Moody's: Outlook for China's residential property market stable in 2017, but regulatory risk remains high

Moody's Investors Service says that the outlook for China's residential property market in 2017 is stable, but regulatory risk remains high in light of the rapid growth in property and land prices.

"We expect the growth in nationwide contracted sales -- in terms of sales value -- to be flat or slightly negative in 2017, against a high base of contracted sales value for 2016. We estimate sales growth of around 25% year-on-year for the full year of 2016," says Kaven Tsang, a Moody's Vice President and Senior Credit Officer.

"Specifically, sales volumes will decline by around 5%-10% in 2017 due to the tightening measures implemented in major cities in September and October 2016, but the decline will be partly offset by a modest rise in selling prices," adds Tsang.

Moody's believes that a sharp decline in prices is unlikely in the next 6-12 months, given the relative low inventory levels in high tier cities. In addition, the government will seek to support a more balanced development across the property market, given the sector's importance to economic growth.

Moody's conclusions were contained in its just-released report on the China property market, "2017 Outlook -- Stable Business Conditions; Rising Risk of Slower Sales from Tighter Controls". Moody's rates a total of 50 developers in China.

"In addition, our rated developers' average reported gross margin will stabilize in 2017 due to reduced destocking pressures and improved selling prices, amidst the strong contracted sales achieved in last 12-18 months," says Cindy Yang, a Moody's analyst.

Our expectation that property prices will rise, although at a slower pace, will also partly offset the effect of rising land costs.

"Overall, rated developers' key financial metrics -- including revenue/adjusted debt and EBIT/interest -- will improve moderately in 2017, supported by strong revenue recognition, stabilizing profit margins, and lower funding costs," adds Yang.

Despite an expected slight tightening in mortgage financing and onshore bond markets in 2017, onshore liquidity will remain adequate in China, which will in turn support access to funding for developers and mortgage availability for home buyers.

Meanwhile, refinancing risk will be manageable for rated developers, given the relatively small amount of onshore and offshore bonds maturing through 2017, and Moody's expects the offshore bond and loan markets will remain open for rated developers.

Next year will also see the continuation of industry consolidation, a trend which will favor large and financially healthy developers. Such large companies will also outperform their peers and increase their market shares.

Moody's believes that a further dramatic tightening of regulatory measures to curb persistently high property prices, leading to an over 5%-10% fall in national contracted sales over 6-12 months, could lead to change in the sector outlook to negative.

On the other hand, if national contracted sales grow at over 10% annually on a sustained basis and in a low regulatory risk environment, the outlook could be changed to positive.