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07/11/2018 10:57

Cycle turning adds risks for China's weakest developers

[ET Net News Agency, 7 November 2018] Residential property prices in China have peaked
and could fall by up to 5% in 2019, S&P Global Rating said today in an article titled,
"China Property Watch: Which Developers Will Be Dragged Down In A Sliding Sector?"
"After robust activity for more than two years, the momentum waned in September and
October, traditionally prime months for Chinese property," said S&P Global Ratings credit
analyst Christopher Yip.
"A downturn for such a cyclical sector has been widely anticipated, but the timing is
particularly bad since credit conditions aren't conducive either." he added.
Sales by area fell 0.8% in September 2018 from a year earlier; and other leading
indicators such as land acquisitions and real-estate investments are also dipping for the
first time in about two years.
Various restrictive policies gripping the sector have finally taken their toll. From
price caps in major cities to slower pre-sale approvals, policies are now gradually
reversing runaway prices and dampening volume across China to varying degrees.
Besides falling prices in 2019, S&P also expects residential property volumes to decline
by 3%-7%, likely leading to an overall sector contraction of 8%-12% next year. Land
transactions and prices will continue to slide next year as they have since earlier this
year. Lower-tier cities are much more vulnerable in a downturn and could quickly turn from
growth drivers to sector drags.
Developers have already done a fair amount of land replenishment while either expanding
or adjusting their geographical footprint in the upcycle. These reserves should last them
a longer period, especially when growth is fading, lowering further replenishment needs.
"The key risks for Chinese developers still stem from liquidity and refinancing," said
Yip. "Conditions have been tight on all major funding channels for developers."
The financing landscape is the most unfavorable in years--whether it's a clampdown on
alternative financing, domestic bonds being designated only for refinancing, or a surge in
offshore bond yields.
Moreover, many developers have large refinancing needs due to surging maturities or
exercisable puts on onshore bonds. Smaller developers will certainly have to endure higher
coupons. In some cases, depleted investor demand will also make new issuances altogether
unfeasible.
While many Chinese developers have lowered their reliance on foreign-currency debt, the
proportion remains significant. A weaker renminbi increases the burden on offshore
funding, although in isolation this isn't a major factor. These conditions will create
further credit divergence in the sector.
Most rated developers are actually likely to increase market share by picking up assets
from more-stressed peers, while the weakest face a real possibility of collapsing. With a
shortage of financing, cash inflows from sales remain the most dependable funding option.
Therefore, most developers are focusing on sell-through, and may sacrifice pricing to
achieve good cash generation. Those with strength in execution may gain the capacity to
snap up more deferred or distressed assets amid a slump. Sector consolidation has been
underway for some years, but is now shifting to a higher gear.
If harsher policies on the sector are introduced, a much steeper decline could ensue.
But the increasing downward pressure on economic growth is compelling the government to
signal more stimulus ahead.
"We believe further suppression of the property sector looks more remote. Mild loosening
is more probable if the cycle turns too far south," said Yip. (KL)

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