‘The party may be over’ for Chinese developers, but home prices to remain stable, says S&P

The Chinese government’s successive cooling measures since the end of September are likely to put an end to the phenomenal sales growth of property developers, while refinancing risks will escalate from 2018 onwards, S&P Global Ratings said on Tuesday.

In a report titled “The party may be over for developers”, the global credit rating agency expects contracted sales value to slide by 5 to 10 per cent in 2017, a reversal from 20 per cent growth it forecasts for 2016, as government measures will likely curb investment and home upgrader demand, and lead to fewer transactions.

However, it does not expect home prices to fall next year.

“We believe prices will remain generally stable due to limited supply in high-tier cities, adequate mortgage availability, and developers’ ability to withstand price cut pressure,” said Cindy Huang, a credit analyst with S&P and an author of the report.

Property sales in the first 10 months surged 41.2 per cent year on year in value terms, according to the National Bureau of Statistics. A majority of major developers already have or are projected to hit their annual sales target, reducing incentives for immediate price cuts.

However, a Goldman Sachs report on Monday warned that developers and property agents are expecting the first price cuts in February or March as more potential buyers adopt a wait-and-see attitude after recent tightening measures.

Goldman Sachs analysts including Yi Wang wrote in a note that Hong Kong-listed Chinese developers have already priced in a negative market outlook, but their shares may remain at current low levels due to lack of market catalysts.

S&P is more sanguine, saying a prolonged and sharp downturn in China’s property market is unlikely, but it expects market fundamentals to weaken due to lower margins and rising leverage amid declining affordability.

S&P estimates that total onshore and offshore bond maturities by real estate companies that it rates will double in 2018 to US$10.3 billion, from US$5.2 billion in 2017. The maturities will double again in 2019, reaching about US$20 billion.

Huang said many onshore notes with five-year maturity in 2020 have step-up features that could bring the maturity forward to 2018. If the sales downturn is more intense and prolonged than expected, and the government continues limiting bond issuances, developers could face significant refinancing risks and even liquidity-triggered defaults.

With the domestic market off limits, offshore issuances are likely to pick up in 2017, S&P expects. But a dramatic increase in offshore bonds outstanding is unlikely given the depreciating renminbi and slower approval process, it said.