Morgan Stanley downgrades China’s property sector on policy risk

Bloomberg reports that Morgan Stanley downgraded its outlook on China’s property sector amid risks policy makers may take steps to cool down the overheated market and further prompt developers to cut their debt levels.

Morgan Stanley lowered its recommendation on the real estate sector in the world’s second-largest economy to “in-line” from “attractive”. Strong sales continue and land sales “haven’t cooled off yet, therefore policy risk is still to the downside,” analysts led by Elly Chen wrote.

China’s property firms are under pressure as Beijing moves to curb leverage in the debt-laden sector that has propelled a record wave of corporate bond defaults this year. 

“We expect government property policy to remain relatively tight, and cities with overheated markets may need to tighten further,” the Morgan Stanley analysts wrote. That may potentially include the introduction of a property tax pilot program and inclusion of commercial paper into ‘three red lines’ evaluation.”

Morgan Stanley also sees China continuing its deleveraging push by tightening funding channels and setting property-related loan caps for lenders. It expects gross margins for developers under its coverage to fall 0.4 percentage points in the 2021 fiscal year due to bookings of low-margin projects with high land cost and capped selling prices.