KUALA LUMPUR (Nov 19): Chinese homebuilders are likely to face more difficult market conditions in 2019, with slowing economic growth and deteriorating sentiment likely to drag down sales volumes and stifle gains in home prices, according to Fitch Ratings.

In a statement on its website Nov 19, the ratings agency said it had switched the sector outlook to negative from stable in 2018.

However, it said the downturn is likely to be muted, and the Chinese government has considerable scope to loosen policies to support the market if required.

"We expect sales volumes to fall by 5%-10%, following low single-digit gains in 2018.

"Declines are likely to be strongest in lower tier cities, which will be most affected by the scaling back of monetised resettlement of shanty town residents. The pool of pent-up demand created by tight purchasing restrictions in higher-tier cities will limit sales declines in these areas," it said.

Fitch said prices are likely to remain largely stable, but could fall in some lower-tier cities.

It explained this would represent a significant softening from the 12% year-on-year rise in average nationwide prices in January-September 2018.

"That said, prices will be closely managed by the government, which suggests any price moves will be modest.

"The significant drop in housing inventory in recent years, particularly in less-developed areas, also limits the risk of large price declines," it said.

Fitch said homebuilders are likely to focus on maintaining cash flow and deleveraging as the market softens, and are most likely to cut to land purchases as part of their response.

It said the liquidity of smaller homebuilders — particularly those rated 'B' or below — could be squeezed by slowing sales and ongoing development costs for existing projects.

"Some could be forced to sell existing projects to larger operators, which would accelerate industry consolidation, or accept lower prices to maintain cash flow, especially in lower-tier cities.

"Developers that are unable to preserve liquidity could face negative rating pressure," it said.