Evergrande and the lessons Indian real estate developers should learn

This week, Fitch confirmed that Evergrande had defaulted for the first time on more than $1.2 billion worth of bond debt, as it downgraded the firm's status to a restricted default rating. (Image: Reuters)

Off the record discussions are not very common in a tight-lipped business such as real estate in India. It was, therefore, surprising to hear a realtor recently admit that China’s Evergrande fiasco is no different than what the Indian real estate market has already experienced. The phenomenal rise and imminent fall of developers like Unitech, Jaypee, Housing Development Infrastructure Ltd (HDIL) and Amrapali has not faded from public memory in this part of the world.

Within the built environment of Indian real estate, there is still denial about parallels that exist between the Indian and Chinese realty markets. Many even believe that the Indian economy is not too dependent on the sector as is the case with the Chinese economy.

For the uninitiated, Evergrande is a real estate giant with a presence in over 280 Chinese cities. With more than $300 billion in debt, it struggled for months on the edge of default, but managed to stay afloat each time due to a last-minute repayment. This week, Fitch confirmed that the firm had defaulted for the first time on more than $1.2 billion worth of bond debt, as it downgraded the firm's status to a restricted default rating.

The two largest real estate markets of the world are today grappling with what could easily be termed as an existential crisis. The lessons and parallels that exist between the Indian and the Chinese property markets are writ large on the wall.

Inventory overhang and holding 

The latest industry narrative is that it is imminent for the property prices to rise due to the increase in input costs. In a market where a large share of inventory is ready or nearing completion, the argument doesn’t hold. Can buyers absorb the already over-valued properties in a stagflation economy of uncertainty? Won’t this keep the fence-sitting buyers away from the property market, instead of instilling FOMO (fear of missing out) in them? The fact is that instead of pushing the urgency button to offload inventory, developers are getting into an oft-repeated loop of inventory holding with price appreciation.

Expansion at the cost of fiscal closure

RERA was expected to ensure that the escrow account remained a foolproof mechanism so that funds collected from homebuyers were not diverted. However, what remains beyond the scope of RERA is that developers in both India and China have this tendency to overstep their borrowing limit and over-leverage in order to expand rather than focus on financial closure of the project. A large number of developers with multiple stuck projects are testimony to mindset.

Deny until exposed 

How many developers in India or China have ever accepted their fault lines, fiscal stress, inability to repay lenders or that their buyers are unhappy and waiting for years for projects to be completed? They live in denial till completely exposed. If it is China’s Evergrande today, it was multiple Indian developers yesterday. But denial is so rampant across stakeholders that any cross-questioning is referred to as ‘spreading negativity’.

Policy as equity

Policies of any given country shape the outcome of businesses across the board, and the real estate business is no exception. Evergrande for a good number of years enjoyed the long rope of Chinese policy facilitating real estate as an engine of economic growth.  But when the Chinese government started tightening the noose, it was not just Evergande but several other developers who felt the pinch.

Indian developers, too, are today enjoying the benefits of easy lending norms, an accommodative regulatory regime and, as the Supreme Court observed a few months ago in an order against a Noida-based developer, a costly and lengthy litigation that keeps consumer activism in check.

Growth beyond execution capabilities 

Believe me, a drive through Shenzhen and Noida-Greater Noida is no different. Empty stretches clearly show that both areas suffer from the problem of supply far exceeding demand. However, the fact that many developers in these markets have opted for growth beyond their execution capabilities brings to the fore the root of the problem – too many stuck projects.

Evergrande, too, finds itself in the same trap despite its gigantic size. Will Indian developers learn a lesson? Very often one finds debt-ridden realty players justifying that if their debt is Rs 16,000 crore, they also have a saleable inventory of Rs 12,000 crore. The problem with this rationale is that the developer has a misplaced assumption that the market is desperate to absorb the saleable inventory and/or till the time inventory is sold off, the lenders will not coming knocking at his door for interest payment.

Overlooked C-SAT Score 

Last, but not the least, the critical link of long-term business and brand goodwill has always been missing in both China and India. C-SAT or the Consumer Satisfaction Score has never been assessed in the two largest property markets of the world. Reason: The pace of property appreciation was all along compensating for the quality of housing, or the lack of it. Till the time property prices were appreciating, buyers did not feel the pinch. Housing was a tradable commodity then, not anymore!

Will China’s Evergrande failure force Indian developers to rethink their business strategy? Unfortunately no, not until they decide to come out of the denial mode.