Moody’s Investors Service says the new supply-side measures that the Chinese government has introduced — requiring cities with less than a year’s supply of housing inventory to increase the amount of residential land for sale, and cities more than three year’s supply to suspend residential land sales — will have mixed implications for property developers operating on the Mainland.
“These measures will have mixed implications for property developers, and we believe that housing price growth will slow in cities where land supply will increase, a credit negative for developers that purchased land at high prices during the past 12 months with the expectation that housing prices will continue to surge,” says Chris Wong, a Moody’s Analyst.
“This slowdown will pressure gross margins for those developers, while, on the other hand, developers operating in cities with large housing inventories — mainly lower-tier cities — will benefit as the measures will restrict new supply in those cities,” says Wong.
Moody’s conclusions are contained in its just-released report on property in China, “New Supply-Side Measures Will Have Mixed Effect on Residential Developers”.
The latest measures were announced on 6 April by the Ministry of Housing and Urban-Rural Development and Ministry of Land and Resources.
However, it remains to be seen if the new measures will materially increase land supply within the next six to 12 months in high-tier cities that have less than six months of inventory, given the limited supply of land suitable for development and the relatively long time frame for redeveloping shantytowns.
These supply-side measures follow various demand-side measures the Chinese government has implemented since late September 2016 to cool the fast growth in housing prices.
The demand-side measures include restrictions on home purchases and increased minimum down-payment requirements. Nearly 40 cities have such measures in place.
The government ministries also said that cities and counties with more than one million inhabitants should formulate three-year (2017-19) and five-year (2017-21) plans for the supply of housing land and also make the plans public by the end of June.
This situation will give developers a better idea of land supply and should help them manage their expectations on land availability and prices, and subsequently help them manage their land acquisition plans.
The inventory of residential properties — as measured by gross floor area (GFA) available for sale over GFA sold — in the Tier 1 and sample Tier 2 cities that we track rose to around nine months in February from around eight and six months, respectively, in January 2017 and December 2016 as a result of a mild growth in construction new starts.