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Wednesday 15 June 2011
China Property Sector Faces ‘Deepening Correction’: S&P
Standard & Poor’s believes a “deepening correction” is looming over China’s red-hot real estate market, with prices set to fall 10 to 30 percent over the next 12 months.
China Property Sector Faces ‘Deepening Correction’: S&P
CNBC.com 15 June 2011
Standard & Poor’s believes a “deepening correction” is looming over China’s red-hot real estate market, with prices set to fall 10 to 30 percent over the next 12 months.
The ratings agency revised its industry outlook from stable to negative on Wednesday, saying the increasingly challenging credit conditions and restrictive government policies will hurt sales over the next year.
A slump in property sales will have a “significant” impact on property developers, which rely heavily on their sales performance for liquidity, Christopher Lee, director of corporate ratings at Standard & Poor’s told CNBC.
“Some of these developers will miss the sales target and that means they will be under quite a bit of cash flow pressure,” he added.
Lee believes highly leveraged developers may even enter delinquency.
In the last 18 months, property developers in China have been increasingly tapping the offshore bond market in an effort to shore up liquidity. However, this has increased the amount of debt that is set to mature in the next 3 to 5 years.
S&P says when the time comes to service this debt, developers may not have enough capital and will likely have to issue new bonds as a result. “With market conditions being so uncertain, this is something to monitor down the road,” noted Bei Fu, Director, Corporate & Infrastructure Ratings at S&P.
Price Cuts ‘Blessing’ for Developers
According to ratings agency, a fall in sales volumes will force developers to lower their prices in the second half of 2011, which may bring their balance sheets under further pressure.
However, HSBC regards price cuts as a “blessing in disguise” for developers as it reduces the chance of the government introducing further cooling measures, which in turn would bring investor confidence back to the market.
“Stabilization on the policy front is an important first step for investors to gain comfort with the sector,” the bank said in a recent report.
In addition, HSBC believes price cuts will act as a stimulus for sales volumes, which could buffer the recent weakness in the property market.
Between December and February of this year, transaction volumes in Tier 1 cities including, Shanghai, Beijing and Shenzhen dived 50 percent.
The bank believes investors should be increasing exposure to China’s property sector, which it says is trading at a 37 percent discount to net asset value (NAV).
HSBC analysts are most bullish on Hong Kong-listed developers China Overseas Land and Investment (COLI) and Longfor , which they say will continue to gain market share.
The bank says COLI trades at a 34 percent discount to forward NAV and has already secured 50 percent of its contract sales for 2011, compared to the industry average of 36 percent.
Longfor, meanwhile, has secured 40 percent of its sales target, according to HSBC, and is on track to achieving its sales growth target of 25 percent.
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China Property Sector Faces ‘Deepening Correction’: S&P
CNBC.com
15 June 2011
Standard & Poor’s believes a “deepening correction” is looming over China’s red-hot real estate market, with prices set to fall 10 to 30 percent over the next 12 months.
The ratings agency revised its industry outlook from stable to negative on Wednesday, saying the increasingly challenging credit conditions and restrictive government policies will hurt sales over the next year.
A slump in property sales will have a “significant” impact on property developers, which rely heavily on their sales performance for liquidity, Christopher Lee, director of corporate ratings at Standard & Poor’s told CNBC.
“Some of these developers will miss the sales target and that means they will be under quite a bit of cash flow pressure,” he added.
Lee believes highly leveraged developers may even enter delinquency.
In the last 18 months, property developers in China have been increasingly tapping the offshore bond market in an effort to shore up liquidity. However, this has increased the amount of debt that is set to mature in the next 3 to 5 years.
S&P says when the time comes to service this debt, developers may not have enough capital and will likely have to issue new bonds as a result. “With market conditions being so uncertain, this is something to monitor down the road,” noted Bei Fu, Director, Corporate & Infrastructure Ratings at S&P.
Price Cuts ‘Blessing’ for Developers
According to ratings agency, a fall in sales volumes will force developers to lower their prices in the second half of 2011, which may bring their balance sheets under further pressure.
However, HSBC regards price cuts as a “blessing in disguise” for developers as it reduces the chance of the government introducing further cooling measures, which in turn would bring investor confidence back to the market.
“Stabilization on the policy front is an important first step for investors to gain comfort with the sector,” the bank said in a recent report.
In addition, HSBC believes price cuts will act as a stimulus for sales volumes, which could buffer the recent weakness in the property market.
Between December and February of this year, transaction volumes in Tier 1 cities including, Shanghai, Beijing and Shenzhen dived 50 percent.
The bank believes investors should be increasing exposure to China’s property sector, which it says is trading at a 37 percent discount to net asset value (NAV).
HSBC analysts are most bullish on Hong Kong-listed developers China Overseas Land and Investment (COLI) and Longfor , which they say will continue to gain market share.
The bank says COLI trades at a 34 percent discount to forward NAV and has already secured 50 percent of its contract sales for 2011, compared to the industry average of 36 percent.
Longfor, meanwhile, has secured 40 percent of its sales target, according to HSBC, and is on track to achieving its sales growth target of 25 percent.
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