Surging land prices, coupled with only moderate home sales growth, will increase margin pressures on China’s developers in the next 12 to 24 months, according to Moody’s. China Jinmao, a Moody’s rated developer, and its partners have made three significant land purchases in the last two months in Shenzhen, Nanjing and Hangzhou, for 8.3 billion yuan, 6.9 billion yuan and 6.4 billion yuan respectively. Logan Property and its partner also bought land in Shenzhen for 14.1 billion yuan earlier this month. But Moody’s analyst Dylan Yeo says such sizable purchases carry growing risk because he expects the high unit cost of land plots and price growth in major cities to moderate in the rest of 2016, just as regulation of the housing market continues to tighten. “The unit land costs for a number of these purchases were also close to secondary market housing prices in surrounding areas, implying an increased risk of squeezed profit margins over the next two to three years if the growth in property prices falls below developers’ expectations, ” he wrote in a new research note. The moderate growth in nationwide home sales is also loading pressure on China’s developers. Moody’s expects that growth to narrow to a single-digit percentage over the 12 months ending May 2017, a shadow of the 16.6 per cent rise in 2015 and 32.2 per cent for the 12 months ended May 2016. “We expect regulatory measures to remain broadly supportive in lower-tier cities where inventory risks are still high,” said Yeo. “But further tightening measures will be implemented in high-tier cities experiencing rapid price growth.” According to China’s National Bureau of Statistics, domestic contracted sales surged 53.4 per cent year-on-year to 3.18 trillion yuan in the first five months of this year from 2.07 trillion yuan last year, driven by growth in both sales volumes and average selling prices. The latter, during the period, rose 14.3 per cent. However, contracted sales moderated on a year-on-year basis in May, and “we expect sales growth has peaked and will moderate further in the second half year of 2016”, Yeo said. “Growth in average selling prices has also trended down from a peak of 18.3 per cent in March 2016 to 14.3 per cent in May.” We expect sales growth has peaked and will moderate further in the second half year of 2016 Moody’s analyst Dylan Yeo Buyers in China’s first-tier cities continue to see strong price growth, but the growth rate started to trend down in May on a month-on-month basis, after the impact of regulatory tightening in Shenzhen and Shanghai at end-March, started to take effect. The four first-tier cities — Shanghai, Beijing ,Guangzhou and Shenzhen — registered an average 32.1 per cent year-on-year growth in May compared to 33.9 per cent in April, as month-on-month price increases slowed to 2.0 per cent in May, from 2.8 per cent in April. However, average property prices in second-tier cities rose for a sixth consecutive month in May, reporting 6.6 per cent year-on-year growth, compared to 5.2 per cent in April. Prices in Xiamen grew most at 28.3 per cent in May year-on-year, followed by Nanjing and Hefei at 27.1 per cent and 23.3 per cent. Hangzhou, Fuzhou, Tianjin and Wuhan also reported double-digit year-on-year price growth. The regulatory tightening in Shenzhen, Shanghai, Nanjing and Wuhan in late March 2016 has resulted in varying degrees of effectiveness so far in reducing demand for property investments and in moderating price growth. Prices in Nanjing and Wuhan continued their upward momentum in May because the degree of tightening in those cities is less than that in Shenzhen and Shanghai, said Moody’s.