Citi Downgrades These Chinese Real Estate Developers as Worry Builds Over Credit Bubble

China real estate market is attractive

The MSCI China Real Estate Index was up 22% YTD (as of May 3). Country Garden Holdings (CTRYF) (CTRYY) had returned a whopping 65.72% YTD. Others such as Agile Group Holdings (AGPYF) (AGPYY) and China Evergrande Group (EGRNY) (EGRNF) had also garnered a good 63.7% and 56.1% return YTD.

At a current valuation of 8.3x times earning (as of May 4), a ROE of 15.7% (ROA of 3.67%) and a dividend yield of 3.8%, China’s (FXI) (YINN) real estate does look attractive.

Tightening credit conditions to impact the real estate sector in China

However, behind these attractive valuations, also lies a current ratio of 1.52 and debt to assets ratio of 31.36 and a debt to equity ratio of 130.88. Two years of pro-growth policy easing measures, rate cuts and relaxed purchased restrictions seem to have led China’s property market to a bubble-like scenario.

Worried over China’s credit situation, the Ministry of Housing and Urban-Rural Development recently initiated a crackdown on malpractice by real estate agents and developers in China. On target are practices such as monopolistic market manipulation, creation and provision of false certificates, and the provision of illegal housing finance.

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China’s monetary policy changes are set to affect the property market in Beijing City. Banks are preparing to adopt benchmark mortgage rates for first-home purchases and increase mortgage rates to 1.2 times benchmark for second home purchases. As a result, discounts offered to first-time home buyers may no longer be available in Beijing city.

Citi warns of declining developer sales

The new round of policy measures and overall tighter credit should start affecting real estate developer sales in China, says Citi analysts. Citigroup (C) cut ratings of various developers in China on concerns over sales, given the tight credit conditions in China.

  • Beijing Capital Land, Greentown, Jinmao, Sino-Ocean stand to be most affected as these developers are involved in projects in larger cities of China
  • Ratings for China Fortune Land Development and Sino-Ocean was cut to sell from neutral
  • Yanlord was downgraded to neutral from buy
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