Chinese property developers could face a severe liquidity crunch over the next six to twelve months should sales fall by 30 percent, according to a recent stress test done by ratings agency Standard and Poor's on the mainland's residential sector.
"For one, the sales prospect is highly uncertain," Bei Fu, Corporate Ratings Director at Standard & Poor's Ratings Services told CNBC on Tuesday, citing the tightening credit conditions both domestically and globally.
More importantly, unlike the previous crunch in 2008, real estate developers are substantially more leveraged now. "Debt due is very high for many of the developers," Fu noted.
"For a 10 percent drop (in sales), we found out most of the developers are okay… among 30 rated developers, only a third have weak liquidity or less than adequate. Most of them still have adequate liquidity,” he added.
“What is painful is the 30 percent cut. Then we will see more than half of our rated developers fall into weak liquidity category, which is our definition of facing material liquidity strain," Fu said.
Fu cites Greentown China Holdings, Coastal Greenland and SRE Group among the companies most vulnerable to a downturn in the sector.
Despite the findings, S&P says a 30 percent fall in sales is unlikely. It is forecasting average sales growth of 25 to 30 percent for the sector this year, and no material decline in sales in 2012 due partly to the high inventory left over from the past two years.
But should the global credit situation worsen dramatically, S&P warns that developers may be forced to cut prices and look for alternative sources of funding, which may be difficult if China's monetary policy continues to remain tight.
"Niche players that develop high-end properties in top-tier cities — including Beijing and Shanghai — may feel the most heat. That's because these properties are generally affordable to just a highly concentrated group of investors, whom purchase restriction policies target," S&P highlighted in a research note.
“Property developers are bracing themselves for slower sales and lower property prices ahead,” the report said. “ The hard times aren’t over yet.”