Moody's: Chinese property outlook remains stable but competition will intensify

Moody's Investors Service says that the outlook for China's property market is stable, but the operating environment will become more challenging and competition will intensify.

"The stable outlook reflects our expectation that national residential property sales will slow but will remain within our parameters for a stable outlook," says Franco Leung, a Moody's Vice President and Senior Credit Officer.

"At the same time, inventory levels will stay low in high-tier cities and thereby support prices, while funding availability for the property sector will continue to be broadly stable," says Leung. "We also expect the Chinese authorities to keep in place the tight regulatory measures designed to cool prices in higher-tier cities."

Moody's conclusions are contained in its just-released report on the property sector in China, "Property - China: Outlook Is Stable; Competition to Intensify as Sales Slow and Liquidity Tightens".

The outlook reflects Moody's expectations for the fundamental business conditions in the industry over the next 6-12 months.

Indicative of the challenging nature of the operating environment is Moody's expectation that nationwide contracted sales growth (in sales value) will be slightly negative through to May 2018 against the high year-on-year growth of 36% achieved for full-year 2016. Residential property sales volumes will dip, especially in major cities owing to the continued tight regulatory measures.

Specifically, Moody's believes that the Chinese government will keep in place tight home-purchase controls in cities where prices are rising rapidly and accommodative policies in cities where inventory is high, as part of its ongoing effort to maintain the stability of the property sector, which is an important driver of China's economic growth.

As of 21 April, approximately 45 cities had home-purchase restrictions in place to curb speculative investment demand. These locations contributed approximately 50% of contracted sales nationally in 2016, a percentage approaching the levels seen in early 2014 when the sector outlook was negative.

However, current monetary conditions are broadly more supportive than early 2014. Accordingly, if the availability of mortgages or bank loans to developers tightens materially in the second half of 2017, Moody's will likely revise the sector outlook to negative.

Moody's expects inventory levels in high tier cities will rise but remain below the peak of 15-20 months in early 2015. Inventory for primary residential properties in the first- and sample second-tier cities rose slightly to about nine months in March from around eight and seven months, respectively, in January 2017 and December 2016, following an increase in construction new starts.

Liquidity for developers will likely tighten gradually, reflecting slowing sales and the dramatic slowdown seen in onshore bond issuance since early 2017.

However, developers with good credit quality will continue to maintain access to onshore and offshore funding.

In addition, mortgage loan growth will mirror the slowdown in contracted sales but mortgage availability will remain broadly stable for home buyers.

As indicated, competition will intensify, exacerbated by the consideration that many rated developers continue to target high sales growth in 2017 to capture additional market share. In general, their focus on Tier 1 and key Tier 2 cities has also increased competition for land, pushing up prices and squeezing profit margins as price growth for residential properties slows in many cities.

Moody's would consider a negative outlook if we expect national contracted sales to fall more than 5%-10%, inventory to approach its March 2015 peak, or funding to be interrupted, or bank liquidity and mortgage availability to tighten materially.

On the other hand, Moody's would consider a positive outlook if we expect national contracted sales to grow more than 10%, inventory to decline further, and general funding conditions to remain supportive. The outlook has been stable since June 2015, when Moody's changed it from negative.