Hui Ka Yan, the founder of China Evergrande Group — one of the largest and among the most indebted real-estate companies in the world — has been detained for “illegal crimes”. Ka Yan now belongs to the infamous list of Chinese entrepreneurs, who are either arrested or investigated under the regime of Xi Jinping. While being accused for “illegal crimes” is a vague charge, the story of rise and fall of China Evergrande is one that will resonate with many homebuyers of the last decade in India. Much like India, when there was less housing but with the rising GDP, the sector boomed. Banks, bondholders, and customers, eager to own their dream homes, provided the much-needed capital for building more houses.
Developers borrowed from banks and even raised debt via offshore and onshore bonds. But most importantly, the downpayments from buyers that paid upfront for under-construction projects were directed for buying more land and to diversify into unrelated businesses. Till the time the economy was growing, the aggressive debt-fueled growth continued uninterrupted. But as Covid-19-led project completion delays coincided with the Chinese government’s decision to tighten the screws on overleveraged firms in August of 2020, these developers started to default on debt payment and left homebuyers with unfinished houses. Currently, China Evergrande and Country Garden, two of the largest developers, have amassed a collective debt burden of around USD500 billion.
“Between Evergrande Group and Country Garden, there are around 4,000 under-construction housing projects that have been affected,” says Christine Li, head of research for APAC at Knight Frank. India is on the cusp of its second capex cycle. And this time, it is widely expected to mirror the two-decade old trajectory of Chinese growth. A strong housing boom is underway in the country. Nifty Realty Index is up 46% over the last one year as against Nifty 50’s 14% gains. Housing sales in value and volume were at an all-time high across seven major cities in India in FY23. Average price of houses is up 5%-15% YoY as of the April-June quarter. As India gets ready for what some developers are calling a “multi-year real-estate boom”, are there any lessons from China’s real-estate crisis? Surprisingly, some have already come into effect. Pitfalls of Chinese real estate Till about 1990, private home ownership in China was less than 30% and housing was considered a social welfare benefit. In the 1990s, China launched housing reforms to privatise and market its housing system and ended provision of subsidised rental housing. According to Wall Street Journal, in 2019, sales of residential homes in China totaled USD2 trillion as against USD528 billion in 2009. Housing also became popular against other investment classes as it offered better returns. Over the past 10 years, MSCI China Index has given an annualised return of just 1.67% while data from Statista shows that average price of real estate has doubled from 2011-2021. “Look at the MSCI China Index, the returns have not been very high and not a lot of the returns go to shareholders (due to high tax incidence). If I wanted to grow my money, property would be the safest (bet) because in the first decade or two of this century, home prices have just been going up,” says Sheana Yue, China economist at Singapore-based Capital Economics. In India, this hasn’t been the case. The benchmark indices rose 4x between 2000 and 2010 and 3x in the next decade. Property prices, on the other hand, peaked between 2000 and 2012. Since then till about the pandemic, prices have risen marginally or been flat. Projects on the periphery of the National Capital Region or the Mumbai Metropolitan Region where buyers bought affordable real estate hoping to double their investment were left high and dry. While some projects Jaypee Infratech’s Wish Town are yet to be completed even after 10 years, others which were completed like Lodha’s Pallava Phase II failed to give investors good returns. “A two-bedroom kitchen purchased for INR70 lakh in 2015 is struggling to find a buyer at even INR60 lakh,” says S Sharma, a homebuyer at the Pallava Project. To make matters worse for buyers like Sharma, since May 2022, interest rates have risen more than 2.5 percentage points and home EMIs have risen 22%. No wonder, real estate was starting to lose its shine against financial assets. Share of financial assets rose from 45% of household savings in 2015 to 52% in 2021. However, post-pandemic as real estate made a comeback, the share of financial assets is on a decline. Interestingly, in most developed countries like Germany and the US, financial assets form a majority of individual investment portfolio. Capital markets rein in developers Unlike China, capital markets have played a key role in controlling the tendencies of developers to pursue aggressive growth, albeit after the route during the last capex cycle. The most recent example of this was in April of 2021, when Macrotech Developers, one of India’s largest real-estate developers by sales, listed at a 10% discount to its issue price of INR486 per share. One of the biggest concerns that investors had about the company was its total debt-to-equity ratio of around 4.3x at the end of FY21. But since listing, the company has managed to bring down its debt significantly. As of FY23, it has a total debt-to-equity ratio of 0.75x, shows data from Ace Equity. Since then, the company’s valuations have also significantly improved, and it now commands a premium over its peers. At present, based on FY23 numbers, all major listed real-estate developers in Nifty Realty Index have a total debt-to-equity ratio of less than 1x, as per Trendlyne. After burning their money in highly leveraged developers during the last capex cycle, equity investors have been successful in pushing companies towards deleveraging.
