Recovery in Chinese Property Market ‘Rather Fragile,’ S&P Says

  • Sales driven by liquidity, causing rise in developer leverage
  • Increasing land prices could squeeze margins in top cities

A recovery in the Chinese property market that’s been fueled by government stimulus may not be sustainable, according to S&P Global Ratings, which has cut ratings on 11 developers this year.

"The recovery isn’t all that rosy, in fact it’s rather fragile," Cindy Huang, director of corporate ratings at S&P, said during a webcast on Monday. "It’s driven by liquidity."

S&P has downgraded Chinese builders, citing their reliance on short-term debt, margin pressure in lower-tier cities due to an oversupply of homes, and the risk of overpaying to replenish land banks. Particularly vulnerable to any tightening of credit are Evergrande Real Estate Group Ltd., Greenland (Hong Kong) Holdings Ltd., and Country Garden Holdings Co., largely due to their aggressive investment appetite and large land needs in bigger cities, Huang said.

Property sales in China surged 61 percent in the first four months of 2016 compared with a year earlier, as the government has cut interest rates and loosened home-buying rules to help stimulate the market and dissolve a glut of unsold homes in smaller cities. Declining interest rates in China have led to abundant liquidity, fueling a 25 percent increase in mortgage growth in the first quarter, enabling developers to achieve strong sales.

Still, lower rates may not be enough to offset a build-up of debt at developers, S&P said. Credit profiles have deteriorated at many builders, including those that expanded their acquisitions of land through debt, according to S&P. Evergrande and Greenland are the two most indebted of 198 listed Chinese builders, according to data compiled by Bloomberg.

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