Moody's upgrades Chinese property sector for first time in two years

According to a report released on Monday, Moody's Investors Service has forecast a positive prognosis for China's property sector for the first time in roughly two years, citing improved sales and finance conditions for developers.

The international rating agency predicts flat growth in home sales over the next 12 months, following a steady recovery in sales volume from a 28% dip last year, owing to China's economic recovery and positive government measures driving housing demand.

The first-quarter sales gain of up to 6% year on year will not be sustained, and the rebound will be uneven, according to the Moody's analysis.

"We expect homebuyers' income growth and consumer confidence to gradually improve amid China's economic recovery, which will increase their willingness to spend on property," the report said, adding that some favourable government measures, such as relaxing home purchase restrictions and lowering mortgage rates, will help sales.

Following fast increases in February and March, Chinese home sales slowed last month. In April, the amount of new home purchases in 30 Chinese cities tracked by Chinese property information platform CRIC plunged 27% month on month to 16.42 million square metres, much below pre-pandemic levels. Lower-tier cities, which suffered a drop in sentiment last month, drove down sales the most.

The report stated that China's tier-1 and tier-2 cities, which have recorded faster economic growth and a consistent population, are projected to lead growth with stronger housing demand and new launches, with inventories dropping back to around historical levels in the coming months. Lower-tier cities, on the other hand, are expected to experience inventory difficulties as sales slow.

According to the analysis, the danger of further downside is limited due to improvements in factors such as home affordability, incompletion risks, and developer defaults. Concerns about unfinished projects, for example, are projected to fade gradually as developers acquire more cash to restart building on stopped projects through various government assistance programmes.

In a study issued on Monday, HSBC stated that it predicted US$10.1 billion in notional defaults in China property US dollar high-yield bonds this year versus US$63.7 billion in 2022, resulting in an annualised default rate of 22% in 2023 versus 60% in 2022.

Furthermore, the probability of a further decrease in sales from a trough in the second half of 2022 is minimal, owing to a more favourable policy and operating environment that will support sales, according to Kelly Chen, a vice president and senior analyst at Moody's.

If China's overall home sales increase by more than 10% in the next 12 months, the rating agency may modify its outlook and contemplate a positive endorsement. On the other hand, if nationwide contractual sales fall by more than 5% in the next six to twelve months, it may consider a negative rating.

By fLEXI tEAM