Analysts at a top credit rating agency are predicting more tough times for China’s residential property market through mid-year, with little meaningful relief through 2023, after a wave of mainland developers reported dented sales for January through March.
“We expect an ‘L-shaped’ dynamic in China’s residential property market, with large fallout in the first half followed by flatter year-on-year patterns in sales,” S&P Global analyst Esther Liu said in a report published last week.
“By our forecasts, national residential sales will shrink by 15 to 20 percent this year,” the credit rating agency said. “The sector will begin to stabilize later in the year but we still foresee a further 3 percent decline in 2023.”
The credit rating giant’s announcement came during the same week that builders such as China Vanke – the mainland’s third-largest developer by contracted sales in 2021 – said that it had recorded RMB 106.5 billion ($16.7 billion) in contracted sales during the first quarter – a total which was down 40 percent from the same period a year earlier.
Defaulters Suffer Most
Part of the challenge facing developers this year is the need to focus cash resources on projects which were derailed during 2021’s funding squeeze.
“Even if (the housing market sentiment notably improves), sales would face a gap given a thinner project pipeline,” S&P’s analysts noted. “This is because some resources are prioritized to complete pre-sold homes and repay debt, rather than investing in new (housing projects).”
While Vanke was among the largest developers to report major sales shortfalls, builders which had struggled – or failed – to meet bond obligations suffered some of the sharpest declines in new contracts.
Beijing-based Sunshine 100, which in December defaulted on a $178.9 million bond obligation, on Thursday announced that it had achieved unaudited contracted sales of RMB 245 million during the first quarter, representing a 68 percent year-on-year drop from 2021.
On that same day, Zhenro Properties reported a 64.9 percent year-on-year decrease in its aggregated contracted sales for the first quarter to RMB 14 billion. On 30 March Fitch Ratings had downgraded Zhenro to Restricted Default after the developer extended the payment period on $200 million in perpetual securities.
The Thursday announcement followed chairman Huang Xianzhi disclosing in an annual performance meeting for 2021 that Zhenro would “not set any specific sales targets this year,” reported The Paper.
Contracted sales for Beijing’s Modern Land, which in October defaulted on a $250 million offshore bond, also fell 83 percent from the previous year to RMB 1.56 billion.
More Trouble Coming
“In our view, stress this year will lead to more defaults,” S&P’s analysts said, citing weak developer cash flow from operations. Delays in audited financial reports are hurting investor confidence, leading to a virtual shutdown of offshore funding windows, it added.
In March, Sunshine 100 and Modern Land joined a flurry of builders to announce a delay in the publication of their annual results for 2021, which led to suspensions in share trading beginning on 1 April.
In January, Modern Land announced the appointment of financial advisors to assess its liquidity and devise a remediation plan, putting the company into a growing group of embattled Chinese developers which have been forced to restructure delinquent debts.
In the same month that Modern Land revealed its restructuring plan, the property management unit of mainland builder Sunac China Holdings announced the termination of an October agreement to acquire a services affiliate of Modern Land for RMB 2.27 billion ($360 million). Sunac Services had cited Modern Land’s default on the offshore notes as its reason for scrapping the deal.
S&P Global Ratings expects more defaults among China’s property developers as the recent policy crackdown on the country’s residential market adds more strain to their finances, making it more difficult for the companies to free up cash and settle outstanding debt.
Chinese authorities began the clampdown on the real estate sector in 2020 when the government tightened rules on lending to avoid excessive borrowing in the industry.
This year, however, the government is expected to bring in easing measures, including lower borrowing costs on home purchases, S&P said in a March report.
While a growing number of mainland local governments have rolled back home purchase restrictions this year, the ratings agency noted that residential property sales for China’s top 100 developers still declined 50 percent year-on-year during the first three months of 2022, the rating agency said in a separate report.