S&P sees further downgrades for developers

Standard & Poor's is forecasting further downgrades for some Chinese mainland developers over the next six months, as the slowing economy and government measures continue to curb property demand.

Its outlook for the Chinese property development sector remains negative, despite some improvement in the past six months from strengthening liquidity and higher sales volumes, said S&P credit analyst Bei Fu on Wednesday.

According to figures released this week by the National Bureau of Statistics, new home prices rose in August for the third straight month, though fewer cities showed gains.

Among the 70 major cities in China, new home prices increased in 36 cities in August, compared to 50 in July.

For the first eight months of this year, total property sales was 3.4 trillion yuan ($537 billion), increasing 2.2 percent from a year ago, of which, the total sales of residential properties increased by 2.3 percent.

"The credit outlook for Chinese property developers is less negative now than it was six to 12 months ago", she added, as a weakening economy limits the government's options and reduces its incentive to further tighten the screws on the property sector.

The liquidity of Chinese developers has been improving, thanks to loosening bank credit conditions, which have boosted the availability of mortgage loans to first-time buyers, and increased the finance available, at a lower cost, for construction projects.

The central bank has reduced interest rates by 0.5 percentage points and cut bank deposit reserves several times since November 2011.

The offshore bond and equity markets have also reopened to mainland developers, and some have already tapped them for funding over the last two months.

Longfor Properties Co Ltd, one of China's top 10 developers by sales, said on Wednesday it would issue HK$3.09 billion ($400 million) worth of new shares to raise cash to fund projects and to use as general working capital.

"Even Greentown China Holdings Ltd is getting out of its difficult period, by selling assets and restructuring," said Fu, referring to the developer which reportedly needs to repay nearly $3 billion in debt in the next 12 months, while holding only $1.2 billion in cash and bank deposits by the end of June, according to its latest regulatory filing.

S&P is maintaining its negative outlook on the Chinese property sector, because the slowing economy is likely to cap any strong sales growth.

As the economic outlook remains weak, purchasing power and investment sentiment have been negatively impacted, Fu explained.

S&P also expects profit margins within the sector to be squeezed over the next two years, due to price-cutting and promotions by agents since 2011.

"We expect the average selling price (of residential properties) in China to decrease by 5 percent in the second half of this year," said Fu, adding that as sales recorded in 2012 are likely to be recognized over the next one to two years, the EBITDA margin of the property sector will remain under pressure in 2013 and 2014.

She also pointed out that some property developers are stepping up their land and project acquisitions, despite the market uncertainty.

"Although the year-to-date sales in 2012 have improved for most rated Chinese developers, we haven't seen any meaningful de-leveraging activities in the sector," said Fu.

"Most developers would rather use cash to purchase land rather than pay down their debts."

She also warned that Chinese developers need to be more disciplined about their financial position, after noticing what she called some "very aggressive balance sheets".

In a recent report, S&P highlighted the example of Sunac China Holdings Ltd, which has acquired 10 projects from Greentown China.

Although better fund flow has been reported to have helped Greentown China's liquidity, the financial and operational burden on Sunac is likely to weigh on its credit profile in the near term, said S&P.

Although the ratings agency said it expects to publish some negative ratings on Chinese developers in the next six months, the number is likely to be lower than in the past 12 months.

It also expects some positive rating actions, and a lower likelihood of default.

"We are less likely to see defaults because distressed developers such as Greentown China have improved their financial strength through asset sales," Fu said.