HONG KONG, 25 February 2020. Pengyuan International has today published a piece of sector commentary on how the recent outbreak of COVID-19 in China would influence the Chinese property development industry in 2020. The commentary highlights our view that the suspension of property sales in China will pressure developers’ liquidity in the short term and squeeze their profitability in the medium term. We believe that credit profile will diverge among different property developers.
Here are some key takeaways from this report:
The suspension of property sales in mainland China will pressure developers’ liquidity, since cash collection from contracted sales contributes around 50% of property funding in China. In addition, the delay in construction caused by the infection will lead to a decline in investment in construction. In tandem with the slowdown in construction, developers are likely to slow down property sales and land acquisition.
We expect developers to lower property sales prices, which is likely to squeeze profitability in the medium term. However, pricing might vary from city to city, depending on the property inventory. In the first-tier and key second-tier cities where demand is more certain, prices are likely to remain stable. In the third and fourth-tier cities where property inventories are high and economic recovery faces challenges, we are likely to see more weakness in price.
We maintain our view that credit profile will diverge among different property developers.(see China Property- Credit differentiation to expand) In our view, developers who have a low-cost landbank and conservative land banking strategy are likely to have a more flexible pricing strategy. Small developers who have tight liquidity and difficulties access funding will see credit profile deteriorate.
We believe if the epidemic can be effectively contained by late February and the productivities can be fully resumed in March, the damage on China’s economy and property sector will be manageable. Under such a scenario, developers are able to speed up construction in the middle of 2020 to make up for the slowdown in the beginning of the year. Under this scenario, we may see marginal loosening of policies on property financing and land acquisition. Policies that might be implemented include allowing extensions of land premium and tax payments, earlier presale of projects and waiving land appreciation tax (LAT).
In our view, if construction activities are fully resumed in April, the country ’s economic activities will be more severely disrupted than the base case. Continuing sluggish property sales coupled with weak economics will test the property developers’ financing and the sector’s sustainability. Should that happen, supportive fiscal and monetary policies will be crucial to the recovery of China’s property sector.
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Simon Lee, CFA
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