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September 28, 2011

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Property developers face squeeze

CHINESE property developers may be forced to cut prices or seek costlier funding sources under liquidity pressure if sales weaken in 2012, Standard & Poor's said yesterday.

More than half of the nearly 30 property developers it has rated in China may be unable to meet debt payments if transaction volume in 2012 falls 30 percent from S&P's forecast for 2011, the company said in a report.

"We view a 30 percent decline in sales next year as unlikely. However, our sensitivity analysis suggests that this is the point at which many developers, including some large players, would feel severe liquidity strain," said Standard & Poor's credit analyst Fu Bei. "Most developers would be able to absorb a 10 percent decline in 2012."

The company estimated in a previous report that Chinese property developers' housing transactions may rise 25-30 percent on average this year. However, the latest data shows a downward trend. China Index Academy, a property research body, said yesterday that housing transactions in 22 out of 35 cities fell last week from a year earlier. Thirteen of them witnessed slumps of more than 30 percent.

Moreover, several major listed property developers, including China Vanke, Gemdale Corp and Poly Real Estate Development Co, have reported that contract transaction volume declined in August, giving out a warning sign on the cooling market, analysts said.

China's top statistics bureau said last week that prices for new homes dropped in 16 of 70 major cities in China from last month, while prices for existing homes fell in 26 of the 70.

S&P said that weakening property sales and tightening credit conditions may force developers to cut prices so as to boost sales next year.

That opinion was echoed by other analysts.

Cao Xute, an analyst with Sinolink Securities, said that "property developers may lower expectations for home prices after the disappointing market in September. Prices may fall by the end of this year and lift housing transactions."

S&P said smaller developers may have to pay higher interest rates to get money from credit companies, and increasing merger and acquisition activities may occur as the smaller developers are forced to give in during the competition.

Greentown China Holdings Ltd, Hopson Development Holdings Ltd and SRE Group Ltd are among the most vulnerable to sales declines because they lack the ability to refinance large short-term debt, S&P said.

Last week, the China Banking Regulatory Commission ordered trust firms to report to it their exposure to the parent and units of Greentown China, which has the heaviest debt burden among China's property developers. Trust firms are also required to assess their own risks associated with the developer and its units.

"The worst isn't over for China's real estate developers," S&P said. "Developers are bracing themselves for slower sales and lower property prices ahead."

A survey conducted among real estate developers by Soufun showed nearly 52 percent of respondents said they don't expect strong sales in September or October.

Only 13 percent of them were positive about the outlook for the two months - traditionally the best season for home sales in China.


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