Untitled

China Property Watch: Sales AndPrices Are Likely To Moderate ThisYear With Tighter Financing

Primary Credit Analyst:

Matthew Kong, Hong Kong (852) 2533-3595; [email protected]

Secondary Contacts:

Bei Fu, Hong Kong (852) 2533-3512; [email protected]

Christopher Lee, Hong Kong (852) 2533-3562; [email protected]

Laura C Li, CFA, Beijing (86) 10-6569-2930; [email protected]

Dennis Lee, Hong Kong (852)2533-3563; [email protected]

Table Of Contents

Contracted Sales Update And Outlook

Tighter Financing Conditions Likely

Aggressive Land Acquisitions

Policy Fine-Tuning Expected To Remain

Appendix

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 4, 2014 1

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China Property Watch: Sales And Prices AreLikely To Moderate This Year With TighterFinancing(Editor's Note: This is the first of a quarterly series on Chinese property developers.)

Chinese property developers struck while the iron was hot and reaped rewards. Most of the Chinese developers

Standard & Poor's Ratings Services rate posted record-high contracted sales in 2013, benefiting from a largely stable

regulatory environment and robust demand, especially in tier-1 and tier-2 cities. The companies also took advantage of

favorable financing conditions to issue bonds; many were new bond issuers. With the proceeds, the Chinese

developers refinanced loans and bought a large amount of land for replenishment and expansion.

However, we expect sales and property prices to grow more moderately this year due to uncertainties in financing

conditions and economic prospects. Developers took advantage of the market opportunities in January and February

to secure funding. On the other hand, we believe leverage will rise in the next 12 months for some developers, as a

result of this round of aggressive land acquisitions. We also expect large construction outlays to help the developers

meet ambitious annual sales targets. Standard & Poor's ratings on these developers may face downward pressure as

their debt increases may have outpaced property sales growth. Nonetheless, we believe the ratings in the sector will

largely remain stable.

Contracted Sales Update And Outlook

After a strong 2013 for Chinese developers, with record-high contracted sales, we expect sales to ease this year. We

are uncertain if the developers will meet their sales targets this year because onshore financing conditions may

change. If financing conditions tighten sharply, mortgage and developers' funding could be severely affected.

In 2013, new home sales in China rose 27% to Chinese renminbi (RMB) 6.8 trillion, driven by an 18% increase in

volume and 8% growth in average selling price (ASP), according to the National Bureau of Statistics. Contracted

sales in our rated companies on aggregate rose 33%, higher than the nationwide sales growth.

Most of the companies we rate exceeded their 2013 sales targets. Sales for Country Garden Holdings Co. Ltd.,

China Aoyuan Property Group Ltd., Yuzhou Properties Co. Ltd., China SCE Property Holdings Ltd., Sunac China

Holdings Ltd., CIFI Holdings (Group) Co. Ltd., and Greenland Holding Group Co. Ltd. all increased more than 50%.


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Chart 1

ASP in the top 100 cities rose 11.5% in 2013. Average price growth in top-tier cities was higher than that for the

overall market (see chart 2). Prices in the tier-1 cities of Beijing, Guangzhou, and Shenzhen soared more than 24% in

2013.

Home prices continued rising in January 2014 although there were signs of easing because of new measures

implemented on financing and purchase restrictions in some markets since the fourth quarter of 2013 and the

traditional slowdown before Chinese New Year for China's property market.

The property price index for the top 100 cities rose 0.63% month on month in January 2014, 7 basis points (bps)

slower than in December 2013. This represents the 20th month of consecutive property price increases in China.

Also, the year-on-year price increase for the top 100 cities was 11.1% in January, 41 bps slower than in December.


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China Property Watch: Sales And Prices Are Likely To Moderate This Year With Tighter Financing

Chart 2

Our base-case scenario for 2014 is 5% growth in ASP and 10% rise in sales volume for Chinese developers.

