Can a crisis similar to China’s Evergrande occur in the Indian real estate market?

Evergrande: One significant distinction between the real estate markets in China and India is that the former has steady buyer demand. 

A Hong Kong court ordered on January 29th the liquidation of the troubled Chinese real estate giant Evergrande. This decision will likely impact the nation’s financial system and the trust of foreign investors. This article looks at the tremendous strides the Indian real estate market has made since the collapse of Infrastructure Leasing & Financial Services, which caused a crisis of non-banking financial companies (NBFCs). 

Experts in real estate claim that there are parallels and differences between the Infrastructure Leasing & Financial Services (IL&FS) debacle and the Evergrande crisis. Both have significant adverse impacts on their respective markets, including high debt levels and inadequate financial management. However, in contrast to China, India’s real estate market recovered gradually due to national initiatives and the creation of the Real Estate Regulatory Authority.

“Thanks to government initiatives and regulatory changes like RERA, India’s real estate market has gradually recovered following the IL&FS disaster. India’s real estate market is more stable than China’s, falling despite challenges like capital shortages and regulatory barriers. The IL&FS crisis was mainly limited to India; Ever grande’s problem has global implications due to its size and exposure to foreign debt, according to ANAROCK Capital’s MD and CEO, Shobit Agarwal. 

Global implications of the Evergrande issue are more extensive. 

China’s real estate market is slowing down, but India’s is more secure despite ongoing challenges like capital shortages and regulatory barriers. According to Agarwal, the IL&FS crisis mainly applied to India, but the scope and exposure to foreign debt of Evergrande’s problem have global implications. 

It is noteworthy that Evergrande owes over $300 billion in debt. Thousands of homebuyers stood in a bind over building and financial mismanagement regarding unfinished apartments. According to agency reports, High Court judge Linda Chan’s ruling on January 29 essentially starts a drawn-out process that includes selling off the developer’s assets and changing the management to ease the worries of its creditors. 

According to agency reports, Ever Grande’s demise came in 2021 when Beijing tightened its lending policies to real estate developers to curb the bubble. 

What distinguishes the two real estate markets? 

Nearly 40% of all home sales in China are due to Chinese real estate developers, who have struggled with severe debt default since 2021. Of the $175 billion in outstanding dollar bonds, they have defaulted on over $114.6 billion. The ongoing COVID-19 impact and government regulations governing financing methods are among the factors. Gulam Zia, Senior Executive Director at Knight Frank India, explains that these actions have developers’ funding options while preserving financial stability and controlling property price surges. 

With 3,100 real estate projects, almost four times as many as Evergrande, and $ 191.7 billion in total liabilities, another real estate developer, Country Garden, has been struggling financially. As per a report published in the South China Morning Post last week, troubled Chinese developer Country Garden Holdings has listed some assets for sale in Guangzhou to clear a significant amount of debt due within the next six months. 

Zia continued, saying another factor to consider is that Chinese homebuyers need more confidence due to unfinished projects and lax laws allowing developers to withdraw funds from escrow accounts.

Furthermore, the real estate industry in China makes up roughly 30% of the country’s GDP, compared to only 7% in India. Real estate experts predict it will not increase by more than 15% even over the next 20 years. 

At $477 billion in valuation, the real estate industry in India accounts for 7.3% of the country’s GDP. According to projections, the economy will grow significantly, reaching $5.8 trillion by 2047, or 15.5% of total output. This growth is due to the increasing demand for better living spaces brought about by rapid urbanization, according to a Knight Frank and Naredco report from the previous year.

RERA: Revolutionizing the real estate industry in India 

The industry has been made cleaner by the real estate regulatory bodies that have been established around the nation to control the real estate market and safeguard homebuyers. 

China faces many challenges, but urbanization will continue to grow India’s market. Thanks to changes in regulations and lessons from past failures, the Indian market has become more resilient and customer-focused. Compared to its Chinese counterparts, India’s real estate market has a brighter future, which puts it in a more stable position, says Zia. 

Persistent demand for housing 

The consistent end-user demand is the primary distinction between China and India. 

Even in times of economic recession, such as the Lehman crisis in 2008, the demand for real estate in India has remained steady. In India, the main issue was developers abusing the money that buyers purchased homes with. China, on the other hand, faced challenges with many builders finding it difficult to make timely payments, which were made worse by limited access to funds due to the global economic situation, as Zia points out in his research paper titled India’s Resilient Real Estate Market Amidst China’s Real Estate Woes: A Comparative Analysis.