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Developers bracing themselves

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Mainland developers face the prospect of 'increasingly severe' credit conditions that might force them, in a worst-case scenario, to make steeper cuts to property prices and look for alternative costly funding channels, according to the ratings agency Standard & Poor's.

'The worst isn't over for China's real estate developers,' S&P analysts led by Frank Lu wrote in a report yesterday.

If sales prices were to fall by 30 per cent next year, it said, many companies, including several large players, would feel a severe liquidity strain.

However, for the moment the ratings agency currently views such a severe decline as unlikely, partly because of developers' higher investment over the past two years - which has meant increased inventories for sale. Its base case outlook for this year is rather for developers' sales to average 25 to 30 per cent growth, though weakening property demand and tightening credit conditions at home and globally are likely to increase pressure on liquidity over the next six to 12 months.

'Developers are bracing themselves for slower sales and lower property prices ahead,' said S&P, adding that most developers rated by the agency could absorb a 10 per cent decline in property sales next year.

Prices of new homes declined in 16 of 70 cities last month, compared with July, according to the National Bureau of Statistics. Sales of new homes in the mainland's largest cities dropped 22.3 per cent in August month on month, while sales in second-tier cities were down just 2.8 per cent month on month.

The sharpest falls in sales volumes came in Shenzhen and Xiamen, which recorded declines of 39.7 per cent and 32.3 per cent month on month respectively.

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