Moody's downgrades mainland property

PUBLISHED : Friday, 15 April, 2011, 12:00am
UPDATED : Friday, 15 April, 2011, 12:00am


Moody's Investors Service has downgraded its outlook for the mainland's property sector from 'stable' to 'negative', citing the government's tightening measures to curb inflation.

The negative rating reflects the rating agency's outlook on the sector in the coming 12 to 18 months. The firm expects sales of residential properties for the period to drop 25 to 30 per cent in first- and second-tier cities, primarily because of a decline in transaction volume.

'Higher inflation has caused the Chinese government to introduce stricter regulatory measures in the sector ... and the central government fears high inflation will affect social stability,' Peter Choy Sing-yip, senior vice-president of corporate finance at Moody's, said.

Flat prices are expected to decline about 10 per cent due to government tightening measures, an abundant supply from developers and the provision of 10 million social welfare housing units by the government.

To cool the housing sector, Beijing unveiled a package of austerity measures in late January, such as banning non-permanent residents in certain cities from buying property and restricting permanent residents to owning no more than two homes. Choy said that given the restrictions, rising interest rates, reduced bank lending and increasing supply, China's property developers would face a tough operating environment.

'We believe this will inevitably lead to slowing sales, as well as pressure on profit margins and on balance sheet liquidity for some,' he said. He added that property sales in the third- and fourth-tier cities would be less affected by the measures.

The firm predicted property developers would face challenges in securing onshore debt financing in the next six to 12 months. The government has been slowing monetary growth to reduce the risk of inflation and manage domestic banks' exposure to the property sector.

Kaven Tsang Kai-yin, Moody's assistant vice-president of corporate finance, expects developers' liquidity to weaken this year. Proceeds from resales will slow and developers will have sizable cash outflows to cover unsettled bills for land acquisitions, larger developments and bank loans.

A recent HSBC report said there was still room for the sector to grow as the nation's urbanisation rate could rise 4 percentage points to 51.5 per cent over the next five years. It said fears of a property bubble bursting in the short term were overplayed.