After China’s largest real estate firm, Evergrande, defaulted on its obligations to debt holders in December 2021, triggering a wider crisis in the industry, the focus over the last few weeks has been on another real estate major, Country Garden. A report by Reuters has said that Country Garden’s entire offshore debt will be deemed to be in default if it fails to make a $15 million coupon payment on October 17, the end of a 30-day grace period.
Having said that, is India’s real estate market, which is currently witnessing a boom as is evident from the recent rally in real estate stocks, better placed and will it be able to sustain its momentum?
According to JP Morgan, real estate developers accounting for almost 40 percent of Chinese home sales have defaulted on their debt obligations since 2021. Reports have quoted CreditSights figures indicating that Chinese developers have defaulted on more than $114.6 billion of $175 billion in dollar bonds outstanding since 2021. A report published in Business Insider recently quoted an expert as saying that the empty homes available in China would be enough to accommodate a whopping 3 billion people.
The reasons for the crisis are the COVID-19 pandemic and a regulatory crackdown by the government on financing methods, such as trust financing and bond issuances. The government had apprehensions about the risk of financial instability and wanted to rein in skyrocketing property prices. This led it to reduce funding options for real estate developers.
The total liabilities of Country Garden stand at $191.7 billion, 59 percent less than those of Evergrande. Country Garden has 3,100 real estate projects, almost four times more than Evergrande’s 800 projects, according to a research paper by Knight Frank.
The research paper noted that a default by Country Garden could disrupt the real estate supply chain, affecting suppliers, and contractors and leading to a domino effect in construction and home delivery at a time when buyer confidence is diminishing. It also noted that tier-two and tier-three city prices have decreased by 0.2 percent and 0.3 percent, respectively, signalling a housing market slowdown despite China’s post-lockdown economic reopening.
China’s real estate market makes up about 30% of its GDP; India’s is just about 7 percent
The research paper by Knight Frank said that the property market has played an important role in China after the establishment of a nationwide housing market in 1998. The property sector’s integration with other industries, particularly construction, allowed it to contribute significantly to China’s GDP, and account for about a third of the economy. According to the research note, China’s real estate sector’s contribution to GDP was 35.8 percent in 2016, 32.9 percent in 2017, 29.6 percent in 2018, 28.7 percent in 2021 and 26.9 percent in 2022.
The research paper pointed out that as GDP growth gradually decelerates, policymakers anticipate reduced reliance on the property sector to fuel a broader economic expansion.
It also observes that homebuyers’ confidence has been dented by unfinished projects and lax regulations, which allowed developers to divert funds from escrow accounts tied to home completions. Presale purchases have caused uncertainty, with concerns about delivery timelines and developers’ financial stability. Buyers may opt for existing properties in the secondary market or state-owned developers for greater certainty, it said.
The Chinese government has implemented policies to address the challenges in the residential market. Measures, such as the 16-point property relief plan aim to stabilise the sector’s liquidity stress. However, the focus is on supporting quality developers, which could lead to further consolidation and a potential exit for struggling non-state-owned developers, it said.
India’s real estate sector, on the other hand, contributes just about 7 percent to the country’s GDP.
In terms of output, the market size of India’s real estate sector is currently estimated at $477 billion, contributing 7.3 percent to the total economic output. By 2047, India’s real estate sector is estimated to expand to $5.8 trillion, contributing 15.5 percent to the total economic output. Factors such as escalating demand for residential properties arising from rapid urbanisation and growing disposable incomes of individuals are supporting the fast-paced expansion of the real estate industry in India, a Knight Frank-Naredco report said recently.
“China’s real estate challenges are directly linked to their GDP—in China, the real estate sector’s contribution to GDP is almost 30 percent; in India 5.5 to 6 percent. Even in the next 25 years it will not be more than 15 percent,” said Gulam Zia, Senior Executive Director, Knight Frank India.
End-user demand fuelling India’s real estate growth
It should be noted that of late the realty index in India has continued with its upward trajectory. The RBI’s recent decision for a status quo with regard to repo rates, the upcoming festive season, recovery in housing demand, real estate developers’ clamour for land parcels, and positive second-quarter business earnings by real estate firms have driven the index up.
According to real estate experts, the comparison with China is not an apple-to-apple comparison. The big differentiator is end-user demand. Even when India’s real estate sector was witnessing a slowdown post the Lehman’s crisis way back in 2008, demand was never an issue, they say. The problems engulfing the sector were on account of overleveraging by real estate developers, who utilised funds collected by homebuyers to buy new land parcels. Even though there was a bubble, somebody was buying property, be it the investor for quick gains or the end user, they told Moneycontrol.
The fact that the majority of homebuyers who invested at that time had paid almost 80 percent of the apartment cost shows that buyers were invested in the projects and there was demand. In China, on the other hand, 50 percent of the builders have failed to make payments on time (Standard and Poor’s); easy access to funds has stopped due to the overall global situation. Consumer advances have gone down. It is a double whammy, said experts.
A few projects launched in 2008, especially in Delhi-NCR, are still struggling to get completed. The fact that the SWAMIH fund was brought in to complete the stuck projects is an indicator that there were end-users involved and the funding has helped complete projects for the benefit of homebuyers. In short, there were always buyers for residential projects in India unlike in China, where demand has dipped, said Zia.
Post the Lehman crisis/2008 Global Financial Crisis (GFC), the Indian real estate market went through the same challenges that the Chinese real estate market is currently going through. Things started going downhill after November 2008—implicit discounts and free cars given away with properties during Diwali failed to revive the market. The luxury end suffered and developers were forced to cut prices and focus on end users rather than investors. Home prices fell by almost 25 percent in certain markets; sales activity slowed by almost 30 percent, distress sales were common and housing loan rates shot up from 7 percent to 12 percent. Job cuts in the market and defaults on loan repayments increased. Confidence levels dropped and house purchase plans were put on the backburner.
But even in the midst of the 2008 crisis, there was demand. To tide over the crisis, some developers started looking at affordable housing and others soon joined the bandwagon. A slew of affordable housing launches across the country led to higher absorption month on month. Even though the average size of the housing units launched in the period shrank by 15 percent to 30 percent across cities compared to similarly priced units launched in early 2008, there was still demand, experts add.
Lessons learnt: RERA changed the game; cleaned up the sector
India’s real estate markets have come a long way since the 2008 crisis. “Lessons have been learnt and the sector cleaned up thanks largely to the real estate regulatory authorities established across the country,” said experts.
“The average size of apartments has increased slightly post-COVID-19 on account of hybrid work schedules. Developers, too, are looking at an asset-light model and prefer to go for joint development agreements with landowners rather than buying land upfront. Their focus currently is on construction rather than rampant land acquisition. The idea is to keep their balance sheets asset light so that the money does not get stuck,” said Aniket Dani, Director-Research, Crisil Market Intelligence & Analytics.
Having said that, in India, there is certainty of actual demand emanating from end users. In FY2020, the total debt-to-asset ratio was 43 percent. This has now fallen to 22-25 percent on account of healthy internal accruals after COVID-19, and the fact that equity markets have performed well. All in all, the wealth effect has been positive, he added.
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