"As the most recent set of regulatory measures are more effectively enforced, there emerges the high probability that contracted sales value (a combination of sales volumes and prices) for the Moody's rated portfolio will drop 15-20% Y-o-Y in 2011 with respect to current projects," says Kaven Tsang, a Moody's assistant vice president and analyst.
"This scenario is manageable for most of our rated developers," says Tsang, adding "Thus, the stable outlook for the sector remains appropriate, assuming the absence of any further drastic regulatory measures, and which we think unlikely at present."
Tsang was speaking on the release of Moody's latest outlook on the Chinese property sector. The report -- which he co-authored with Peter Choy, a Moody's senior vice president -- looks at the latest trends in the sector, including regulatory measures to cool the market, the financial fundamentals of the developers, the results of stress testing, and the financial health of home owners and investors.
Moody's rates a total of 23 Chinese property developers and their ratings range between Baa2 and Caa1. A total of 15 (65%) show a stable or positive outlook, while the 8 with a negative outlook are challenged either by high debt leverage profiles, aggressive expansion, or weak sales execution.
A stress test of the liquidity positions of the rated developers [excluding China Properties, rated Caa1/Negative] -- in which debt maturing in 12 months is not refinanced -- shows Hopson Development Holdings Limited (B1/Stable), Glorious Property Holdings Limited (B1/Negative) and SRE Group Limited (B2/Negative) as more vulnerable than their peers.
"While there has been some asset inflation after 18 months of price growth, only moderate downward price corrections are highly likely in 2011. But, investors and developers still have on hand the financial means required to respond to near-term corrections of such a degree," says Peter Choy, a Moody's senior vice president who co-authors the report.
"The Chinese government has been preoccupied with taming the price surge evident since 2H09, and which has been fueled by excess liquidity from its stimulus program, reduced supply -- due to austerity actions in late 20072008 -- and the lack of viable alternative channels for savings," says Choy.
"For now, we expect only a moderate correction in the next 12 months. The improved liquidity positions of developers -- resulting from robust sales over the last year -- and the low debt leverage of buyers reduce the risk of any panic selling, therefore helping avoid any drastic correction," says Choy.
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