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China's property developers are facing increasing liquidity pressure over the next six to 12 months and tightening credit conditions may see some cut prices, Standard and Poor's said on Tuesday.
Niche players that develop high-end properties in top-tier Chinese cities such as Beijing and Shanghai may "feel the most heat" as these properties are generally affordable to only a highly concentrated group of investors, it said in a report.
The most vulnerable are SRE Group Ltd, Shanghai Zendai Property Ltd, Coastal Greenland Ltd, Greentown China Holdings Ltd, Hopson Development Holdings Ltd, and SPG Land (Holdings) Ltd, the report said.
"The worst isn't over for China's real estate developers. Weakening property sales and tightening credit conditions at home and globally are likely to increase the pressure on liquidity over the next six to 12 months," S&P said.
Nearly two years of efforts by the Chinese government to cool the country's overheated property sector seem to be showing some impact in major Chinese cities. Housing inflation has shown signs of peaking, easing a touch in August, with home prices in major cities remaining flat for a second consecutive month, according to government data.
Developers are likely to suffer "severe liquidity strain" and "struggle to meet their short-term obligations" if sales decline by 30 percent next year, the rating agency warned, adding, however, the likelihood of such a drop should be limited.
Most of the 30 Chinese developers S&P currently rates could only absorb a 10 percent decline in property sales in 2012, the report said.
However, for now, it did not expect any material decline in sales for developers in 2012, partly because of their heavy investments over the past two years that have increased inventories for sale.
But China's increased implementation of measures to cool the property market would likely be a further sales damper for developers, it said.
Potential policy initiatives include the roll-out of purchase restrictions to more cities, property price restrictions, and a further tightening of credit lines for buyers and developers, the report said.
"We expect credit conditions to become increasingly severe for property developers. That would increase the impetus for companies to cut prices and look for alternative funding channels, many of which would be costly," it said.
These alternative channels include offshore bonds and onshore trusts, but these may not be available when developers need them the most due to heightened credit risks and turmoil in the global capital markets.
But the offshore capital market is virtually shut for Chinese sub-investment grade names because of the European debt crisis.
Yields on the bonds are already reflecting equity-like returns, according to Thomson Reuters data. Shanghai Zendai bonds due June 2012 are quoted at around 87 cents on the dollar for a yield of an astounding 32 percent.
Coastal Greenland bonds due 2012 trades at 91 and SRE Group bonds due 2013 trade at 78 cents on the dollar for a yield of 21 percent and 26 percent respectively.
China has already imposed home purchase restrictions in about 40 cities, limiting the number of apartments a person can buy or barring non-local residents.
The latest salvo in Beijing's battle to rein in the sector came last week, when the banking regulator ordered trust firms to detail their exposure to debt-laden Greentown. The move stoked concerns of a funding squeeze for the sector and sparked a selloff in shares and bonds in many other Hong Kong-listed Chinese developers.
Many Hong Kong-listed developers are highly geared and some of them have relied on trust loans as a key source of financing in the absence of other channels of funding.
S&P said lower-rated developers are much more reliant on trust financing than large ones, which still have access to onshore and offshore bank loans.
Developers that it rates 'BB' or higher, such as China Resources Land Ltd., Evergrande Real Estate Group Ltd., and Shimao Property Holdings Ltd. are more sensitive to cuts in contract sales because of their large land premiums, short-term debt due, or construction costs, it said.
But those with good bank relationship and parent support, such as China Resources Land, are in better position of weathering any liquidity pressure, the report said.
With market conditions deteriorating, consolidation in China's highly fragmented property industry might accelerate with smaller ones disappearing or swallowed up by bigger rivals, S&P analysts said.
There are an estimated 80,000 developers in China, with the top three accounting for less than 5 percent of the total market.