It’s now abundantly clear that real estate firms are entering a challenging phase. According to CRISIL, many planned and ongoing projects are expected to experience delays, with several players facing issues of over-leverage. The combination of dwindling demand alongside rising costs is likely to result in a significant shakeout within the industry. Notably, residential complexes, which are primarily funded by customer advances, are suffering severely from a downturn in bookings, indicating that project completion will take considerable time. Consequently, eager buyers may have to endure a prolonged and arduous wait.
Much of this distress might have been mitigate had governmental oversight on builders been enforceable, as the current Indian regulations seem overly lenient. For instance, in China, developers may only pre-sell residential properties once a substantial portion—one-third or even two-thirds—of construction has been completed, depending on the specific province. In stark contrast, Indian builders can pre-sell properties even prior to the commencement of any excavation work.
For those aspiring to own a home—who among us doesn’t—Inevitably buyers are compelled to navigate these uncertain waters with scant awareness regarding the deployment of their hard-earned funds by developers. In China, it's mandated that mortgage payments be allocated strictly for a designated project, a regulatory framework that could arguably yield benefits if applied in India as well. This would prevent developers from possibly misallocating customer advances for unrelated undertakings, a misstep that some appear to be engaging in.
Several ambitious developers have competed aggressively for land banks, leading to financial strains as they scramble to fulfill payment obligations. Unless there’s a favorable shift in the landscape, it’s likely that these developers may lack the necessary financial capability to start construction, irrespective of land procurement, and without facing penalties.
In China, a realty firm is obligated to commence development of acquired land within a specified time frame, with penalties for non-compliance manifested in taxes on land value appreciation. Unfortunately, the opposite is true in India: land can remain undeveloped indefinitely without repercussions, a troubling scenario given that the country grapples with a pressing housing deficit.
Chinese developers typically manage relatively modest land banks, with brokerage CLSA estimating such reserves suffice for development over a period of 4-10 years, contingent on growth initiatives. Conversely, Indian developers are reported to retain land banks projected to last between 8 to 15 years. While it’s acknowledged that obtaining approvals in India can be protracted—especially due to the prevalence of agricultural land—developers still appear eager to acquire new properties. With an imminent downturn foreseen, there’s a risk of accumulating significant unsold inventory amidst declining prices.
The alarming truth is that many Indian property players are operating under a heavy debt load, rendering them ill-equipped to thrive amidst falling prices. CLSA highlights a stark contrast in debt levels, where average gearing for Chinese developers hovers around 50-60%, with just a few nearing 100%. In India, however, the average tops 100%, with certain firms exceeding even that threshold. Moreover, timely recovery of funds remains a considerable challenge; for example, receivables for Parsvanath surged by approximately 20% sequentially in the March 2008 quarter. The increasing cost of capital will only exacerbate existing debt burdens.
The opacity surrounding the financial status of property firms adds another layer of complexity. Developers in India often employ a percentage-of-completion method to recognize sales and profits much earlier than the actual project completion, leading to a lack of clarity. In China, however, revenue is only reported post-project completion and handover to buyers, thus ensuring greater financial transparency.
It appears that Indian firms capitalize on this leniency, as observed by CLSA, which described property developers in India as being too close to policymakers. In contrast, while these developers may also nurture relationships with provincial government officials in China, the central government has adopted a more aggressive stance towards regulating the sector. Remarkably, current real estate conditions in China resonate closely with those currently unfolding in India, with weakening property markets forcing buyers to adopt a wait-and-see attitude. However, a notable distinction remains: property prices in China are relatively affordable, whereas in India, even modest homes remain financially out of reach for many, stunting transaction volumes. As such, it’s imperative to rethink existing regulations; homebuyers certainly deserve a better deal.