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The suspension of property sales in China will pressure developers’ liquidity in the short term and squeeze their profitability in the medium term. Their credit profiles will diverge, with small developers seeing their credit profiles deteriorate.


Authors: Winnie Guo, Xinping Lin, Simon Lee; Publisher: Pengyuan International

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Introduction

The coronavirus infection (COVID-19) which broke out before the Chinese New Year has since spread rapidly throughout China and other countries. The Chinese government has banned property sales centres in many major cities to prevent contagion. Strict transport restrictions and closure of communities have put on hold property sales in February. Although the first quarter is normally the low season of property sales in China, how COVID-19 will play out will significantly affect Chinese developers’ credit profile.

Chinese property developers’ liquidity is under pressure. 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. 

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ARX Editorial Team

Director: Scott Lee
Content manager, Editor: Piotr Zembrowski, CFA
Coordinator: Natalie Yiu

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