China's property sector facing increasing credit risks - S&P

    Sustained weak conditions in China's property market will erode the credit profiles of the country's developers and could even bring the survival prospects of some weak players into question over the next couple of years, according to a report published by Standard & Poor's Ratings Services today.
  This report is the first in a series of four on China's property sector. The four property articles are also part of our "China Credit Spotlight" series, which examines the credit conditions for the country's top corporates and banks, key sectors, local and regional governments, and structured finance. 
  "We believe the industry can no longer sustain the high growth rates of the recent past," said S&P's credit analyst Bei Fu. "In addition, we do not expect the government to provide lifelines as it has done in previous downturns, setting the stage for prolonged tough operating conditions for developers."
  S&P expects that slower credit growth and high inventories will limit growth for developers over the next couple of years, although from a high base. Leverage is also likely to continue to rise because of an industrywide slowdown in growth coupled with a squeeze in margins.
  "Profitability of most developers will likely decline over the next couple of years because of rising costs, stagnating or sliding prices, and a gradual shift in demand away from higher-end residential housing," said S&P's credit analyst Christopher Yip.
  "However, some developers with good cost control and faster asset turnover will be able to partly mitigate the margin squeeze." he added.
  S&P believes defaults or disappearances of poorly managed small or unrated developers through mergers and acquisitions will accelerate under the current market condition. On the other hand, larger players may not be in the clear, particularly the ones with aggressive land acquisition strategies. The volatile landscape will generate further reshuffling of sector players as the market continues to mature and align itself to China's GDP growth.
  "In our base case, we expect prices to drop up to 5% for the full year, unchanged from our previous expectation. However, we now expect zero volume growth year on year because the recovery in sales that we anticipated in the second half of 2014 is unlikely to counter the weakness in sales so far this year. Overall, we expect property sales (in value terms) to decline by 5% in 2014. However, we believe the developers that we rate -which are generally the larger players - will fare better than the sector overall." the credit rating agency noted.
  S&P expects negative rating actions to outweigh positive rating actions over the next 12 months, and it anticipates some defaults for companies at the lower end of the rating spectrum.