Demand--stemming from urbanization and rising disposable income--should continue to support volumes and

modest price growth. However, we expect increasing volatility in the Chinese property market into 2014. The

growth in sales and pricing will be constrained because of easing economic growth prospects, tightened

local-government regulations, and an uncertain financing environment in 2014. Any adverse news could weaken the

property market sentiment.

Tighter Financing Conditions Likely

Listed Chinese developers may face a contraction in funding channels and higher funding cost.

The new Chinese leadership has shown signs that it will be more restrained in pumping liquidity into the banking

system.

Commercial banks may slow down domestic mortgage lending or request higher premium on project loans as China

curbs credit growth and shadow banking.

We expect average domestic funding cost in 2014 to be higher than in 2013 amid rising bank deposit rates.

Furthermore, the strong financing needs of a few weak industries may cause a shortage of funds or raise interest

rates.


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Chart 3


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Chart 4


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Chart 5


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Chart 6

Many property developers have raised funds for refinancing and working capital. In January and February 2014,

developers issued US$7.15 billion and RMB6.8 billion, respectively, in offshore bonds to bolster their liquidity and

funding buffer. This follows a record year for new bond issuance in 2013.

The market may hold uncertainties because of the U.S. Federal Reserve's reduction in its bond buyback program,

often called tapering. Chinese developers are issuing bonds in anticipation of the market turning volatile if the Fed's

tapering is more aggressive than expected.

Bond issues in 2014 are showing a mixed trend in their coupon rates. The coupon rates of most bonds in the 'B'

category declined (except KWG Property Holding Ltd.'s), mainly owing to stabilized credit profiles and improving

track record.

In the 'BB' category or above, the coupon rates for many bonds spiked, e.g., Dalian Wanda Commercial Properties

Co. Ltd., Greenland, and Shimao Property Holdings Ltd. This reflects a lower risk appetite in the China debt capital

market as the U.S. Fed's tapering caused capital outflows to increase from high-yield bond markets.

Comparing the tenors for bond issues in 2014 with those in 2013, the companies selling bonds with shorter tenors

(seven issues) this year outnumber those with longer tenors (four issues). For this comparison, we view the first call

date of perpetual securities as the effective maturity date. Convertible bonds are excluded from this comparison.


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Table 1

Coupon Rates Of Bond Issues In 2014 Versus Previous Issuance

2014 issuance Previous issuance

Company Amount (mil.) Tenor Coupon rate (%) Amount (mil.) Tenor Coupon rate (%)

Agile US$500 5 8.375 US$700 Perpetual 8.25

RMB2,000 3 6.5

Aoyuan US$300 5 11.25 US$100 4 13.875

Beijing Capital Land RMB2,000 3 5.75 USD400 Perpetual 8.375

RMB250 5 6.875

CIFI US$200 5 8.875 US$225 5 12.25

COGO US$400 5 5.125 HK$2,200* 5 2

CR Land US$400 5 4.375 US$750 5 4.625

US$700 10 6

CSC US$400 5 8.25 HK$975 5 6.5

Fantasia US$300 5 10.625 US$250 7 10.75

Gemdale RMB1,050 3 6.5 RMB2,000 5 5.625

Greenland HK RMB1,500 4 5.5 US$700 3 4.75

Greentown US$500 Perpetual 9 US$300 6 8

Kaisa US$250 4 8.875 RMB1,800 3 6.875

KWG US$600 5 8.975 US$300 7 8.625

R&F US$1,000 5 8.5 US$400 7 8.75

Shimao US$600 7 8.125 US$800 7 6.625

Wanda US$600 10 7.25 US$600 5 4.875

Wuzhou US$100 4 13.75 US$100 6 13.75

Yuzhou US$300 5 8.625 US$300 5 8.75

RMB--Chinese renminbi. HK$--Hong Kong dollar. *Convertible bond. Coupon rate before step-up. Source: Standard & Poor's.

The financing conditions for developers may vary. With the country's strengthening regulations on shadow banking

and tightening credit in banking system, developers with maturing trust loans will find it harder to refinance using

the same method. Large developers generally have more financial flexibility than smaller ones.

