Potential home buyers check out a property project in Beijing. [Photo/VCG]

A stable outlook is expected in the Chinese mainland property market in the coming 6 to 12 months but going forward developers face a challenging operating environment, Moody's Investors Service said in a report.

Moody's said the challenging operating environment is manifesting itself nationally in a slight drop in home sales values, tighter regulatory measures, rising home inventory levels and a gradual tightening of market liquidity.

"The stable outlook reflects our expectation that national residential property sales will slow but will remain within our parameters," said Franco Leung Chun-bong, vice-president and senior credit officer at Moody's.

The US credit rating agency expected nationwide that contracted sales value growth would be slightly negative through May this year against the soaring 36 percent year-on-year growth registered for the same month in 2016.

Residential property sales volumes will contract and home prices will slow, as the Chinese government continued its tightening regulatory measures in major Chinese cities, Moody's added.

"We also expect the Chinese government to keep in place the tight regulatory measures designed to cool prices in higher-tier cities," Leung added.

As of April 21, 45 Chinese mainland cities had home-purchase restrictions in place to curb speculative investment demand and these locations accounted for around 50 percent of the country's contracted home sales in 2016, the credit rating agency noted.

The third factor to gauge is the home inventory level, Moody's said.

The Moody's survey found that the current inventory levels of primary residential properties were below the peak levels in early 2015.

But the survey also revealed inventory levels in March rose for first and second-tiered cities, indicating houses were selling more slowly as supply outpaced demand.

Moody's said the final challenging market factor was the gradual tightening of market liquidity, even though current monetary conditions were broadly more supportive than in early 2014.

It said this was due to slowing home sales and the dramatic slowdown seen in onshore bond issuance since early 2017.

Small-scale developers with weak credit profiles were expected to be hard-hit, the rating agency said, as they continued to face pressure to sell off their assets to competitors or were acquired by stronger industry players.

The reserve requirement rate and one-year benchmark lending rate set by the People's Bank of China, as at April 2014, are 17 percent and 4.3 percent, respectively. The two ratios are currently lower than the figures recorded in January 2014.

According to Moody's data, rated Chinese developers in total issued 8 onshore bonds totaling 15.8 billion yuan ($2.29 billion) in the first quarter of this year, compared with 41 onshore bonds totaling 116 billion yuan a year ago.

Against the backdrop of the challenging operating environment, Moody's said it anticipated that market competition would continue to intensify as many developers continued to target high sales growth in the current year to capture additional market share－in the process pushing up land prices and squeezing profit margins.

However, the US-based credit rating agency cautioned that the stable outlook for Chinese residential property market may be downgraded to a negative.

It said that scenario could be played out if national contracted home sales fall more than 5 to 10 percent, home inventory levels reach the peak levels of March 2015－or there is an interruption to developers' access to funding or a material tightening of bank liquidity and mortgage availability.