Morgan Stanley warning sparks property sell-off

PUBLISHED : Saturday, 13 September, 2008, 12:00am
UPDATED : Saturday, 13 September, 2008, 12:00am

Mainland property stocks continued to fall yesterday after Morgan Stanley warned the market could be headed for a meltdown as home prices and sales slumped, putting developers and banks' earnings in doubt.

'Property prices are already cracking in major cities. We believe the likelihood of a property sector meltdown is high,' said Morgan Stanley analyst Jerry Lou in a report.

'The impact on banks' earnings may be substantial.'

The report singled out Guangzhou R&F Properties as facing the worst solvency risks, while Shimao Property Holdings and KWG Property Holding are the worst in terms of earnings risks.

Agile Property Holdings seems to be the best positioned when it comes to earnings impact and solvency risk, according to the report.

Shares of KWG fell 5.31 per cent to close at HK$2.32 yesterday, marking a 22.67 per cent drop for the week. Shimao lost 2.15 per cent to HK$5.91 and China Overseas Land & Investment slid 1.83 per cent to HK$9.13.

Agile, which has cut its home sales target and slowed project developments for the next three years, rebounded 4.88 per cent to HK$4.30 after falling in the previous four days.

Guangzhou R&F rose 3.42 per cent to settle at HK$9.68.

Unlike the housing downturn in 2005, the uncertainty surrounding the country's economic outlook as a whole had acted as a restraint on home purchases, said Thomas Shik, an economist at Hang Seng Bank.

'Equity prices on the mainland have dropped by over 60 per cent since reaching a peak in October 2007,' Mr Shik said.

'The resulting slowdown, or even a decline, in household wealth may weigh on housing demand.'

Meanwhile, Standard & Poor's Rating Services has revised its outlook on Greentown China Holdings to negative from stable. It also lowered the ratings on the firm's 2.3 billion yuan (HK$2.62 billion) convertible bond due in 2012 and US$400 million senior unsecured notes due in 2013 to B-plus from BB-minus.

In the first half, Greentown recorded slower than expected cash generation and higher than expected financial leverage. Its total reported borrowings increased to 14.4 billion yuan, compared with 11.8 billion yuan at the end of last year.

China Vanke, the mainland's largest listed property developer, said it had rejected demands from buyers for compensation on homes bought before the company cut prices to boost sales.

The Shanghai Morning Post had earlier reported Vanke might compensate the buyers.