracted sales for Moody’s 20 tracked developers for the first two months of 2014 rose 18.6% year-on-year to RMB173.9 billion, mainly because of the strong sales performance of a few major developers.

Moody’s also expects growth in property prices across China’s 70 major cities to moderate over the next 12 months, as a result of the high base effect of 2013, tighter liquidity, and weakened market sentiment in the China property market.

The number of cities recording strong price gains of more than 10% year-on-year decreased to 14 in February 2014, from a record high of 28 in December 2013.