by THO
A Hong Kong court on January 29 ordered the liquidation of embattled Chinese real estate giant Evergrande, a move that is likely to impact China’s financial system and the confidence of global investors. Here’s a look at how the Indian real estate market has come a long way since the non-banking financial companies (NBFCs) crisis triggered by the collapse of Infrastructure Leasing & Financial Services.
Real estate experts say that there are similarities as well as variations between the Evergrande crisis and the Infrastructure Leasing & Financial Services (IL&FS) disaster. Both include massive debt and poor financial management, which have serious consequences for their respective markets. But unlike China, India’s real estate sector gradually recovered thanks to government initiatives and the setting up of the Real Estate Regulatory Authority across the country.
“Following the IL&FS disaster, India’s real estate market has gradually recovered thanks to government initiatives and regulatory changes like RERA. While there are still obstacles like capital shortages and regulatory barriers, India’s real estate sector is comparatively more stable than China’s, which is currently experiencing a slowdown. The IL&FS crisis was primarily limited to India, whereas Evergrande’s issue has wider global ramifications because of its scale and exposure to foreign debt,” said Shobhit Agarwal, MD and CEO, ANAROCK Capital.
Evergrande issue has wider global ramifications
While there are still obstacles like capital shortages and regulatory barriers, India’s real estate sector is comparatively more stable than China’s, which is currently experiencing a slowdown. The IL&FS crisis was primarily limited to India, whereas Evergrande’s issue has wider global ramifications because of its scale and exposure to foreign debt, Agarwal adds.
It should be noted that Evergrande has more than $300 billion in debt. It had overbuilt and taken money for flats that were not completed leaving thousands of homebuyers in a lurch. Agency reports said that High Court judge Linda Chan’s decision on January 29 effectively kickstarts a long process which includes liquidating the developer’s assets and replacing its management to assuage concerns of its creditors.
Agency reports said that the demise of Evergrande, which first defaulted on a debt payment in 2021 after Beijing clamped down on lending to property developers in an effort to cool a property bubble.
How are the two real estate markets different?
Chinese real estate developers, responsible for almost 40% of home sales in China, have grappled with a significant issue of defaulting on debt since 2021. They’ve defaulted on over $114.6 billion of the $175 billion in outstanding dollar bonds. Factors include the ongoing COVID-19 impact and government regulations to control financing methods. These measures were aimed to maintain financial stability and control property price surges, limiting funding options for developers, explains Gulam Zia, Senior Executive Director at Knight Frank India.
Another real estate developer Country Garden has been facing financial turmoil, with $191.7 billion in total liabilities and 3,100 real estate projects, nearly four times more than Evergrande. A report published in the South China Morning Post last week had said that embattled Chinese developer Country Garden Holdings has put a chunk of assets on the block in Guangzhou in a bid to repay sizable debt due within the next six months.
One more aspect to be kept in mind is that Chinese homebuyers have lost confidence due to incomplete projects and lax regulations allowing developers to redirect funds from escrow accounts, said Zia.
Also, China’s real estate sector accounts for about 30% of its GDP, while India’s contributes only around 7%. Even in the next two decades, this will not increase by more than 15%, say real estate experts.
India’s real estate sector is currently valued at $477 billion, making up 7.3% of the economy. Projections foresee substantial expansion, reaching $5.8 trillion by 2047, contributing 15.5% to the total economic output. This growth is driven by increasing demand for better living spaces due to rapid urbanization, a report by Knight Frank and Naredco had observed last year.
RERA: A game changer for India’s real estate sector
The real estate regulatory authorities set up across the country to regulate the realty sector and protect homebuyers have helped clean up the sector.
“China faces significant challenges, while India’s market is poised for growth, driven by urbanization. Lessons from past challenges and regulatory reforms have made India’s market more resilient and consumer-oriented. The outlook for India’s real estate sector is optimistic, making it better positioned for stability compared to China’s counterparts,” adds Zia.
Sustained housing demand
The crucial difference between China and India is the sustained demand from end-users.
India’s real estate sector has shown stable demand, even during economic downturns like the 2008 Lehman crisis. Challenges in India were more about developers overleveraging funds from homebuyers. China, on the other hand, faced difficulties with many builders struggling to make timely payments, worsened by limited access to funds due to the global economic situation, Zia notes in his research paper titled India’s Resilient Real Estate Market Amidst China’s Real Estate Woes: A Comparative Analysis.
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Several reports by international consultancies have indicated that India’s top seven residential markets have continued their bull run in 2023 with housing sales increasing by 26% on a year-on-year basis to touch 2.71 lakh units.
Tech-driven cities such Pune, Chennai, Bengaluru, and Hyderabad witnessed increased sales compared to the previous year, a report by JLL said on January 10.
The average apartment sizes in the top seven cities have also grown by 11% annually last year – from 1,175 sq ft in 2022 to 1,300 sq ft in 2023 on the back of increasing demand for bigger homes, data shared by Anarock Research showed. Among the top 7 cities, NCR saw the highest growth (37%) in average flat size in the last one year – from 1,375 sq. ft. in 2022 to 1,890 sq. ft. in 2023.
The land acquisition spree of financially strong developers and entities also continues and as many as 97 separate land deals were closed for over 2707 acres in 2023 across the country. Backed by strong residential sales momentum across cities, at least 72% of the total land area closed in 2023 is slated to be used for residential development, data shared by Anarock Research showed.
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