Real Estate

China’s Real Estate Crisis and India’s Property Market Boom

china's real estate crisis

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 has been on another real estate giant, Country Garden, in recent weeks. Country Garden’s offshore debt will be considered in default if it doesn’t pay a $15 million coupon by October 17, the end of a 30-day grace period, according to Reuters.

Therefore, is India’s real estate market better placed and will it be able to sustain its momentum, which is evident from the recent rally in real estate stocks?

JP Morgan reports that nearly 40 percent of Chinese home sales are backed by defaulting real estate developers as of 2021. $114.6 billion of the $175 billion in dollar bonds outstanding have reportedly been defaulted on by Chinese developers, according to CreditSights figures quoted in various sources. stated that the abundance of empty homes in China could easily house a staggering three billion individuals.

COVID-19 and a government crackdown on financing methods, such as trust financing and bond issuances, are responsible for the crisis. In order to reduce the risk of financial instability and to rein in skyrocketing property prices, the government reduced funding options for real estate developers.

Country Garden has 3,100 real estate projects, almost four times more than Evergrande’s 800 projects, according to a Knight Frank report. Country Garden’s total liabilities are $191.7 billion, 59 percent less than Evergrande’s.

It was noted in the research paper that Country Garden’s default could disrupt the real estate supply chain, affecting suppliers and contractors, and creating a domino effect in home construction. It also noted that tier-two and tier-three city prices have decreased by 0.2 percent and 0.3 percent, respectively, suggesting a housing market slowdown despite China’s post-lockdown economic reopening.

About 30% of China’s GDP comes from the real estate market; about 7 percent comes from India’s

According to a recent paper by Knight Frank, China’s real estate crisis- china’s property market has been a key player in the country’s economy since the implementation of a national housing market in 1998. This integration with related industries, particularly construction, has allowed the property sector to make a significant contribution to China’s GDP, accounting for approximately one third of the overall economy. The research also notes that in 2016, real estate made up 35.8 percent of GDP, while in 2022 it accounted for 26.9 percent.

As a consequence of unfinished projects and lax regulations, homebuyers’ confidence has also suffered. Developers were able to divert funds from escrow accounts tied to home completions due to unfinished projects and lax regulations. As a result of concerns regarding delivery timelines and developer financial stability, presale purchases have caused uncertainty. For greater certainty, buyers may seek out existing properties on the secondary market or state-owned developers.

In order to stabilize the residential market’s liquidity stress, the Chinese government has implemented policies such as the 16-point property relief plan. Although the emphasis is on supporting quality developers, it could lead to further consolidation and a potential exit of struggling non-state-owned developers.

The country’s real estate sector contributes just about 7 percent to its GDP.

India’s real estate sector has a current market size of $477 billion, which makes up 7.3 percent of the country’s economic output. However, experts project that by 2047, this sector will significantly grow to reach $5.8 trillion, contributing 15.5 percent to the total economic output. This rapid expansion is largely driven by factors such as increasing demand for residential properties due to urbanization and rising levels of disposable income among individuals in India, according to a recent report by Knight Frank-Naredco.

China’s real estate crisis challenges are directly linked to their GDP — real estate contributes almost 30 percent to GDP in China; 5.5 to 6 percent in India. Knight Frank India’s senior executive director, Gulam Zia, says it won’t exceed 15 percent in the next 25 years.

Real estate growth in India is driven by end-user demand

Real estate indexes in India have been increasing steadily for some time now. Recent RBI decisions regarding repo rates, the upcoming festive season, a recovery in housing demand, developers’ clamour for land parcels, and positive business earnings by real estate firms have all contributed to the index’s rise.

Real estate experts point out that comparing China to India is not as straightforward as comparing apples to apples. The main factor that sets them apart is the level of demand from end users. Despite a slowdown in India’s real estate sector after the 2008 Lehman’s crisis, experts assure that demand was never a key concern. Rather, issues arose due to real estate developers overleveraging and using funds from homebuyers for purchasing new land parcels. Even during the bubble period, there were still buyers in the market – whether it be investors looking for quick returns or genuine end users. This insight was shared with Moneycontrol by industry professionals.

The fact that the majority of homebuyers who invested at that time had paid almost 80 percent of the apartment cost shows there was a demand for the projects and buyers were invested. In China, on the other hand, 50 percent of the builders have not made payments on time (Standard and Poor’s); easy access to funds has stopped due to the overall global situation; consumer advances have decreased. It is a double whammy, experts said.

There are still some projects launched in 2008, especially in Delhi-NCR. The fact that the SWAMIH fund was brought in to complete the stuck projects is an indication that end users were involved and the funding has helped complete projects for the benefit of homebuyers. According to Zia, there have always been buyers for residential developments in India, as opposed to China where demand has declined.

Following the Lehman crisis in 2008, the Indian real estate market faced similar difficulties as the current situation in the Chinese real estate market. However, after November of that year, things took a turn for the worse. Despite offering discounts and even free cars during Diwali, there was no revival in the market. The luxury sector suffered greatly, leading developers to reduce prices and shift their focus to end users rather than investors. This resulted in a significant decline of almost 25 percent in home prices and a 30 percent decrease in sales activity. Distress sales became more frequent and housing loan rates skyrocketed from 7 percent to 12 percent. As job cuts and defaults on loan payments increased, confidence levels dropped and plans for purchasing homes were postponed.

However, demand was still strong in 2008, despite the economic crisis. A slew of affordable housing launches across the country led to higher absorption month over month, as some developers started looking at affordable housing to tide over the crisis. Although the average size of units launched in the period shrunk by 15 to 30 percent compared to units launched in early 2008, experts say there was still demand.

The RERA changed the game; it cleaned up the sector

In the years since the 2008 crisis, India’s real estate markets have come a long way. Lessons have been learned, and the sector has cleaned up thanks largely to the real estate regulatory authorities established across the country.

According to Aniket Dani, Director-Research at Crisil Market Intelligence & Analytics, the average apartment size has slightly increased after the COVID-19 pandemic due to hybrid work schedules. In addition, developers are now adopting an asset-light approach and opting for joint development agreements with landowners instead of purchasing land outright. This is because their current focus is on construction rather than aggressive land acquisition in order to maintain asset-light balance sheets and avoid financial complications.

As a result, in India, there is a certainty that actual demand will come from end users. The total debt-to-asset ratio in FY2020 was 43 percent. As a result of healthy internal accruals following COVID-19, as well as the performance of equity markets, this ratio has now fallen to 22-25 percent. In general, he said, there has been a positive wealth effect.

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Editorial Director
I'm Shruti Mishra, Editorial Director @Newsblare Media, growing up in the bustling city of New Delhi, I was always fascinated by the power of words. This love for words and storytelling led me to pursue a career in journalism. In this position, I oversee the editorial team and plan out content strategies for our digital news platform. I am constantly seeking new ways to engage readers with thought-provoking and impactful stories.

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