Margin pressure persists in China property

This is because of increasing competition.

Moody's Investors Service says that national contracted sales growth in China's residential property market will slow over the next 12 months, but remain healthy.

According to a release from Moody’s Investors Service, its analysis is contained in its recently-released report titled "Property -- China: Outlook Is Stable but Margin Pressure Continues amid Rising Competition," and is co-authored by Franco Leung, a Moody's Vice President and Senior Credit Officer, and Dylan Yeo, a Moody's Analyst.

"Inventory levels in first- and second-tier cities will rise slightly over the next 12 months because of an increase in new housing starts and our expectation of a slowdown in sales growth, but will remain close to the low levels recorded in 2013," says Leung.

"Property developers will also maintain stable funding access during this period, which will support their liquidity," adds Leung. "But the slowing sales growth and increasing competition among developers, particularly in higher-tier cities, means that profit margins will remain under pressure."

Here’s more from Moody’s Investors Service:

Moody's report says that year-on-year sales growth should moderate to a single-digit percentage for the 12 months ending May 2017 from 16.6% in 2015, and 28.4% for the 12 months ended March 2016. These projections reflect the high base of comparison against 2H 2015 and 1Q 2016, when stimulus measures spurred strong sales growth.

Moody's also expects limited benefits from any further stimulus measures, while selective regulatory tightening in some higher-tier cities with rapid price growth will reduce property demand in those cities.

Moody's says regulatory measures will likely remain broadly supportive, and focus mainly on lower-tier cities where inventory risks are still high, as the government seeks to support a more balanced development across China's property market.

While inventory levels in lower-tier cities have fallen from the peak in early 2015, Moody's expects such levels to remain elevated. On the issue of funding, Moody's says funding conditions for the sector will generally remain supportive. The sector's overall liquidity will likely remain adequate, benefiting from strong sales collection in recent months, the opening of the domestic bond market to developers, and manageable refinancing needs over the next 12 months.

As for the high proportion of negative outlooks for the 50 Chinese property developers that Moody's rates, Moody's says this situation is driven mainly by company-specific issues.

The proportion of Moody's-rated developers with negative outlooks or under review for downgrade hit 44% on 6 May 2016—one of the highest levels since 2012—owing largely to company-specific challenges such as debt-funded growth or acquisitions, major business transformations, large refinancing needs, or weak operating models.

Moody's also says the rising land prices in higher-tier cities and the ongoing destocking in lower-tier cities will result in continued pressure on the developers' profit margins, although the recent price run up in certain cities will partly alleviate that pressure. Overall, Moody's expects that the credit metrics of developers that Moody's rates will stabilize in 2016 but remain weak.