As India’s real estate sector experiences a robust upswing, questions about its preparedness to handle this property boom have come to the forefront. This discussion inevitably draws parallels with the Evergrande crisis in China, where one of the world’s largest real estate companies teetered on the edge of collapse. While comparisons can be made, several distinctive features set India apart and showcase its capacity to manage a property surge effectively.
Property ownership landscape
A fundamental contrast lies in the tradition of property ownership. In India, owning residential properties has been a longstanding cultural norm for a significant portion of the population. This contrasts sharply with China, where a mere 30% of the population owned homes until the early ’90s. The privatization and marketization of housing in China are relatively recent phenomena compared to India.
Investment returns
China saw a tremendous boom in residential property sales, with the total value soaring to USD 2 trillion in 2019, a stark increase from USD 528 billion in 2009. Housing became a favoured avenue for investment, primarily because of the impressive returns it offered. Over the past decade, the MSCI China Index delivered a modest annualized return of only 1.67%. In contrast, the data reveals that the average real estate prices in China nearly doubled from 2011 to 2021.
Regulatory oversight
The Indian real estate sector benefits from robust regulatory oversight, primarily through the Real Estate Regulation and Development Act (RERA) enacted in 2016. RERA introduces financial discipline, ensures project completion within stipulated timelines, and offers safeguards against fund misappropriation. By requiring developers to maintain project funds in escrow accounts, RERA minimizes the risk of financial mismanagement and project delays, while providing a structured mechanism for grievance resolution.
Capital market influence
In India, the influence of capital markets plays a crucial role in monitoring and curbing the aggressive growth strategies of developers, particularly following challenges faced during the prior capital expenditure cycle. The outcome of this influence is evident through the recent example of Macrotech Developers, one of India’s prominent real estate firms, which managed to significantly reduce its debt burden and enhance its valuations. Currently, major listed real estate developers in India maintain total debt-to-equity ratios below 1x.
The Chinese Evergrande crisis
Conversely, the Chinese property market faced a starkly contrasting scenario, marked by escalating debt levels, defaults, and extensive financial instability. The Evergrande crisis serves as a vivid illustration, where the colossal debt burdens of property developers loomed large, triggering concerns about an industry-wide meltdown.
The comparison between India’s burgeoning property market and the Evergrande crisis in China underscores India’s resilience. This resilience stems from regulatory safeguards, established property ownership traditions, and the robust influence of capital markets, all of which together provide a more secure and stable environment for property investors. The true litmus test for India’s property market will be its ability to navigate and thrive in the midst of this booming environment.