Compared to this, the situation in China is much bleaker. “By the end of May 2023, 60 of the total 102 property issuers in China with offshore bonds as of mid-2021 had defaulted, while 26% or 40 of the onshore property bond issuers had defaulted. In contrast, there had been few defaults by Chinese developers prior to 2021, totaling six onshore and five offshore, due mostly to company-specific factors,” according to a study published by global credit rating agency Fitch Ratings.
Interestingly, experts point out that defaults are higher in offshore bonds issuances while onshore bond defaults are comparatively less as Beijing is focused on averting backlash at home front. It has already been widely reported that homebuyers in China last year refused to pay mortgages on stalled real-estate properties. The government has now asked banks to step in and provide the capital required to complete existing stalled projects. “A lot of people have been looking for a large-scale fiscal stimulus to come in and save the real-estate sector. But the approach of the government has been pretty clear that they want a cleansing to happen. The cleanse will happen with some pain, but they're not willing to bail out the zombie developers,” says Priyanka Kishore, founder and principal economist at think-tank Asia Decoded.
The Indian real-estate sector, on the other hand, has already been through the process of a “cleanse” with many highly leveraged developers either cleaning up their balance sheets or completing the bankruptcy procedure and seeing a change of ownership. For example, Jaypee Infratech’s stalled projects have been taken over by Mumbai-based Suraksha Group this year.
India does it better
Before the real-estate crisis hit China, first-time homebuyers in tier 1 cities were required to make downpayments to the tune of 30%-40% of the total value of the house. Second time, home buyers were to make upfront payments to the tune of 50%-80%.
At the end of August, the minimum downpayment has now been uniformly set at 20% for first-time homebuyers and 30% for second-time buyers across the country.
“Weekly primary residential sales in the 30 major cities rose to 2.84m sqm in the week ended September 24 and have averaged 2.3m sqm in the four weeks to September 24, up 16% from an average 1.99m sqm in the four weeks to August 27,” says a recent report by Jefferies. However, it adds that there is growing evidence of declining prices, which could affect buyers.
In India, under Reserve Bank of India guidelines, banks can loan up to 90% of capital for homes under INR30 lakh and up to 80% for homes costing below INR75 lakh. For loans above INR75 lakh, customers are eligible to secure a loan for 75%.
The Real Estate Regulation and Development Act (RERA) introduced in 2016 also provides an additional layer of safety for buyers. To avoid situations where a developer misuses funds from homebuyers, the rules now dictate that these project funds need to be put in an escrow account.
RERA ensures financial discipline, project completion within stipulated timelines, and safeguards against capital misuse. This minimises the risk of money misuse and project delays and provides a mechanism for grievance solutions in unforeseen circumstances.
So, does India have better safeguards to keep a massive real-estate boom in check? The answer is yes.
With the help of capital markets and a new-found system of regulatory oversight, the Indian real-estate market looks in a better shape than its peers across the border.
But the true test of the system will be in the days ahead as the market heats up and the animal spirit unleashes.
https://economictimes.indiatimes.com/prime/money-and-markets/evergrande-exposes-cracks-in-chinas-real-estate-is-india-better-prepared-to-handle-property-boom/primearticleshow/104505823.cms
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