Fitch Ratings has downgraded its 2022 forecast for China home sales to a 25-30% drop as COVID-19 lockdowns, developer failures and consumer confidence erode. consumers continue to suppress buyer demand.
Sales in the world’s largest housing market have been impacted by COVID-related social and mobility restrictions put in place after the outbreak in March, Fitch said in analysis released this week. The rating agency had predicted a lower fall of 10 to 15% on a full year in its previous projection made last December.
Nationwide real estate sales fell 30% year-on-year in the first four months of 2022 and 47% year-on-year in April, according to Chinese government statistics. The pace of the recovery will depend on the success of Beijing’s zero COVID policy, Fitch said, but other lingering issues are expected to dampen sales in the near term.
“We believe a lack of capital will hamper the ability to accelerate land acquisitions and project launches, hence a quick and sharp recovery in sales is unlikely,” the agency said.
Developers in shock
Fitch noted that new home sales among China’s biggest developers fell sharply in the first quarter, with many down 30-45% year-on-year, and continued to weaken in April as lockdown measures have hit new launches and sales across the country.
“Several major developers reported sequential month-over-month sales improvement in May, but fell more than 40% on a year-over-year basis,” the agency said.
Wide-ranging defaults by domestic developers, including top five builders Evergrande and Sunac, are seen as adding uncertainty to project delivery and further weighing on buyer confidence.
Despite the negative trend, Fitch expects conditions to moderate over the coming months in light of clearer policy support, lower prime rates and an acceleration in mortgage approvals that have started. last October.
To sweeten their debt offerings, several developers have in recent months sold bonds with credit enhancement features. Greentown, Excellence and Sino-Ocean issued debt backed by a stand-by letter of credit from China Zheshang Bank, while Longfor, Country Garden, Midea and Seazen sold bonds with protection mechanisms such as money orders. credit risk mitigation or credit default swaps.
“However, funding channels for much of the industry will remain closed in the short to medium term if the issuance of bonds backed by default protection devices is not extended to smaller or more mature automakers. difficulty,” Fitch said.
Fitch blamed the re-emergence of COVID-19 for blunting the effectiveness of government housing support measures, which include relaxed lending rules and lower mortgage costs.
The agency currently rates 64% of Chinese developers under its coverage at B+ or lower, indicating significant default risk, with further negative rating action likely absent a more sustained sales recovery.
Smaller developers won’t regain access to capital markets in the near term, Fitch said, while year-to-date cash generation is below most developers’ expectations.
Despite the government’s call for asset management companies and other financial institutions to acquire distressed assets, Fitch believes most lack the expertise to oversee sales and lending. completion of the projects and eagerly welcome the participation of industry leaders.
“Consolidating developers want to seize opportunities in upper-tier cities,” the agency said, “but foreclosure measures may have disrupted the due diligence process, and sellers also want to retain stronger assets while navigating the restructuring process”.