The mainland's property market is expected to have bottomed out in the second quarter and is set to recover in the second half of the year, according to a Standard & Poor's Rating Services' report.

However, the credit profiles of most mainland developers are unlikely to improve until after the second half, the report says.

The recovery is expected to be supported by an increase in new projects and lowering mortgage rates, while profitability of the developers will continue to trend down, reflecting flagging prices since early 2014, says Standard & Poor's.

Christopher Yip, corporate ratings director at Standard & Poor's in Hong Kong, said property markets of mainland's first- and second-tier cities are expected to have good growth due to strong economic performance.

Though the central government's monetary easing measures have continued to offer strong support, the property market is not expected to rebound sharply this year, said Yip.

As most developers had significantly increased their leverage in 2014 to cope with the downturn in the business circle, it would take significantly stronger sales and the adoption of a lower-growth strategy involving reduction in land acquisition and capital spending before developers' leverage and liquidity can improve.

"Developers with greater foresight in leverage control and a more levelheaded expansion pace will be in a stronger position to maintain their credit profiles. Large developers will continue to benefit from the downturn as weaker players scale back expansion and some even exit the industry," said Yip.

Default risks for developers with weak sales, large land premium commitments, and concentrated debt maturities have already heightened, according to Standard & Poor's. Improving onshore financing conditions have mainly benefited the larger developers, while investors are more cautious about smaller players' increased credit risks. Refinancing risks continue to be acute for these weaker developers with limited room for sales slippage amid intense competition and tightened access to trust loans and offshore bonds for funding.

Standard & Poor's said polarization between developers that are large, well-capitalized, and more financially disciplined and those that are smaller and highly leveraged will intensify. The rating agency predicted that more debt defaults will happen in the sector and mergers and acquisitions will become a trend.

Most developers will continue to face margin compression, making pricing flexibility and product diversity a key differentiator. Developer's risk tolerance and growth appetite will be crucial to their performance in the slow-growth environment ahead. Developers that have better control over sales and land acquisitions through the cycle are more likely to maintain their sound financial positions, said Standard & Poor's.

Alan Kao Yu-lap, a credit strategist at Haitong International Securities Co Ltd, has remained optimistic about the future performance of Hong Kong-listed mainland developers. "With improving fundamentals, mainland developers' stocks will become more attractive," he said.

felix@chinadailyhk.com

Mainland's property market is said to recover due to increase in new projects and lowering mortgage rates, but the profitability of the industry is trimming down, according to a recent report. Asia News Photo

(HK Edition 06/18/2015 page7)