Real estate market slows as tighter credit and gov't curbs 'start to bite'

SHANGHAI - Chinese developers' outlook was cut to "negative" from "stable" by Standard & Poor's, which said tighter credit and further government curbs may lead to rating downgrades in the next year.

Property sales may start to slow as the government's policy "starts to bite", leading to price cuts that may drive home prices 10 percent lower in the next 12 months, the credit rating company said. Hong Kong's real estate market faces the risk of a "sharp correction", S&P also said in its statement on Wednesday.

"We haven't seen any encouraging news so far," said Bei Fu, an analyst at S&P. "Inventory and sales pressure have increased, government policy is gradually showing effect, and transactions have been curbed. Many companies issued bonds that will improve their liquidity but put pressure on gearing."

The People's Bank of China on Tuesday raised banks' reserve ratio requirements for the ninth time since October. The government said last month that it will maintain curbs after intensifying measures this year with higher minimum down payments for second-home purchases and the introduction of residential property taxes in Shanghai and Chongqing.

Price cuts among developers may hurt their liquidity, raising the likelihood for a broader "price war", Fu said. S&P will monitor the performance of Chinese developers and further downgrade their outlook if they fall below expectations in the next two to three months, she said.

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Greentown China Holdings Ltd has the lowest rating among developers, Fu said. The company's contracted home sales to June 13 was 17 billion yuan ($2.6 billion), less than expected, Radio Television Hong Kong said, citing Chief Executive Officer Shou Bainian, adding that the Hangzhou-based developer is "unsure" if it will achieve the sales target for 2011. China Resources Land Ltd, China Overseas Land & Investment Ltd and Franshion Properties China Ltd, all State-owned, have the highest ratings, Fu said.

Moody's Investors Service lowered its outlook for China's property sector to "negative" from "stable" on April 14 on concern that residential sales could decline by as much as 30 percent as local governments enforce housing curbs. The ratings firm said 10 property companies, including Shimao Property Holdings Ltd and Greentown, will be "more vulnerable" in terms of their liquidity positions if contracted sales decline by 25 percent from the previous year.

The government said this week that May's home sales transaction value rose 17 percent from April as developers heavily marketed their residential projects during the Labor Day long weekend. The value of homes sold increased to 380.9 billion yuan from 324.9 billion in April, based on data from the National Bureau of Statistics (NBS).

April new home prices increased in all but three of the 70 cities monitored by the government. The NBS is scheduled to report May's home price data on June 18. Nationwide prices rose 0.5 percent in May, the ninth consecutive month of gains, as smaller cities withstood government curbs, SouFun Holdings Ltd, the country's biggest real estate website, said on June 1.

"I can't say a bubble will never happen, there's always a risk of asset bubbles in any economy including China," said Stephen Roach, non-executive chairman of Morgan Stanley Asia Ltd. "The important signal Chinese authorities have sent is, unlike their counterparts in the West, they are focused on relieving or deflating bubbles before they become a major problem for the economy."

"The tightening policies may have bottomed out because some home prices have started falling in larger cities including Beijing and Shanghai," Zhu Jixiang, a Shanghai-based analyst at Capital Securities Corp, said, adding that the downgrade "may have a limited effect on larger developers".

S&P said Hong Kong's real estate industry faces the risk of a correction because of the city's "soaring market".

Home prices have climbed more than 70 percent since the beginning of 2009, according to an index compiled by Centaline Property Agency Ltd, the city's biggest privately held realtor.

Sales at 10 of Hong Kong's biggest private residential developments fell 58 percent over the weekend from a week earlier after the city government raised minimum down payments and deposits for foreign buyers last week, according to Centaline.

The Hong Kong Monetary Authority said on June 10 that buyers of homes worth more than HK$6 million ($770,000) will have to increase upfront payments.

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