What lies ahead for Indian developers?
Ramesh Nair
CEO - Mindspace REIT, Former CEO & Country Head of JLL India, Former CEO - India & MD - Market Development, Asia of Colliers, HBS, YPO, Coach, Author, Board Member - IGBC, Corenet India, IRA, CII Real Estate Task Force
Moody's has issued 91 downgrades for top developers in China in the last nine months. That is a record pace since it has only issued 56 downgrades for these companies for 2010-20. This downgrade indicates a challenging environment for the developers due to weak financial health.
What went wrong in China's property markets?
China, the world's second-largest #economy, is facing persistent pressure in the real estate sector. Developers' imprudent borrowing activities, tightening regulations, and the onset of Covid-19 are the primary reasons that led to the debt crisis.
Over the last few years, many developers, particularly Evergrande, have been under pressure due to high debt and liquidity concerns. Real estate giant, Evergrande accounted for liabilities of about USD 300 billion. The #developer had borrowed large amounts at low rates from banks but could not repay its debt.
Starting 2017, the government tightened financial regulations to control debt and rising housing prices. In August 2020, China imposed the "Three Red Lines" policy. The policy was a set of 3 parameters basis which realtors were evaluated for borrowing eligibility. The three red lines included:
????????Liability-to-asset ratio of less than 70%
????????Net gearing ratio of less than 100%
????????Cash-to-short-term debt ratio of more than 1x
With the onset of Covid-19 and the tightening of regulations, developers defaulted as they failed to repay the debt.
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Impact on the housing market and consumers
Due to developers' excessive borrowings, housing prices have doubled in China over the last decade. #Homebuyers in China have refrained from paying mortgage interests for properties. According to research by a development institution in China, mortgages account for about USD 133 million. Investments in residential properties also declined by 8% YoY. Millions of investors who had partially paid for under-construction projects continue to wait for project completion.
Homebuyers and investors are now much more inclined towards ready-to-move-in properties from state-owned developers. With muted demand, residential sales during May 2022 dropped to about 50% YoY. According to National Public Radio (NPR), about 20% of the country's housing stock remains unoccupied. Led by a drop in sales and increasing vacancies, the initiation of new projects also dropped significantly.
Parallels lying between Indian and Chinese developers
Indian developers, just like Chinese ones, tend to exceed their borrowing limit and over-leverage for expansion. Several small developers have been unable to deliver their projects on time in India. Some had to default during the pandemic after failing to repay their debt.
In both countries, developers have enjoyed a liberal regulatory regime for real estate. Developers feel the pinch as soon as the regulations are revised or made more stringent. Developers have also increased property prices in both these countries to accommodate increased input costs. Developers must be flexible with the pricing of unsold inventory to offload it. ?
Lessons for Indian developers
Finding the balance between the growth and stability of a business is critical for sustaining the current market. Indian developers should consider a strategy for faster sales of their unsold inventory. They must be flexible in pricing to attract a larger group of buyers. This will help in creating a healthy financial position.
Developers can also look for multi-city projects by conducting essential market assessments before entering new geographies. They can also explore asset sales and exit non-core or loss-making businesses. Finally, entering development partnerships and raising equity can also help developers to attract funds.
Overall, distress in the Chinese #realestate market will not only leave shockwaves in the Chinese economy but can have ripple effects on other economies. Indian developers must critically evaluate their financial risks and reconsider their business strategy to make it more robust in the current economic setup to avoid a similar situation well in time.
MSc in Planning and Development (UK) | MBA in Real Estate and Urban Infrastructure(India) | Architect (India)
2 年The one similarity that both cultures have is the aspiration of having to own a property but sadly this social upbringing has not been favourable as each generation will have its own needs. I'm not saying investing in property is bad but putting all eggs in one basket is also a risk. Developers need to diversify their portfolios and so do people need to look beyond property markets and invest in other financial resources.
Excellent Article Sir! In India also Property Prices have grown 1.5-2 times in last 2-3 years, The fast rising Property prices in India is also a matter of Concern!
"Project Management Specialist | Focused on Continuous Improvement & Client Satisfaction"
2 年China Real estate has crashed due to following factors: 1. China is providing trillen dollars loan amount to his neighbors country for development : Pakistan, Nepal, Bhutan etc and same amount is taken from Banks which is correlated with the Public money that amount was paid to those countries by Chinese government on his personal interest which can't be repaid by them within set timelines. 2. Due to above said factors in current scenarios China Bank's is not able to pay laon to developers and Chinese people's hard earned money account has been seized by Chinese government 3.Money rotations depends upon banks which is currently in Chinese government control! Hope, this few points will correlate with the Chinese real estate crisis as per my knowledge! Thanks,Virender
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2 年China's number will never be trusted. This is far more than worse. The debt ratio of Indian counterparts is more prudent and manageable. Also Indian banks and Indian govt are closely watching the loan outstanding.