While the Chinese property market has been on the road to recovery during the past few months, Bloomberg is reporting that experts do not believe this turnaround is sustainable. A government stimulus has been the main reason for the uptick in fortunes but S&P Global Ratings does not view this method as being stable.
“The recovery isn’t all that rosy, in fact it’s rather fragile,” Cindy Huang, director of corporate ratings at S&P, told Bloomberg recently. “It’s driven by liquidity.”
S&P has already cut ratings on 11 Chinese developers this year pointing out that they are reliant on short-term debt. Other issues these companies must deal with are margin pressure in lower-tier cities due to an oversupply of homes and the risk of needing to overpay to replenish dwindling land holdings.
Evergrande Real Estate Group Ltd., Greenland (Hong Kong) Holdings Ltd. and Country Garden Holdings Co., are among the large developers who could face issues should credit restrictions in China become tighter. Huang pointed out that this is largely due to their aggressive investment strategies and large land needs in the country’s bigger cities.
Property sales in China rose a staggering 61 percent during the first four months of this year when compared to the figures from 2015. In order to stimulate the market, the government reduced interest rates and loosened home-buying rules as it wanted to help developers unload a large backlog of unsold homes in smaller cities. Liquidity in the country has improved thanks in part to interest rate cuts and a 25 percent increase in mortgage growth was recorded in the first quarter.
However, S&P noted that the lower rates are unlikely to help offset the significant amount of debt Chinese developers have built up. These companies used debt to expanded their land acquisitions, however, this move has led to a deterioration of their credit ratings. Bloomberg data revealed that Evergrande and Greenland are the two most indebted of 198-listed developers in China.
