Fitch: Positive Rating Action Unlikely from Chinese Homebuilders' Strong Sales
China's last 12 months (LTM) housing sales by gross floor area (GFA) was 1.25 billion square metres (sqm) at end-June 2016, the fourth consecutive new record since March. The first six months' sales of 571 million sqm were also 24% higher than the previous peak of 461 million sqm in 1H13, and 29% higher than the same period in 2015. 1H16 housing sales of CNY4,180bn was a larger 44% increase over 1H15, also signifying a robust 12% rise in the selling price.
Fitch believes that this rapid uptrend in contracted sales is unsustainable. The homebuilders will either slow down their project launches to conserve inventories or replenish land reserves quickly to re-stock their saleable resources. The former will result in slower contracted sales growth or even sales contraction - and potentially a wider margin if prices continue to rise. The latter factor will inevitably put pressure on both leverage and profitability.
We believe homebuilders' land reserves are getting tighter as China's land sales remain subdued, having been in decline since late 2014. Land sold for housing development of 95 million sqm in 1H16 continued to lag behind GFA sold, and this trend will remain unless the industry-wide plot ratio can go as high as 6.0x, which is unreasonable. The industry had been drawing down on land reserves, and industry sales growth will have to slow eventually until this drawing-down process reverses.
On the other hand, we believe that there is major downside risk on the current land prices in the higher-tier cities. The average selling price (ASP) of recent land sales in Tier 1 and some higher-Tier 2 cities were on a par or higher than the contracted sales ASP of existing projects nearby. Land prices have been on an upward trend, with a 14% rise in land prices from CNY2,925/sqm in 1H15. Homebuilders' strong liquidity - due to their high collection rate on significantly improved contracted sales, and easier funding access from the onshore bond market and banks - has provided sufficient funding to compete aggressively for new land deals and to drive the rapid rise in land prices.