It's now quite evident that real estate companies are in for some difficult times. CRISIL not only foresees a delay in many planned and ongoing projects, it believes several players are over-leveraged and that the combination of sluggish demand and rising costs will lead to a shakeout. In particular, residential complexes, funded largely by customer advances, have been severely hit by the slowdown in bookings, which means it will be a while before the projects are completed. So it's going to be a long and painful wait for buyers who have paid up. Much of this pain could perhaps have been avoided if the government kept an eye on builders and subjected them to more scrutiny. Indian laws, it would appear, are far too lenient. In China, for instance, developers can pre-sell a residential property only when one-third or two-thirds of the construction is complete, depending on which province they're in. It's a far easier world out here where builders are free to pre-sell property even before they've started digging. Those who want to own a home of their own, and who doesn't, often have little choice but to play along. Buyers also have very little idea about how their hard-earned money is being utilised by the developer. In China, we're told, mortgage payments have to be utilised for a specific project. Maybe that's the way it should be done here too; builders would then not be able to divert customer advances for other purposes.
Because that's precisely what some of them appear to have been doing. Overly ambitious developers have bid for land banks and are now scrambling for the money to settle the bills. Unless things take a turn for the better, these developers will probably not have the financial wherewithal to start building even if they get possession of the land. And neither will they be penalised for this. In China, a realty firm must develop the land acquired within a certain time frame, failing which the appreciation in the value of the land is taxed. Back home that's not the case, so there's really no hurry to start any construction, the land can simply lie vacant. It's a pity that this can happen in a country where there are so few houses and so many more people waiting for a home of their own.
Chinese developers hold relatively small land banks; brokerage CLSA estimates it would be sufficient for development over a 4- to 10-year period, depending on growth targets; in India developers are estimated to be holding on to land banks for anywhere between 8 and 15 years. To be fair, approvals in India do take much longer than they do in China because much of the land is agricultural land. But even then, companies appear to be in a hurry to pick up property. Given that there's a downturn in the offing, they might just end up owing a lot of inventory at a time when prices are coming off. Most Indian property players are already so highly leveraged that few would be able to cash in on falling prices. The difference in the amount of debt that Indian and Chinese players have on their books is striking. The average gearing for listed Chinese developers, CLSA reckons, is 50-60 per cent with only a couple of them at 100 per cent. For companies back home, the average would be closer to 100 per cent with a couple of firms indulging themselves beyond that. What's more, some of them are not able to recover their money in time; receivables for Parsvanath rose by about 20 per cent sequentially in the March 2008 quarter. The higher cost of money means the debt will continue to pile up.
As it is, it's not easy to tell what kind of shape the finances of property firms are in. That's because the percentage-of-completion method followed by companies means that sales and profits and recognised well before the entire project is completed. That just won't do in China; revenues there flow into the books only after the project has been completed and the property handed over to the buyers. In that sense, investors in property stocks may want to note, Indian firms would seem to be less transparent than their Chinese peers.
That's possibly because they can get away with it. As CLSA notes, in India property developers are "friends" of policy makers in India. On the contrary in China, while they may enjoy similar good relations with the provincial governments, the central government has been seen to be taking aggressive steps against the sector. Conditions in the real estate space in China today are pretty similar to those in India. Property markets there too have weakened and buyers are biding their time. A big difference, however, is that property prices in China are still considered affordable whereas back home even a modest home remains out of reach. That's the main reason why there have been so few transactions. It's time we changed some of the rules, home buyers deserve better.