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Announcement:

Moody's: Rise in land prices to raise margin pressures for Chinese developers

 The document has been translated in other languages

28 Jun 2016

Hong Kong, June 28, 2016 -- Moody's Investors Service expects the rapid rise in land prices in recent months to increase margin pressures and business risk for Chinese property developers.

At the same time, the growth in nationwide home sales has peaked and will moderate to a single-digit percentage for the twelve months ending May 2017, while the rise in property prices -- which has been strong so far -- will also likely show signs of slowing in some first-tier cities.

"The high-priced land purchases by developers in recent months have highlighted the rapid rise in land costs in major cities against the backdrop of intense competition," says Dylan Yeo, a Moody's Analyst.

"The rapid growth in land costs will raise the developers' capital requirements and will also likely add margin pressure in the next 12-24 months. Furthermore, developers that acquired land with high unit costs in major cities will face increased business risks, given our expectation that price growth in these cities will moderate," adds Yeo.

Moody's conclusions were contained in the latest edition of its China Property Focus.

The report says that nationwide home sales growth will moderate to a single-digit percentage for the 12 months ending May 2017, down from 16.6% in 2015 and 32.2% for the 12 months ended May 2016.

This expectation reflects a comparison against the high base recorded in 2H 2015 and in 1Q 2016 when stimulus measures spurred strong sales growth. We also expect limited benefits from any further such measures, while selective regulatory tightening in higher-tier cities will lead to lower demand for property in those areas.

Moody's further expects regulatory measures to remain broadly supportive in low-tier cities where inventory risks are still high, but further tightening will be implemented in high-tier cities experiencing rapid price growth.

The rising trend of home prices for China's 70 major cities continued during May 2016. The number of cities registering year-on-year increases rose to 50 in May from 46 in April and the number reporting year-on-year rises of more than 5% rose to 18 from 17.

For the fifth consecutive month, all four first-tier cities -- Beijing, Guangzhou, Shanghai and Shenzhen -- posted double-digit year-on-year price growth. Shenzhen continued to register the highest growth at 54% year-on-year in May, followed by Shanghai's 33.8%. However, their growth rates came down from 63.4% and 34.2% in the previous month.

The regulatory tightening in four major cities in late-March 2016 has had varying degrees of effectiveness. The pace of price growth in Shenzhen and Shanghai started to moderate, but prices in Nanjing and Wuhan continued their upward momentum in May.

Key topics covered in the China Property Focus are:

• Sales Growth Shows Signs of Moderation in May

• Price Growth Remains Strong, But Moderating in Some First-Tier Cities

• Rapid Rise in Land Prices Increases Margin Pressure and Business Risks

• Liquidity Index Remains Stable in May 2016

• One Outlook Change From Negative to Stable

Subscribers can read the full report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_190689

The report may also be found through Moody's topic page "China's Trilemma: Growth, Reform and Stability", available at http://www.moodys.com/chinarebalancing. This page provides a centralized source for Moody's research related to key credit issues in China as the country's macroeconomic story continues to unfold.

Recent Moody's publications relating to China's Trilemma include:

• China Credit: Heard From the Market: Contingent Liabilities a Sizeable But Manageable Risk

• Chinese Banks: Investments in Loans and Receivables Increase System Risks

• China Credit: Authorities Have Tools to Avert Financial Crisis, but Erosion of Credit Quality Likely

• Government of China: What does the build-up in corporate leverage matter to the sovereign? (Presentation)

• Regional and Local Governments -- China: Stabilization Benefit of Property Taxes Will Take Time to Materialize

• Auto ABS -- China: Delinquencies Will Rise After Holding Steady in Q1 2016

• China Credit Market: Negative Credit Events Highlight Offshore/Onshore Investor Protection Disparity

• China Property & Casualty Insurance: Household Earthquake Insurance Plan Supports Business Growth, Raises Pricing Challenges

These reports are available at http://www.moodys.com/chinarebalancing

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Dylan Yeo
Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's: Rise in land prices to raise margin pressures for Chinese developers
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