Could the Indian real estate market experience a problem similar to what China’s Evergrande is facing?
The key contrast between China and India’s real estate sectors lies in the consistent demand for housing from prospective buyers.
On January 29, a Hong Kong court mandated the liquidation of troubled Chinese real estate behemoth Evergrande, potentially affecting China’s financial system and global investor confidence. Let’s examine how the Indian real estate market has progressed since the non-banking financial companies (NBFCs) crisis sparked by the Infrastructure Leasing & Financial Services collapse.
Real estate analysts suggest that while similarities exist, there are also differences between the Evergrande crisis and the Infrastructure Leasing & Financial Services (IL&FS) debacle. Both involve substantial debt and inadequate financial management, leading to significant ramifications for their respective markets. However, unlike China, India’s real estate industry has witnessed a gradual rebound owing to governmental measures and the establishment of the Real Estate Regulatory Authority nationwide.
Shobhit Agarwal, MD and CEO of ANAROCK Capital, remarked, “In the aftermath of the IL&FS debacle, India’s real estate market has made gradual strides forward, courtesy of governmental interventions and regulatory reforms like RERA. Although challenges such as capital shortages and regulatory hurdles persist, India’s real estate sector stands relatively more stable compared to China’s, currently grappling with a slowdown. While the IL&FS crisis predominantly affected India, Evergrande’s predicament holds broader global implications due to its extensive scale and exposure to foreign debt.”
Evergrande issue has wider global ramifications
Agarwal further emphasizes that despite challenges such as capital shortages and regulatory hurdles, India’s real estate sector exhibits greater stability in comparison to China’s, which is presently facing a downturn. Unlike the IL&FS crisis, which predominantly impacted India, Evergrande’s challenges carry global significance due to its extensive scale and exposure to foreign debt.
It’s worth noting that Evergrande is burdened with over $300 billion in debt. The company engaged in excessive construction and accepted payments for unfinished properties, leaving numerous homebuyers in limbo. According to agency reports, High Court judge Linda Chan’s ruling on January 29 initiates a lengthy procedure involving the liquidation of the developer’s assets and the appointment of new management to address the concerns of its creditors.
According to agency reports, Evergrande’s downfall began when it defaulted on a debt payment in 2021, coinciding with Beijing’s crackdown on lending to property developers aimed at mitigating a property bubble.
How are the two real estate markets different?
Since 2021, Chinese real estate developers, accounting for nearly 40% of home sales in China, have been struggling with a substantial problem of debt defaults. They have defaulted on more than $114.6 billion of the $175 billion in outstanding dollar bonds. Contributing factors encompass the persistent impact of COVID-19 and government regulations aimed at curbing financing practices. These measures were implemented to uphold financial stability and curb surges in property prices, consequently constraining funding avenues for developers, elucidates Gulam Zia, Senior Executive Director at Knight Frank India.
Another real estate developer, Country Garden, is encountering financial upheaval, burdened with $191.7 billion in overall liabilities and overseeing 3,100 real estate projects, nearly four times the number managed by Evergrande. According to a recent report in the South China Morning Post, embattled Chinese developer Country Garden Holdings is divesting a portion of its assets in Guangzhou to settle substantial debt obligations due within the next six months.
Another crucial point to consider is the loss of confidence among Chinese homebuyers due to unfinished projects and lenient regulations allowing developers to divert funds from escrow accounts, noted Zia.
Furthermore, China’s real estate sector represents approximately 30% of its GDP, whereas India’s accounts for only about 7%. According to real estate experts, this proportion is unlikely to exceed 15% even in the next two decades.
Currently valued at $477 billion, India’s real estate sector constitutes 7.3% of the economy. Forecasts indicate significant expansion, reaching $5.8 trillion by 2047 and contributing 15.5% to the overall economic output. This growth is attributed to rising demand for improved living spaces driven by rapid urbanization, as highlighted in a report by Knight Frank and Naredco last year.
RERA: A game changer for India’s real estate sector
The establishment of real estate regulatory authorities nationwide has played a crucial role in regulating the realty sector and safeguarding the interests of homebuyers, contributing to the sector’s cleanliness.
“China confronts substantial hurdles, whereas India’s market shows promise for expansion, fueled by urbanization. Insights gleaned from previous challenges and regulatory overhauls have bolstered India’s market resilience and consumer-centric focus. The outlook for India’s real estate sector appears positive, positioning it more favorably for stability in contrast to counterparts in China,” Zia further elaborates.
Sustained housing demand
A significant distinction between China and India lies in the enduring demand from end-users.
India’s real estate sector has demonstrated consistent demand, even amid economic downturns such as the 2008 Lehman crisis. Challenges in India primarily revolved around developers excessively leveraging funds from homebuyers. Conversely, China encountered difficulties as numerous builders grappled with making timely payments, exacerbated by restricted access to funds amidst the global economic conditions, as highlighted in Zia’s research paper titled “India’s Resilient Real Estate Market Amidst China’s Real Estate Woes: A Comparative Analysis.”
Multiple reports by global consulting firms indicate that India’s leading seven residential markets maintained their upward trajectory in 2023, with housing sales surging by 26% year-on-year to reach 2.71 lakh units.
According to a report by JLL released on January 10, tech-driven cities like Pune, Chennai, Bengaluru, and Hyderabad experienced heightened sales compared to the previous year.
Furthermore, data from Anarock Research reveals that the average apartment sizes in the top seven cities increased by 11% annually last year, rising from 1,175 sq ft in 2022 to 1,300 sq ft in 2023, driven by the rising demand for larger homes. Among these cities, the National Capital Region (NCR) witnessed the most significant growth (37%) in average flat size over the past year, increasing from 1,375 sq ft in 2022 to 1,890 sq ft in 2023.
Financially robust developers and entities have maintained their land acquisition activities, with a total of 97 individual land deals covering over 2707 acres finalized across the country in 2023. According to data from Anarock Research, bolstered by robust residential sales in various cities, approximately 72% of the total land area acquired in 2023 is earmarked for residential development.
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