For China’s Property Developers, Will Weaker Economic Conditions Obstruct Recovery Prospects?

Like many others, Chinese property developers are nervously waiting to see what’s in store for China’s weakening economy. And they probably have some cause to worry. A weak economic outlook typically dampens purchasing power and investment sentiment, potentially leading to easing property sales and weaker credit quality. Standard & Poor’s Ratings Services has highlighted the weakening Chinese economy as one of the main factors for keeping a negative outlook on the country’s property developers.

But Standard & Poor’s latest report card for the sector says the credit outlook for Chinese property developers is now less negative than it was six-to-12 months earlier. And it expects the number of negative rating actions to be lower in the next six months than in the past year. The improved outlook partly reflects higher property sales in the past few quarters, which have helped ease liquidity pressure for many developers. What’s more, the report says improving credit conditions will increase the availability of mortgage loans for first-time buyers and boost liquidity for project/construction loans.

Even so, Standard & Poor’s believes the prospects of strong growth for the sector are limited. Apart from the weak economic outlook, property sales may start to ease as pent-up demand is gradually absorbed. Moreover, administrative controls on speculation will continue to put a lid on investment demand and housing prices. According to the report, gross margins and EBITDA margins will be under pressure for the majority of rated developers due to sector-wide price-cutting and active promotions since 2011.

The report, titled “China Property Market Outlook Improves On Easing Liquidity Pressure,” can be found here.

The posts on this blog are opinions, not advice.
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