We believe refinancing risk should be manageable for bonds due 2014. Among outstanding bonds, Powerlong Real

Estate Holdings Ltd. and Country Garden should be able to either refinance or use their cash to pay off their debts,

given their healthy sales and balance sheets. We expect the parent company of Shanghai Industrial Urban

Development Group Ltd. (SIUD) to step in as a last resort if it exhausts other refinancing channels. The refinancing

of China Properties Group Ltd.'s (CPG) US$103 million in outstanding bonds faces slightly higher uncertainty,

however, given the company's poor sales; but we believe its good quality assets and the controlling shareholder's

track record in providing support alleviate the risk somewhat.

Table 2

List Of Credits With Bond Maturities Within 12 Months

Issuer Amount (mil.) Coupon rate (%) Maturity month Bond type

Evergrande* RMB5,550 7.5 Jan Synthetics

Road King* RMB1,272 6 Feb Offshore renminbi bonds (CNH)

Powerlong RMB750 11.5 Mar Synthetics

R&F* RMB2,612 7 Apr Offshore renminbi bonds (CNH)


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Table 2

List Of Credits With Bond Maturities Within 12 Months (cont.)

Lai Fung* US$185 9.125 Apr Senior unsecured

Agile* US$500 4 Apr Convertible

CPG US$103 9.125 May Senior unsecured

SOHO HK$2,357 3.75 Jul Convertible

SIUD US$400 9.75 Jul Senior unsecured

Country Garden US$375 11.75 Sep Senior unsecured

*Refinanced. --Redeemed early. RMB--Chinese renminbi. HK$--Hong Kong dollar. Source: Standard & Poor's.

Aggressive Land Acquisitions

We believe competition for land will remain fierce. In our view, the Chinese land market in tier-1 cities overheated.

Many land parcels were sold at record prices. Land sales in 300 cities rose 50% to RMB3.1 trillion in 2013,

according to China Real Estate Index System (CREIS) data. Land cost on average rose 24% in 2013, according to

CREIS. Construction cost has also been increasing.

Table 3

Top 5 Land Acquisitions By Total Price And Average Price In 2013

Company City District Project type

Total cost

(RMB million)

Average cost

(RMB/sqm)

Premium over

base price

Top 5 by total cost

Sun Hung Kai Properties Shanghai Xujiahui Commercial 21,770 37,264 24%

CR Land Shenzhen Qianhai Commercial 10,900 13,360 62%

Sunac Tianjin Nankai Residential,

Commercial

10,320 10,109 12%

Yuexiu Property Wuhan Jianghan Residential,

Commercial

9,010 12,617 29%

Excellence Group Shenzhen Qianhai Commercial 7,810 20,300 50%

Top 5 by average cost

Sunac/Henderson Beijing Chaoyang Residential 2,100 73,099 16%

Evergrande Beijing Chaoyang Residential 5,135 55,000 30%

Jiangsu Wuzhong Economic and

Technological Development

Corporation

Suzhou Wuzhong Commercial 555 51,046 410%

Wing Tai Holdings Shanghai Huangpu Commercial 1,104 42,821 48%

K.Wah International Shanghai Pudong Residential 568 40,106 63%

sqm--square meter. Source: Soufun.

Most of the companies we rate have devoted a larger proportion of cash proceeds from contracted sales to land

acquisitions in 2013. Developers acquired land more aggressively in 2013 than we had expected to increase their

scale. Some aggressive developers, such as Evergrande and Sunac, are vulnerable to a sudden decline in the

property market due to their large commitments for land acquisitions and high land cost on certain projects.

Because of rising land costs and competition, profitability will likely be compressed in the next 18-24 months. Most

developers' margins in contracted sales rebounded in 2013 owing to better pricing and historically low land costs,

but we believe further improvement may be limited because of (1) a shift toward the mass-market segment, where


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margins are thinner; (2) continued aggressive pricing to generate cash flow; and (3) increasing land and construction

costs.

