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Research Report

02/03/2020 17:46

Stress tests show rating vulnerability for China developers

[ET Net News Agency, 2 March 2020] The COVID-19 outbreak and China's staunch
containment measures have left the country's property sector exposed to risks not seen
before. S&P Global Ratings estimates that nearly a third of the Chinese developers it
rates could breach or skirt their downgrade triggers under a prolonged-outbreak scenario.
Even in a more benign baseline scenario, nearly a quarter of sector players could face
ratings or outlook pressure. That's according to a report S&P published today, titled,
"New Virus, Unprecedented Risks For China's Developers."
"We anticipate that China's residential property sales could fall by 5%-10% in 2020, in
a baseline test scenario where new coronavirus cases peak in March," said S&P's credit
analyst Christopher Yip. "Residential property sales have all but stalled and will likely
remain dismal for the coming weeks, with sales centers shut or empty."
The agency performed stress test sales based on sales and rental hits versus expenditure
cuts to 66 rated Chinese property companies under two scenarios.
In its baseline scenario in which the outbreak peaks in March, property sales centers
should reopen selectively and operations should adjust, bringing gradual improvements
through May. S&P would then expect China's property sales volumes to return to normal by
midyear, with a mild rebound toward year-end.
Under a more stressed scenario, with the outbreak peaking in April, monthly sales would
not start to normalize until July. The overall rebound would be pushed to the fourth
quarter. It thinks this harsher case is comparable to the most severe downturn in China's
property sector, which saw a 19% decline in national residential sales in 2008.
These assumptions do not include additional measures that could be taken by the
developers or policymakers to mitigate fallout. (KL)

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