Moody's: Chinese Property Developer Margins Under Pressure

Source Moody's:

Announcement: Moody's: Chinese property developer margins under pressure

Global Credit Research - 26 Sep 2013

Hong Kong, September 26, 2013 -- Moody's Investors Service says the profit margins of most Chinese rated property developers will be under pressure over the next 6-12 months, as they continue to recognize sales contracted during the downcycle in 2011 and early 2012.

"We expect the developers' average gross margins to stay at around 30% for the next six to 12 months, versus 33.3% for all of 2012," says Franco Leung, a Moody's Assistant Vice President and Analyst.

"While the developers have shifted their focus to meeting the growing demand for mass market housing, such products will constrain their profit margins," adds Leung.

"Average land prices have also increased in the past year; developers who have recently replenished their land banks are likely to see an erosion of profit margins in the next one to two years, if average selling prices do not increase accordingly," says Leung.

Moody's analysis is contained in the latest edition of its China Property Focus newsletter.

Moody's newsletter says the developers will report higher recognized revenues in the second half of this year compared with the first half, as they have achieved good contracted sales, and typically complete and deliver more of their projects in the latter part of the year.

The newsletter also says Moody's expects more active bond issues before end-2013.

However, Moody's newsletter further warns that the continuing growth in Chinese property prices could risk the emergence of additional government measures to cool the sector.

The newsletter notes that prices in 69 of China's 70 major cities were higher in August compared to July, and the number of cities recording strong price gains of more than 5% year-on-year increased to 59 in August from 52 in July.

First-tier cities, such as Beijing and Guangzhou, have maintained their records of posting the highest growth in property prices, at 19.3% and 19.0% respectively in August. Shanghai recorded an increase of 18.5%, and Shenzhen of 18.4%.

Major second-tier cities, such as Nanjing and Xiamen, also recorded more than 10% year-on-year price increases.

Moody's points out that while nationwide cumulative contracted sales grew a strong 35.7% year-on-year in the first eight months of this year, supported by solid underlying demand for residential property and better sentiment, the growth was lower than the 46.0% recorded for January-June, reflecting the gradual absorption of pent-up demand.

Total sales for August of RMB515 billion were relatively unchanged from July's RMB517 billion.

Subscribers can access the report at https://www.moodys.com/research/China-Property-Focus-September-2013--PBC_158832.

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