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25/08/2014 14:30

Hangzhou's home price drop negative for developers - Moody's

    Moody's Investors Service said the home price decline in Hangzhou is credit negative for property developers operating in Hangzhou and adds to existing pressure on local developers' profit margins.
  On 18 August, the National Bureau of Statistics of China reported that the City of Hangzhou registered a 2.5% year-on-year decline in residential property prices in July, down from modest 0.7% growth in June.
  The credit rating agency said, Zhong An Real Estate Limited (B3 stable)(00672), Greentown China Holdings Limited (B1 stable)(03900) and Yuexiu Property Company Limited (Baa3 stable)(00123) have the most exposure to Hangzhou.
  Hangzhou is one of China's largest second-tier cities (the second largest and most prosperous cities, after the first-tier cities of Beijing, Shanghai, Guangzhou and Shenzhen). Its housing development and supply exceed demand by a greater margin than in other second-tier cities. Consequently, Hangzhou's home prices declined year-on-year while other second-tier cities registered average 2.7% year-on-year growth in July. Hangzhou home prices have also been more volatile over the past 18 months than elsewhere. The weakness stems from its substantial land and residential development outside the city center.
  Zhong An will face the greatest pressure to reduce prices in order to boost its liquidity and sales volumes in the city. Nearly half of its land bank and contracted sales in 2013 were in Hangzhou, according to company data.
  Despite the increased pressure on its profit margins from the weakness in Hangzhou, we expect the company's EBITDA/interest expense to increase to 1.5x-2.0x over the next 12 months from 1.1x in 2013 because we project its total revenue to increase owing to high growth in contracted sales value in 2013 in Hangzhou.
  Hangzhou is Greentown's home base. About 30% of its 2013 revenue was from Hangzhou and 11% of its land bank is there, according to company data. Moody's estimated that Greentown has a 10% market share in Hangzhou, with a wide range of property projects in the city center and on the outskirts. Some projects are luxury housing developments, which expose the company to home-purchase restrictions and tight mortgage policies on investment properties.
  Greentown said earlier this year that it plans to slow down its land acquisition and focus on destocking its inventory, including existing projects in Hangzhou. The agency expects the company will reduce its prices in order to sell the projects it has completed, which will further squeeze its profit margins. Moody's expects Greentown's EBITDA margin will stay between 15% and 20% in the next 12-18 months, down from around 24.6% in 2013.
  It also expects Yuexiu Property's relatively large land bank in Hangzhou to have only a modest negative effect on the company's profit margins over the next 12 months because its project launches in Hangzhou will be spread over the next few years and we estimate the annual profit contribution from these at less than 10% per annum in the next one to two years. Yuexiu Property is a relatively new player in the Hangzhou market, where it is still establishing its brand name.
  Enforcement of home-purchase restrictions has become looser in certain parts of Hangzhou and local authorities are approving home purchases more quickly, according to developers' sales representatives in the city. But this relaxation will have limited immediate effect on developers' sales in the city, unless it is accompanied by increased availability of mortgage financing and a reduction in mortgage rates.
 

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