Bloomberg News

China Property Developers’ Outlook Cut to ‘Negative’ by S&P

June 15, 2011

(Updates with closing share prices in 12th paragraph.)

June 15 (Bloomberg) -- Chinese developers’ outlook was cut to “negative” from “stable” by Standard & Poor’s, which said tighter credit and further government curbs may lead to rating downgrades in the next year.

Property sales may start to slow as the government’s policy “starts to bite,” leading to price cuts that may drive home prices 10 percent lower in the next 12 months, the credit rating company said. Hong Kong’s real estate market faces the risk of a “sharp correction,” S&P also said in the statement today.

“We haven’t seen any encouraging news so far,” Bei Fu, an analyst at S&P, said on a conference call today. “Inventory and sales pressure increased, government’s policy is gradually showing effect, transactions have been curbed. Many companies issued bonds that will improve their liquidity but put pressure on gearing.”

The People’s Bank of China yesterday raised banks’ reserve ratio requirements for the ninth time since October. The government said last month it will maintain curbs after intensifying measures this year with higher minimum down payments for second-home purchases and the introduction of residential property taxes in Shanghai and Chongqing.

Price cuts among developers may hurt their liquidity, raising the likelihood for a broader “price war,” Fu said on the call. S&P will monitor the performance of Chinese developers and further downgrade their outlook if they fall below its expectations in the next two to three months, she said.

Greentown, China Resources Land

Greentown China Holdings Ltd. is among developers with the lowest ratings, Fu said. The company’s contracted home sales to June 13 were 17 billion yuan ($2.6 billion), less than expected, RTHK said on that date, citing Chief Executive Officer Shou Bainian. The Hangzhou-based developer is “unsure” about achieving the sales target for 2011, RTHK said, citing Shou.

China Resources Land Ltd., China Overseas Land & Investment Ltd. and Franshion Properties China Ltd., all state-controlled, have the highest ratings, Fu said.

Moody’s Investors Service lowered its outlook for China’s property sector to “negative” from “stable” on April 14 on concern residential sales could decline by as much as 30 percent as local governments enforce housing curbs. The ratings firm said 10 property companies, including Shimao Property Holdings Ltd. and Greentown, will be “more vulnerable” in terms of their liquidity positions if contracted sales decline by 25 percent from the previous year.

Higher Sales Transactions

The government this week said May’s home sales transaction value rose 17 percent from April as developers marketed more residential projects during the Labor Day long weekend. The value of homes sold increased to 380.9 billion yuan from 324.9 billion yuan in April, based on the difference between the statistics bureau’s data for the first five and four months.

April new home prices increased in all but three of the 70 Chinese cities monitored by the government. The national statistics bureau is scheduled to report May’s home price data on June 18. Nationwide prices rose 0.5 percent in May, the ninth consecutive month of gains, as smaller cities withstood government curbs, SouFun Holdings Ltd., the country’s biggest real estate website, said on June 1.

“I can’t say a bubble will never happen, there’s always a risk of asset bubbles in any economy including China,” Stephen Roach, non-executive chairman of Morgan Stanley Asia Ltd., said in an interview in Shanghai today. “The important signal Chinese authorities have sent is, unlike their counterparts in the West, they are focused on relieving or deflating bubbles before they become a major problem for the economy.”

Shares Rise

The measure tracking property stocks on the Shanghai Composite Index lost 0.3 percent at the 3 p.m. close in Shanghai, compared with the 0.9 percent drop in the benchmark gauge. China Vanke Co., the country’s biggest publicly traded developer, lost 1.2 percent to 8.07 yuan in Shenzhen, while Poly Real Estate Group Co., the second largest, rose 0.4 percent to 10.22 yuan.

“The tightening policies may have bottomed out because some home prices have started falling in larger cities including Beijing and Shanghai,” Zhu Jixiang, a Shanghai-based analyst at Capital Securities Corp., said by phone, adding that today’s downgrade “may have a limited impact on larger developers.”

S&P said Hong Kong’s real estate industry faces the risk of a correction because of the city’s “soaring market.” Home prices have climbed more than 70 percent since the beginning of 2009, according to an index compiled by Centaline Property Agency Ltd.

Hong Kong Sales

Sales at 10 of Hong Kong’s biggest private residential developments fell 58 percent over the weekend from a week earlier after the city’s government last week raised minimum down payments and deposits for foreign buyers, according to Centaline, the city’s biggest privately held realtor.

The Hong Kong Monetary Authority on June 10 said buyers of homes costing more than HK$6 million ($770,000) will have to increase up-front payments. Foreign buyers must deposit an additional 10 percent. The curbs will depress speculation, though the effect on buyers from China will be limited because the number of them taking out mortgages is low, S&P’s Fu said on the conference call.

It was Hong Kong’s fourth attempt since October 2009 to curb inflating residential values, rated by Savills Plc as the world’s most expensive. Banks also have accelerated mortgage interest rate increases this year.

--Bonnie Cao, Huiwen Yang. With assistance from Jiang Jianguo in Shanghai. Editors: Linus Chua, Andreea Papuc

To contact Bloomberg News staff for this story: Bonnie Cao in Shanghai at bcao4@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net


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