Chart 7

Policy Fine-Tuning Expected To Remain

We expect China's housing policy to remain relatively unchanged in 2014. The central government is likely to

continue experimenting with market-based measures such as property tax and increasing the housing supply to

control overheating in selective markets.

However, the government is unlikely to roll out severe measures to suppress demand. Some cities have restricted

the purchase of a second home and reduced mortgage financing. We expect these measures to remain; the

government may take further steps to cool the market if prices continue to rise sharply across the country.

We believe the government's adoption of market-oriented policies will bear fruit in the long term. Increased land

supply and development of public housing would reduce demand pressure due to increasing urbanization.

Some local Chinese governments have increased supply of housing to cool soaring property prices. For instance,

the Beijing government announced in January 2014 that 30% of new land supply in 2014 will be normal

"commodity housing" (private housing at market price) and 70% will be for social housing (subsidized housing for

low-income families) and "self-use" commodity housing.

In our view, such measures are unlikely to control prices in the short term but will accommodate popular demand


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for improved and better housing for low-income families.

Table 4

Key Property Policy Updates

Issuing authorities Policies Details Coverage

Central governments National "Five Rules"

and long-term property

market regulations

Property price control; property tax pilot

expansion; national network of personal housing

information and completing uniform property

registration system

Nationwide

Central governments 3rd plenum policy Allow collectively owned rural land designated for

construction to be put on sale. Such land will have

the same rights and prices as state-owned land.

This will increase land supply.

Nationwide

Local governments/banks Tightened mortgage

availability

Downpayments for second home raised further;

mostly to 70% from 60%. Some cities stopped

offering mortgage loans for purchasinge a third

home or above.

A number of tier 1-2 cities,

including Shanghai, Shenzhen,

Guangzhou, Wuhan, Hangzhou,

and Xiamen

Local governments Home purchase

restrictions

Purchase restrictions further tightened for

non-local households; non-local buyers need to

provide longer records of individual income tax or

social security payments to qualify for home

purchases.

A number of tier 1-2 cities

including Shanghai, Guangzhou,

Zhengzhou, Wuhan, Shenyang,

Nanchang, Fuzhou, and Taiyuan

Beijing On self-use commodity

homes

70,000 units of self-use commodity homes to be

rolled out in two years with ASP 30% below

market rate; resale not allowed in the first five

years

Beijing

Source: Standard & Poor's.

Appendix

Table 5

Bond Issues In 2013 For Companies Rated By Standard & Poor's

Issuer Currency

Sale/Original Amount

(million)

Coupon

(%)

Final Maturity

Date

Issue

Rating

Central China Real Estate Ltd. USD 200 8 1/28/2020 BB-

Central China Real Estate Ltd. USD 400 6.5 6/4/2018 BB-

China Overseas Land & Investment Ltd. USD 500 3.375 10/29/2018 BBB+



China Properties Group Ltd. USD 250 13.5 10/16/2018 B-

CIFI Holdings (Group) Co. Ltd. USD 500 12.25 4/15/2018 B

Country Garden Holdings Co. Ltd. USD 750 7.5 1/10/2023 BB-

Country Garden Holdings Co. Ltd. USD 750 7.25 4/4/2021 BB-

Evergrande Real Estate Group Ltd. USD 1,500 8.75 10/30/2018 BB-

Famous Commercial Ltd. (Gemdale)* RMB 2,000 5.625 3/21/2018 BB-

Fantasia Holdings Group Co. Ltd. USD 250 10.75 1/22/2020 B+

Fantasia Holdings Group Co. Ltd. RMB 1,000 7.875 5/27/2016 B+

Franshion Properties (China) Ltd. USD 300 5.375 10/17/2018 BBB-

Future Land Development Holdings Ltd. USD 200 10.25 1/31/2018 B+

Future Land Development Holdings Ltd. RMB 1,500 9.75 4/25/2016 B+


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Table 5

Bond Issues In 2013 For Companies Rated By Standard & Poor's (cont.)

