Policy loosening puts developers on track for mild growth

    China's property developers are largely on the road to recovery, according to a report that Standard & Poor's Ratings Services released today, titled "China Property Watch: Policy Loosening Puts The Sector On Course For Mild Growth In 2016." 
  For the first 10 months of 2015, residential housing sales increased a healthy 18% year-on-year, according to the National Bureau of Statistics. Average selling prices (ASPs) in many cities moved into positive month-on-month growth.
  "We believe that most of the developers that we rate will be able to meet their annual targets in 2015, paving the way for credit profiles to stabilize," said S&P's credit analyst Dennis Lee. "But individual players in the sector will likely face some rocky patches." 
  The agency forecast that sales in 2016 will grow 0%-5%, mainly driven by increases in the ASP. Ongoing policy loosening and recovering market sentiment will continue to support an overall price recovery. In the next few quarters, S&P anticipated more cities to show positive month-on-month price growth. It also envisaged that the gross floor area sold may stay flat or slightly decrease from the 2015 level.
  Developers are refocusing on tier-one and tier-two cities that have higher ASPs, and no longer emphasize scale with massive expansion into lower-tier cities, as they did a few years ago. Higher land costs should constrain a rapid ramp-up in scale and force developers to shift to better preservation of profitability.
  "We predict that the Chinese government will continue to release more supportive measures in the coming few quarters to prop up growth and staunch the deceleration in real estate investment. This could provide additional fuel for the sector," said Lee.
  "Higher-tier cities will remain the main driver of growth, given stronger inward migration and better economic prospects, leading to higher demand." he added
  The credit rating agency views the sector risk as reducing because of recovering operating conditions. Sales momentum and profitability compression are still the key risks for leverage to improve. However, the pressure is decreasing, and there's a lower likelihood that developers' credit metrics will deviate from S&P's base case.
  "We expect to take fewer negative rating actions in 2016, compared with the second half of 2014 and 2015. Balanced by more positive actions, ratings are moving closer towards the two ends of the spectrum," said Lee.
  The property market is now undergoing consolidation, with large players consistently gaining market share throughout the cycle. These developers generally have better access to funding, more favorable cost structures, and greater financial resources to compete and expand. Smaller players will find it difficult to compete because of their comparative disadvantages. S&P anticipates more small-to-medium size players to focus in a particular region, or form joint ventures to reduce risk and investment burdens while expanding.