OREANDA-NEWS. Housing sales in China reached a record CNY7.3trn in value in 2015, owing in part to price rises in Tier 1 cities, and Fitch Ratings expects sales growth to continue this year. The sales growth, in conjunction with de-stocking and reduced home construction expenditure, resulted in homebuilders' financial profiles strengthening in recent quarters. That said, the prospects for continued improvement in financial profiles is limited in 2016 as high land prices continue to squeeze margins and falling housing completions prompt renewed growth in construction expenditures.

December data for major Chinese property issuers, outlined in Fitch's latest China Property Watch report published on 26 January, confirmed trends from earlier quarters. For Fitch-rated issuers, strong sales growth, price rises in most cities, de-stocking and reduced new-home construction were the key trends in 2015- all contributing to improving financials for the sector.

Gross floor area sold grew to 1.12 billion square metres in 2015 - only slightly less than the record of 1.16 billion square metres in 2013 - and all but three Fitch-rated homebuilders reported growth in contracted sales. The proportion of sales accounted for by larger Tier 1 and 2 cities grew, reflecting the stronger market relative to the smaller Tier 3 and 4 markets. Price growth accelerated further in the final quarter of 2015, with 39 major cities reporting increases in December, up from 33 in the previous month.

Easing regulations and rising demand for residential upgrades should keep sales growth buoyed in 2016, and de-stocking will continue in Tier 3 and 4 cities. The authorities could also spur growth as they maintain some policy space to loosen regulations further.

That said, the outlook for homebuilders' financial profiles this year is much more muted, and the improvements seen last year are unlikely to be repeated. Low rates of new construction expenditure - which were a key factor boosting homebuilders' liquidity in 2015 - are likely to be reversed by 2H16. We also expect high ongoing land costs in Tier 1 and Tier 2 cities to offset potential benefits from lower funding costs as rates fall.

Weaker profitability in new projects - given the high land costs - will especially add pressure on leverage for the lower rated firms. Smaller and 'B' rated developers are likely to continue to seek out partnerships with larger competitors for developments in larger cities as a result.

Updated data on China's property sector can be found in the latest monthly China Property Watch report available at www.fitchratings.com.