Glorious Property Holdings Ltd. USD 400 13.25 3/4/2018 CCC+

Golden Wheel Tiandi Holdings Co. Ltd. RMB 600 11.25 4/25/2016 B

Greenland Hong Kong Holdings Ltd.

(Greenland Group)*

USD 700 4.75 10/18/2016 BB+

Greentown China Holdings Ltd. USD 700 8.5 2/4/2018 B+

Greentown China Holdings Ltd. RMB 2,500 5.625 5/13/2016 B+

Greentown China Holdings Ltd. USD 300 8 3/24/2019 B+

Hengli (Hong Kong) Real Estate Ltd. (Poly Real

Estate)*

USD 500 4.5 8/6/2018 BBB-

Hopson Development Holdings Ltd. USD 300 9.875 1/16/2018 CCC+

Kaisa Group Holdings Ltd. USD 500 10.25 1/8/2020 B+

Kaisa Group Holdings Ltd. USD 800 8.875 3/19/2018 B+

Kaisa Group Holdings Ltd. RMB 1,800 6.875 4/22/2016 B+

KWG Property Holding Ltd. USD 300 8.625 2/5/2020 B+

Lai Fung Holdings Ltd. RMB 1,800 6.875 4/25/2018 B+

Longfor Properties Co. Ltd. USD 500 6.75 1/29/2023 BB

Mingfa Group (International) Co. Ltd. USD 100 13.25 2/1/2018 B-

Powerlong Real Estate Holdings Ltd. USD 250 11.25 1/25/2018 B-

Powerlong Real Estate Holdings Ltd. RMB 800 9.5 5/27/2016 B-

R&F Properties (HK) Co. Ltd. (Guangzhou

R&F)*

USD 600 8.75 1/24/2020 BB-

Road King Infrastructure Ltd. RMB 2,200 6 12/3/2016 BB-

Shimao Property Holdings Ltd. USD 800 6.625 1/14/2020 BB-

Sunac China Holdings Ltd. USD 500 9.375 4/5/2018 B+

Vanke Real Estate (Hong Kong) Co. Ltd. (China

Vanke)*

USD 800 2.625 3/13/2018 BBB


Vanke)*

RMB 1,000 4.5 12/4/2018 BBB


Vanke)*

RMB 1,000 4.05 12/16/2016 BBB

Wanda Commercial Properties (Hong Kong)

Co. Ltd. (Dalian Wanda)*

USD 600 4.875 11/21/2018 BBB-

Xinyuan Real Estate Co. Ltd. USD 200 13.25 5/3/2018 B+

Xinyuan Real Estate Co. Ltd. USD 200 13 6/6/2019 B+

Yanlord Land Group Ltd. RMB 2,000 5.375 5/23/2016 BB-

Yuexiu Real Estate Investment Trust USD 350 3.1 4/3/2018 BBB

Yuzhou Properties Co. Ltd. USD 300 8.75 10/4/2018 B

*The companies in brackets refer to their parents.

Table 6

2014 Year-To-Date Bond Issues For Companies Rated By Standard & Poor's

Issuer Currency

Sale/Original Amount

(million) Coupon (%)

Final Maturity

Date

Issue

Rating

Agile Property Holdings Ltd. USD 500 8.375 2/18/2019 BB-

Agile Property Holdings Ltd. RMB 2,000 6.5 2/28/2017 BB-


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Table 6

2014 Year-To-Date Bond Issues For Companies Rated By Standard & Poor's (cont.)

China Aoyuan Property Group Ltd. USD 300 11.25 1/17/2019 B-

China Overseas Grand Oceans Group Ltd. USD 400 5.125 1/23/2019 BBB-

China South City Holdings Ltd. USD 400 8.25 1/29/2019 B

CIFI Holdings (Group) Co. Ltd. USD 200 8.875 1/27/2019 B

Famous Commercial Ltd. (Gemdale)* RMB 1,050 6.5 3/4/2017 BB-

Fantasia Holdings Group Co. Ltd. USD 300 10.625 1/23/2019 B+

KWG Property Holding Ltd. USD 600 8.975 1/14/2019 B+

R&F Properties (HK) Co. Ltd. (Guangzhou

R&F)*

USD 1,000 8.5 10/1/2019 BB-

Shimao Property Holdings Ltd. USD 600 8.125 1/22/2021 BB-

Wanda Commercial Properties (Hong Kong)

