OREANDA-NEWS. Fitch Ratings says that Chinese homebuilders' year-end cash positions received a temporary boost from their strong December sales, which may distort net-debt based credit metrics measured at the end of the year.

Of the 29 Fitch-rated homebuilders, 21 reported monthly sales performances, with 16 reporting higher sales in December 2014 than the average of the preceding eleven months. This trend, coupled with the quicker pace of home mortgage loan approvals in the last quarter of 2014, would have boosted the year-end cash positions in their 2014 financial statements that they will announce over the next two months. This situation is in contrast to June 2014, when the home loan approval pace was slow and total sales for the industry in 1H14 was only 41% of the whole year's.

The strong December sales will improve Chinese homebuilders' liquidity positions at end-2014, but they also mean the companies need to speed up the pace of development, with pressure on development expenditures likely to surface by mid-2015. Although Fitch's leverage measure - the ratio of net debt to adjusted inventory - adjusts for sales proceeds collected by deducting it from property inventory to get the denominator, the temporary cash boost will still result in a favourable leverage ratio by reducing the numerator. As such, the agency places more emphasis on the trend and sustainability of leverage ratios across several reporting periods than on changes in a single period.

The temporary distortion is, however, less pronounced among the 21 Fitch-rated homebuilders that reported monthly sales. Their December 2014 sales were 11.6% of their 2014 total sales, compared with 15% for the industry.

Although the strong growth of 41% in home sales in December 2014 compared with November was an encouraging trend, December sales have usually posted strong growth over November, ranging in the past five years from 25% in 2013 to a high of 93% in 2011. December 2014 showed the second-lowest growth over this period, indicating that the Chinese homebuilding industry continues to adjust towards a more sustainable and rationale pace of growth.