Moody's goes negative on property sector

Moody's Investors Service reported on Wednesday a "negative outlook" for the Chinese property sector over the next 12 months, citing a sales meltdown, rising inventories and tight liquidity.

The ratings agency forecast a "significant slowdown" of home sales for the period, which it said would be flat or at most up 5 percent in value terms year-on-year.

Inventory in eight cities - four first-tier and four second-tier - tracked by Moody's was about 14 months at the end of April, approaching the previous high of about 16 months in February 2012.

"Especially in the first four months, sales have declined 9.9 percent," said Franco Leung, an analyst at Moody's. "Inventory levels will remain high. The situation in smaller cities will be particularly serious. That will increase pressure on developers' working capital and cash flow."

The last time the agency downgraded the sector to "negative" was in April 2011.

Chinese developers face deteriorating liquidity conditions as banks are taking longer to disburse mortgages and the collection of sales proceeds is slowing, the report said.

However, Leung said that developers have a chance to strengthen their financial positions. On May 14, the People's Bank of China encouraged domestic commercial banks to ease conditions on mortgage approvals. And the China Securities Regulatory Commission has announced a resumption of initial public offerings this year, opening an avenue to raising funds in the domestic equity market.

"Developers with bigger names and stronger financial profiles will be more able to weather the challenge," said Leung. "Larger national players tend to have stable sales, and those with mass market products will see better sales, especially with discounts, given solid demand driven by urbanization."

According to a report released by Barclays Bank Plc's Hong Kong office on Wednesday, Chinese builders will achieve their sales targets this year but at the cost of declining margins.

The bank found that about 60 percent of developers don't rule out discounts to stimulate sales, while one in five anticipate lower margins this year on contracted sales.

"We believe price cuts are inevitable to stimulate homebuyer sentiment," the report said. "Any price cuts could stimulate homebuyer sentiment ... Although the PBOC has urged banks to prioritize first-home mortgages, most developers believe the tight mortgage environment will continue, with a drawdown period of two to three months."

Separately, the bank said the trend of large developers becoming larger should continue as quality developers keep grabbing market share.

Moody's also forecast market consolidation during the downturn. "It can take more forms. While merger and acquisition activity depends more on market valuations, which vary, market players could also purchase each others' projects like they did last time," said Leung.

Some Chinese homebuilders such as Greentown sold megaprojects to peers during the 2012 downturn.

Kaven Tsang, senior analyst at Moody's, said in the current challenging environment, it's crucial for developers to have the backing of banks.

"Beyond project funding, developers will also benefit if banks are active in providing mortgages," he said, adding that while a majority of developers focus on mass market housing, their target consumers are largely first-time home purchasers who carry huge mortgages.