Evergrande Debt Crisis & Bond Default Impact on Indian real Estate

China’s Evergrande is the talk of the town in the global real estate environment today. It is the story of a debt-ridden real estate company that is financially overleveraged, has gone beyond execution capabilities, has multi-city penetration, is into multiple businesses and where the promoters are just delaying the inevitable.

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The Evergrande debt crisis is big enough to destabilise the Chinese economy and make the global economy feel the heat. It is being referred to as the Lehman Brothers moment of China.

However, in India too there have been instances where the same recipe for disaster has been followed by several developers. True, they were not big enough to affect the economy at large but the model of unsustainable aspirations presented by Unitech, Jaypee, Amrapali, or HDIL, was more or less the same.

This raises a fundamental question – are there any learnings for the Indian real estate ecosystem from the Evergrande imbroglio. Equally important is to analyse whether there is any potential for disruption, because of the imminent failure of Evergrande. This also raises questions about the regulatory checks and balances, to deleverage the large developers whose ambitions far exceed their business capabilities.

Evergrande Group debt crisis and learnings for India

Here are a few points that the Indian developers would do well to keep in mind.

Fiscal closure of the project is more important than expansion aspirations.
Growth beyond execution capabilities is a recipe for disaster.
Multi-city, large format projects could also mean over-leveraged market penetration.
Multiple business interests at the cost of timely delivery is a red flag.
Home buyers must stay away from realty brands that are spreading across cities without timely delivery and a high C-SAT score.

China Evergrande potential shocks in India

This is how the Evergrande crisis will impact India.

Evergrande collapse could hurt the supply chains.
Steel, tiles, sanitaryware and electrical items could become costlier for India.

Regulatory learnings from Evergrande default

Things to keep in mind.

Deleveraging the real estate business is as important as leveraging.
Regulators must take preemptive measures to discourage defaulters.
Stringent checks and balances are needed.

Will the Evergrande debt crisis affect Indian realty?

It is still early to assess the extent of the impact on the Indian real estate market and its supply chain. Industry reaction in India is, hence, guarded with caution at the moment.

Subhankar Mitra, managing director – valuation and advisory services, Colliers India, believes that it is important that developers should avoid taking a speculative position, rely on the actual end-user demand, continue to focus on corporate governance and continue to lower their debt levels. “Developers should be prudent in expansion and conduct an essential market assessment before entering any new geography. Diversification is important but focus on core business is essential. Projects should be in-sync with the demand,” says Mitra.

The top 10 listed developers in India cut their debt levels by 37% between March 2020 and June 2021. To deleverage further, developers can look at a combination of asset sales, raising equity and development partnerships.

Aditya Kushwaha, CEO and director at Axis Ecorp, admits that while it is only now that we have got to know about China’s Evergrande Group, the trouble may have been brewing for a while. According to media reports, Evergrande is likely to default on liabilities, including interest payments and debt obligations. One level of impact has already been absorbed by the supply chain players. “Stocks of several top commodity companies took a hit for a few trading sessions. Thankfully, the impact was not far bearing for the Indian companies and the stock prices have started to stabilise. However, these companies may continue to face exposure if Evergrande collapses. It is hard to draw a ballpark figure on their exposure levels but we can be certain that the worst is now behind us,” says Kushwaha.

Aditya Kedia, managing director, Transcon Developers, points out that a majority of real estate developers across the world use lending to finance their projects at multiple levels, such as land acquisition, construction finance and sales. With a strong balance sheet, smart moves and sound fundamentals, leverage can be a tool to magnify profits. However, at the same time, it can also become detrimental if they over-leverage market penetration. If any organisation, in any industry, is in such circumstances, it is bound to suffer. “Being the second-largest real estate developer in China, the Evergrande Group was the reason behind the Chinese real estate boom. Therefore, this crisis cannot be an example to the developers who are thinly spread across the cities. Every successful company wants to grow further and add to the overall prosperity of the country. In India, for instance, several prominent developers have spread their roots across multiple cities and have successfully managed to gain trust from people over the years,” says Kedia.

China developer Evergrande and similarities in Indian realty

Just like some of the large real estate companies that failed in India, it was incorrectly believed that Evergrande was too big to fail. Moreover, in the case of Evergrande, it was not just its strategies and inefficiencies but the problems that may have existed in the overall real estate ecosystem for a while, that led to the situation.

Analysts tracking both, the Indian and Chinese, real estate market believe that it is always advisable for home buyers to do their due diligence before investing in a costly product like real estate which operates on the sell-and-build model. Evergrande has only reminded the Indian home buyers about their experiences with some of the over-leveraged developers where the Supreme Court’s intervention, along with the government-backed stress fund, was needed to bail out the buyers.

Any slowdown in the Chinese economy due to Evergrande’s failure and devaluation of the Yuan, could spell short-term troubles for the Indian developers relying on Chinese imports of raw materials. Nevertheless, Evergrande has reminded the Indian home buyers that over-leveraged and thinly spread big brands, with execution uncertainty, should be avoided.

FAQs

What is Evergrande?

The Evergrande Group is one of China's largest real estate developers.

What is the China Evergrande crisis?

Chinese real estate developer Evergrande borrowed heavily to finance its various projects and has warned that cash flow issues could force it to default.

Where is Evergrande Group?

Real estate developer Evergrande Group is headquartered in Shenzhen, Guangdong Province, in China.

(The writer is CEO, Track2Realty)

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Ravi Sinha

Ravi Sinha is a journalist with nearly two decades of cross-discipline media exposure. He is the CEO of real estate think-tank group Track2Realty. He has been writing extensively on the real estate sector for nearly a decade. Evaluation of real estate brand performance is his expertise and he has immense insight into consumers’ psychograph in the property market.

Twitter: https://twitter.com/ravitrack2media