Moody's negative on China property
China's rated property developers face critical challenges in the near and medium term, according to a new report by MoodyÆs.
Moody's Investors Service has a negative outlook for China's property development sector over the next 12 to18 months as local developers face rising operating uncertainties, a tight credit environment and high regulatory risk.
"Contractions in sales volumes, price declines, and land purchases in the first half of the year have caused balance-sheet liquidity and financial profiles to deteriorate to such an extent that we have had to take various negative rating actions over the past six months,ö says Kaven Tsang, a MoodyÆs analyst and the lead author of the rating agencyÆs latest report on China property.
Tsang notes that although some developers have access to onshore financing that can partly mitigate the handicap of limited or no offshore credit, increased borrowing from domestic banks presents subordination risks for bondholders.
He says some developers have been selling assets and equity interests in projects to raise cash and improve their liquidity, but opportunities for doing so have diminished. Potential overseas investors such as property funds have had to repatriate money to the US amid a credit crisis that has starved them of capital, he adds.
As developers complete projects now under construction, the resulting rise in the supply of new housing will further depress the market, says Peter Choy, a Moody's senior credit officer and contributing author of the report.
To stabilise the market, Choy points to recent announcements by China's central government to implement tax cuts and relax restrictions on mortgages as well as steps by local governments to encourage home purchases. However, he notes that the impact of these actions remains unknown.
"Moody's looks at financial discipline as the key determinant for ratings to ensure that issuers can withstand the challenging market environment and preserve their credit and liquidity profiles,ö Choy says.
"Contractions in sales volumes, price declines, and land purchases in the first half of the year have caused balance-sheet liquidity and financial profiles to deteriorate to such an extent that we have had to take various negative rating actions over the past six months,ö says Kaven Tsang, a MoodyÆs analyst and the lead author of the rating agencyÆs latest report on China property.
Tsang notes that although some developers have access to onshore financing that can partly mitigate the handicap of limited or no offshore credit, increased borrowing from domestic banks presents subordination risks for bondholders.
He says some developers have been selling assets and equity interests in projects to raise cash and improve their liquidity, but opportunities for doing so have diminished. Potential overseas investors such as property funds have had to repatriate money to the US amid a credit crisis that has starved them of capital, he adds.
As developers complete projects now under construction, the resulting rise in the supply of new housing will further depress the market, says Peter Choy, a Moody's senior credit officer and contributing author of the report.
To stabilise the market, Choy points to recent announcements by China's central government to implement tax cuts and relax restrictions on mortgages as well as steps by local governments to encourage home purchases. However, he notes that the impact of these actions remains unknown.
"Moody's looks at financial discipline as the key determinant for ratings to ensure that issuers can withstand the challenging market environment and preserve their credit and liquidity profiles,ö Choy says.
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