Sluggish home sales unlikely to trigger major defaults by developers

Sluggish property sales amid the novel coronavirus outbreak will not trigger large-scale defaults by property developers nor systemic financial risks, experts said on Monday.

The brisk recovery in property sales and easier financing options will help avoid any major risks, but some small and medium-sized developers may see credit quality souring, they said.

China's property market has remained depressed due to the social distancing amid the outbreak, as nationwide property sales－both by area and by value－dropped nearly 40 percent year-on-year in the first two months of the year, according to the National Bureau of Statistics.

The slump has sparked concerns that sluggish property sales may threaten cash flow stability of real estate developers and lead to defaults, placing a landmine in the financial system given the sector's huge amount of borrowing.

Chinese developers rated by Moody's will have $51.2 billion of onshore bonds maturing or subject to put options in the 12 months from March, accounting for 60 percent of total onshore and offshore bonds maturing or becoming puttable over the period, according to the global credit ratings agency. Put options allow investors to demand bond redemption before maturity.

Risks have already started to surface. Macrolink Culturaltainment, a Shenzhen-listed developer of cultural tourism projects, announced in early March that its parent company, affected by the epidemic, could not redeem the 1 billion yuan ($141 million) principal of a matured bond.

Yet Moody's regards default risks of the sector controllable.

"We expect the liquidity of rated Chinese developers to weaken in the first quarter of this year because the coronavirus outbreak will disrupt property sales. However, we expect most rated developers will have sufficient liquidity buffer against the disruption in sales," said a Moody's report.

A more accommodative financing condition has helped developers to replenish liquidity and repay debts. Eligible companies only need to register with authorities instead of seeking approvals to issue bonds from March 1, benefiting from a shortened lead time for domestic bond issuance, the report said.

Yan Yuejin, director of the Shanghai-based E-house China Research and Development Institution, said the financing conditions faced by property developers are expected to continue improving amid authorities' efforts to guide lending rates lower and facilitate bond financing to bail out businesses in need.

Meanwhile, regulators may intensify supervision of developers' use of the newly-borrowed funds, to avoid their illegal diversion to land use purchases and inflating property bubbles, Yan said.

The China Banking and Insurance Regulatory Commission, the regulator, has reaffirmed the principle of "houses are for living and not for speculation" and vowed to continue promoting the steady and healthy development of the property market on Sunday.

Wu Chaoming, chief economist with Chasing Securities, said the rapid recovery in property sales will also keep default risks subdued.

As of Saturday, 5.61 million square meters of property were sold in the 30 large and medium-sized mainland cities this month, versus 2.43 million sq m for the whole of February, according to Wind Info.

Wu expected the recovery in property sales to further gather pace as the epidemic has been brought under better control domestically. "Default risks of property developers will gradually ease and therefore will not induce systemic risks," he said.

Liu Xiaoliang, an analyst with S&P Global (China) Ratings, said losses from the outbreak are "recoverable" for Chinese developers, with sales in the first and second-tier cities as well as core cities of urban clusters set to recover as the outbreak recedes.

Full-year real estate sales by area and value are likely to fall by around 5 percent compared with last year, and credit quality of the real estate development industry is expected to remain stable this year, Liu said in a report.

However, Liu said that developers with high property inventories in the third and fourth-tier cities may see their credit quality weaken as demand may not hold up like in core cities, and so could small and medium-sized developers with insufficient cash reserves.

Yan expected more policy measures at local levels to ensure market stability and release housing demand, such as providing subsidies for residents purchasing property, adding that the peak of developer default risks may come in the second quarter due to depleted cash reserves.