S&P Cuts The Outlook For Chinese Real Estate Developers To Negative

S&P Cuts The Outlook For Chinese Real Estate Developers To Negative

Following the earlier move by Moody’s to cut the Chinese real estate sector’s outlook to negative, Standard and Poor’s follows today according to Bloomberg.

In its rating update, it says the credit condition for the sector is getting “increasingly challenging”, citing increasingly difficult credit situation in China and restrictive policy of the Chinese government which curbs the demand. Although many developers have prepared themselves for the downtown by raising more cash ahead for the down cycle, Standard and Poor’s believes that a protracted downturn would be a problem as the concentration of debt maturities would pose a risk for refinancing. Bei Fu, the credit analyst, said:

We expect meaningful price adjustments in the second half of 2011. If sales volumes remain sluggish, developers’ liquidity will quickly dry up, suggesting sporadic price discounting will likely intensify.

This is, of course, nothing too new. I have mentioned the worrying statistics that real estate developers’ profits are shrinking, yet the debts are rising. This is largely due to more and more restrictive measures by the government in curbing home prices as well as increasingly tightened monetary policy. Both home buyers and real estate developers are having difficulties obtaining credit these days. Mortgage tightening reduces demand for property as home buyers cannot obtain financing, while the difficulties in obtaining credits by real estate developers will, in my view, trigger price cutting in the future as developers have to speed up sales to cash in.

Looking at the list of recent debt capital raising by Chinese developers I compiled two months ago (see 10 Reasons to short China), we can see that most of the big names developers listed in Hong Kong have raised significant amount of capital ahead of the downturn just as the Standard and Poor’s suggests. But S&P is right to point out the many of the debts maturities are concentrated within a period of time, specifically, around 2015 – 2016. I believe this will give them enough buffer to withstand any shock in the coming years, provided that the downturn is brief and not deep. Of course, in the event that the downturn is more severe and protracted, that would be troubling even for these group of developers, which are still relatively well capitalised for the time being.