Moody’s turns negative on China property

Mark Ralston | AFP | Getty Images

Moody's joined the drumbeat of pessimism on China's property industry, cutting its outlook to negative from stable, but it still expects most rated developers' finances will remain on an even keel.

"We expect a significant slowdown in residential property sales growth, high inventory levels and weakening liquidity over the coming 12 months," Moody's said in a report Wednesday. "A differentiation in the credit quality of developers will become more apparent."

Concerns that China's property market is a popping bubble recently moved to the front burner, with home sales in the four months ended April down 9.9 percent, after slumping 7.7 percent in the first quarter. Property is estimated to account for around 20 percent of the mainland's gross domestic product (GDP).

Read More Who's afraid of China's ghost towns?

Moody's expects sales growth will slow to 0-5 percent over the next 12 months, below 2013's 26.6 percent rise in nationwide contracted sales, with sales in the first half of 2014 likely to decline compared with the first half of 2013.

But while it expects some lower-tier cities will see increasing pricing pressure due to excess supply, it doesn't expect broad-based severe price declines as the government can loosen some of its cooling measures.

Read MoreIs China loosening its grip on the property market?

"Strong new housing starts in recent years have increased developers' unsold inventory levels, and levels will remain high, given the slower sales growth," which will weaken pricing power, pressuring working capital and profit margins, it said.

The credit quality of smaller developers with weak balance sheets and liquidity are likely to decline further as sales growth slows and banks get pickier about lending, Moody's said.

"Some companies, predominantly unrated ones, will likely go out of business or be absorbed by larger, stronger developers," it said. "The credit quality of the majority of rated developers will remain stable as a result of their good liquidity and access to funding."

Read More China property bubble popping? Not so fast

Moody's expects the rated developers will see their revenues rise "materially" this year as they recognize the completed projects they presold last year.

"In addition, the recent push from the People's Bank of China to accelerate mortgage financing to home buyers will support developers' sales and consequently, their liquidity profiles," it said.

Others also see signs the known risks in China's housing market may be increasing.

"A property market slump remains a tail risk, but the tail is getting fatter," Citigroup said in a note Monday.

Read MoreChina goes local to soften hit from property downturn

"In the near term, China's housing market suffers from demand overdrafting and supply mislocation, and there are signs that a correction is around the corner," it said. Citigroup expects a property investment slowdown would put downward pressure on growth, estimating the segment contributes about 12 percent of GDP.

"If residential new starts drop by 25 percent this year in the absence of policy support, GDP growth may fall below 7 percent," Citigroup said, but it added it expects the government will initiate policies to support demand.

In addition, Citigroup believes China's property market risks may be more a matter of timing.

"From a medium-term perspective, the current inventory and incoming supply can be mostly digested by rising demand amid ongoing urbanization and upgrading of living conditions," it said.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

Contact Real Estate


    Get the best of CNBC in your inbox

    To learn more about how we use your information,
    please read our Privacy Policy.
    › Learn More
  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

Latest Special Reports

  • A logo sits on a sign at the World Economic Forum in Davos, Switzerland, on Thursday, Jan. 23, 2014.

    Coverage of the 2015 World Economic Forum’s annual meeting in Davos, Switzerland.

  • NYSE traders

    Go inside the world of exchange-traded funds with CNBC's coverage from the ETF industry's biggest event of 2014.

  • Advisor-centric content with guest columns covering practice management, investment strategies and marketing/social media.