Co. Ltd. (Dalian Wanda)*

USD 600 7.25 1/29/2024 BBB-

Yuzhou Properties Co. Ltd. USD 300 8.625 1/24/2019 B

*The companies in brackets refer to their parents.

Table 7

Rating List

Issuer Name Issuer Credit Rating (as of March 3, 2014) CreditWatch/Outlook

Agile Property Holdings Ltd. BB Stable

Central China Real Estate Ltd. BB- Stable

China Aoyuan Property Group Ltd. B Stable

China Overseas Grand Oceans Group Ltd. BBB- Stable

China Overseas Land & Investment Ltd. BBB+ Stable

China Properties Group Ltd. B- Stable

China Resources Land Ltd. BBB Stable

China SCE Property Holdings Ltd. B Stable

China South City Holdings Ltd. B+ Positive

China Vanke Co. Ltd. BBB+ Stable

CIFI Holdings (Group) Co. Ltd. B+ Stable

Coastal Greenland Ltd. B- Negative

Country Garden Holdings Co. Ltd. BB Positive

Dalian Wanda Commercial Properties Co. Ltd. BBB+ Stable

Evergrande Real Estate Group Ltd. BB Watch Neg

Famous Commercial Ltd. BB Stable

Fantasia Holdings Group Co. Ltd. BB- Stable

Franshion Properties (China) Ltd. BBB- Stable

Future Land Development Holdings Ltd. BB- Stable

Gemdale Corp. BB+ Stable

Glorious Property Holdings Ltd. B- Negative

Golden Wheel Tiandi Holdings Co. Ltd. B Stable

Greenland Holding Group Co. Ltd. BBB Stable

Greenland Hong Kong Holdings Ltd. BBB- Stable

Greentown China Holdings Ltd. BB- Stable


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Table 7

Rating List (cont.)

Guangzhou R&F Properties Co. Ltd. BB Stable

Hengli (Hong Kong) Real Estate Ltd. BBB Stable

Hopson Development Holdings Ltd. B- Stable

Kaisa Group Holdings Ltd. B+ Stable

KWG Property Holding Ltd. BB- Negative

Lai Fung Holdings Ltd. B+ Stable

Longfor Properties Co. Ltd. BB+ Stable

Mingfa Group (International) Co. Ltd. B Stable

Poly Real Estate Group Co. Ltd. BBB+ Stable

Powerlong Real Estate Holdings Ltd. B Stable

R&F Properties (HK) Co. Ltd. BB Stable

Renhe Commercial Holdings Co. Ltd. CCC Negative

Road King Infrastructure Ltd. BB- Stable

Shanghai Industrial Urban Development Group Ltd. BB Stable

Shimao Property Holdings Ltd. BB Stable

SOHO China Ltd. BB+ Stable

Sunac China Holdings Ltd. BB- Stable

Vanke Real Estate (Hong Kong) Co. Ltd. BBB+ Stable

Wanda Commercial Properties (Hong Kong) Co. Ltd. BBB Stable

Xinyuan Real Estate Co. Ltd. B+ Stable

Yanlord Land Group Ltd. BB- Stable

Yuexiu Real Estate Investment Trust BBB Stable

Yuzhou Properties Co. Ltd. B+ Stable

Zhong An Real Estate Ltd. B Negative


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Chart 8


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Chart 9


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Research:Contracted Sales Update And OutlookTighter Financing Conditions LikelyAggressive Land AcquisitionsPolicy Fine-Tuning Expected To RemainAppendix

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