HONG KONG: Improved home sales on the mainland have boosted shares of several Hong Kong-listed mainland developers as they claw their way out of the market crater they found themselves in at the beginning of the year. But the budding recovery does not rule out market volatility, according to a report from Standard & Poor's, the rating agency.

Hong Kong-listed China Overseas Land & Investment, the second largest developer on the mainland, tripled in the past six months after its price reached a bottom at HK$6 last November. However, a robust stock performance like China Overseas' is shadowed by industry uncertainty, according to the ratings agency.

The report found that the second half of 2009 is likely to remain volatile due to continued uncertainty over the global economy and government policies, while many developers continue to have a potentially risky appetite for expansion and land acquisitions, largely supported by an aggressive equity culture.

China Vanke, the largest developer on the mainland recently said it will revise upwards its housing starts target to 5.85 million square meters from an initial target of 4.03 million square meters for the year, as home sales recorded a sharp rise in the first half of the year. The developer's interim profit climbed 22 percent to 2.52 billion, the company said on Monday.

Improved operating conditions have, in the meantime, reduced the risk of refinancing, deteriorating financial performances and tight liquidity, the report said.

However, the rating agency downgraded their outlooks on several developers to negative from stable, citing the consideration that the improved sector outlook may not benefit from a rating if a company has taken on debt to fund its increased capital expenditure and property sales and profitability are disappointing.

It also noted that the sharp pickup in sales in the first six months of 2009 is partly attributable to developers' price cuts since the second half of last year and reflects the release of pent-up demand as well as investment buying stemming from inflationary expectations.

Favorable central and local government policies also spurred buyer's confidence after it bottomed at the end of 2008, according to the report.

The report warned of several risks that may undermine the recovery, including tightening credit,a deteriorating external economy, aggressive land acquisition and asset bubbles.

As real estate remains a segmented sector on the mainland, it suggests that industry consolidation and market correction will continue, perpetuating boom-bust cycles.

(HK Edition 08/05/2009 page4)