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April 18, 2015

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Falling profits may see realty firms default

A drop in profitability amid slowing sales activity is likely to put more property developers at risk of defaulting on their loans, according to credit rating agency Standard & Poor’s.

S&P said many more Chinese developers are in significantly worse shape than the previous year, and earnings could continue to fall in the sector before the market turns around. S&P sees the overall risk of loan defaults across the sector as rising, if operating and financing conditions don’t improve.

“The slack operating performance in recent months has weakened the credit profiles of many Chinese developers,” S&P credit analyst Christopher Yip said in a statement. “Liquidity remains a key risk for Chinese developers, and has worsened for a number of already-weak companies.”

Chinese authorities have been trying to stoke demand in the property market to avoid a sharp drop, with low interest rates and easier limits on down payment level.

S&P said the measures should help ease a downturn in the market, but will take time to have an impact, most likely in the second half of the year.

S&P expects stable demand from first-home buyers and upgraders, which should keep sales volumes steady through 2015, though a build-up in inventories held by developers will prevent higher prices. It predicts prices will fall 5 percent this year.

S&P has already downgraded the credit ratings of seven Chinese developers this year and said slower sales growth, smaller profit margins and higher levels of debt could lead to more rating cuts, raising the likelihood of debt defaults.

“Lower cash balances paired with increased short-term maturities have heightened refinancing risks,” said Yip.

The rating agency is also pessimistic about developers who focus on high-end projects, which typically have a slow turnaround in cash flows.

S&P sees developers who are able to generate cash and check their debt levels as the ones that will be able to weather the downturn, as will larger and more established players.




 

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