HONG KONG, - Moody's Investors Service on Thursday downgraded China's property sector to "negative" from "stable" as it warned that rising interest rates and reduced bank lending would dampen demand.

It also said Beijing's policy moves to tame soaring inflation and ward off a property bubble, including bans on second home buying and trial property taxes, would hurt developers in some cities.

Home purchasing restrictions have taken a bite out of new home sales with volumes in Beijing down nearly 40 percent in the first quarter of 2011, compared with the prior three months, Moody's said.

Proceeds from the sale of residential property in the country's first and second-tier cities would fall 25-30% over the next year, Moody's said, but added that prices were unlikely to tumble.

"We think the sector will be challenged for the next 12 to 18 months, "Peter Choy, senior vice president in the firm's corporate finance group, told a news conference in Hong Kong.

New supply would also flood the market after Beijing pledged to roll out more affordable housing amid growing public concern over rising prices, with plans to build 10 million low-income apartments this year.

The move comes as China tightens up lending and raises interest rates in a bid to tame inflation, which is sitting around five percent.

"The government's priorities of maintaining social stability, by controlling inflation and containing any emerging property bubble, will continue to heavily influence the direction of the property market," Moody's said in a report released Thursday.

The firm added the mix of policy and economic factors "will inevitably lead to slowing sales, and pressure on profit margins and on balance sheet liquidity for some (developers)."

As many as 10 major Chinese developers could face a cash crunch and be forced to tap the market, or shrink the the pace of their new projects, if sales dipped 25% this year, Moody's said.

"(But) we continue to recognise that increased urbanization and rising wealth provide long-term support to the growth of (China's) property sector," it added.

Source: AFP