Chinese property outlook downgraded due to excessive leverage by developers

Standard & Poor’s (S&P) ratings agency lowered its outlook on China’s red-hot property market to negative from stable, citing increasingly challenging credit conditions due to regulatory tightening and leverage concerns.

China’s property prices are expected to fall by 10 per cent over the next 12 months, with a 20-30 per cent dip less likely, S&P said.

It also noted that neighbouring Hong Kong might also see a sharp correction if interest rates rise too quickly.

“For the next 6 to 12 months, we feel that there are heightened risks (in China) because the leverage has really gone up substantially,” S&P analyst Mr Bei Fu told a news conference.

“Given that (developers’) leverage is already high, we really need to see their sales performance on track to maintain their current credit profile,” Mr Fu said. “But right now, we feel our confidence over the market outlook on the effect on their sales is a heightened risk.”

S&P’s downgrade had a limited impact on Chinese property stocks, with the Shanghai property index ending down 0.26 per cent.

Hong Kong-listed China Overseas Land, the country’s largest developer by market cap, fell 1.4 percent.

Chinese property developers have been actively issuing bonds abroad, tapping the high-yielding US dollar bond markets in Hong Kong, as they face problems raising money at home. The Chinese government is clamping down on property lending.

Chinese companies, many being developers, have accounted for more than a third of the $48 billion (S$59.3 billion) in G3 currency issuance from Asia, excluding Japan and Australia, so far in 2011, with high-yield credits at the forefront of that action.

“Offshore debt issuance and an increase in borrowing in anticipation of this downturn has actually weakened their capital structure,” said Mr Christopher Lee, a director at S&P.

“If sales do not play up as planned, that means they will be under a lot of pressure in terms of cash flows and the ability to service some of their debt,” said Mr Lee.

Some of the companies that face bigger refinancing risks included Glorious Property, Coastal Greenland and Shanghai Zhenda S&P analysts said.

Property prices in China doubled over the past five years in first-tier cities and a series of harsh market-cooling measures have been unveiled. These aim to restricti the number of apartments citizens can buy, raise the level of downpayments and they introduced a property tax.

Analysts said a hard landing in China’s economy would be a huge risk for the sector.

“If the Chinese government continues to be very aggressive to fight inflation and inflation stubbornly remains high, it will affect the home buyers’ sentiment,” said Mr Wee Liat Lee, an analyst at Samsung Securities.

China, like many Asian countries, faces the threat of a property bubble, with S&P analysts saying implementation of government measures was key to stemming sharp price rises.

“Right now it’s more of an implementation of what has been announced, rather than pushing out new policies,” said Mr Fu.

“If the current policies have been strictly implemented in tier 1, 2 and 3 cities, that’s very severe already,” he added.

Source : Today – 16 Jun 2011

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