S&P: Stress test reveals China real estate's breaking point

KUALA LUMPUR: China's real estate developers will struggle to meet short term obligations if their level of sales slipped as much as 30%, said Standard & Poor's Ratings Services.

The rating agency said on Tuesday, Sept 27 that a 30% decline in sales next year was unlikely, but that its sensitivity analysis suggested that this was the point at which many developers, including some large rated players, would feel severe liquidity strain.

S&P said this in an article entitled "Stress tests show a big sales slump could severely strain the liquidity of many rated Chinese developers".

Its credit analyst Bei Fu said most developers would be able to absorb a 10% decline next year.

"Weakening property sales and tightening credit conditions at home and globally are the key drivers that increase liquidity pressure. We see greater risks that smaller and niche developers with large refinancing risks could struggle in 2012," she said.

S&P said that based on China real estate developer's execution track records and overall competitive positions, the base case for 2011 was for developers' contract sales to average 25% to 30% in growth.

The rating agency said its base case for 2012 did not show material decline in sales, partly due to higher inventory for sale resulted from developers' higher investments over the past two years.

The article grouped the rated developers in China into the categories of "adequate", "less than adequate", and "weak", according to S&P's definition.

The groupings are based on two scenarios that show varying sales declines in the second half of 2011 and 2012 from the base case.

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