It's a real estate hunt

With experts concurring that India and China are lucrative markets for real estate, a comparison between the two countries is inevitable, writes Ravi Teja Sharma

India and China are similar in many ways. Rapid GDP growth, huge urbanisation, growth in middle-class spends, a boom in housing, organised retail malls and a growing choice of products.

Most macro-economic factors are similar for the two but China is ahead in some developments by at least two-four years "" and real estate is one of them. India, however, is fast catching up and most international companies wanting to invest in real estate consider both China and India top markets.

It is true the Indian economy only began to open up after 1990 and should not be compared to China, where free-market systems began to take hold after 1978. Only now are the effects of Indian reforms beginning to become evident. Nevertheless, a comparison is always imminent when one is talking about real-estate developments in the two large countries.

While China began to allow overseas businesses to mainland China in 1978, it took them 10 years to allow private ownership of real estate. Prior to that all housing was owned by the government, says CY Leung, chairman, Asia Pacific, global property adviser, DTZ Debenham Tie Leung.

In fact, Leung was one of the first to help the Chinese government sell the first parcels of land in Shanghai in 1988-89. Since then, he says, the country has invested heavily in building infrastructure, roads and tunnels. State governments that sold land in their cities plowed back the money into large infrastructure development projects.

Some experts feel that India's story is better than that of China. While India's story is based on IT and knowledge, China's is manufacturing-based. Growth for India is comparatively easier with less infrastructure required for IT as compared to manufacturing, which needs large, complex infrastructure including huge highways and machinery.

Still, a lot of what of the infrastructure projects and real estate scale we're seeing in India today has also happened in China a few years ago. Take SEZs, for example, which in India are sprouting up almost everywhere. If all of these are approved, we might see hundreds of SEZs, big and small, in the next couple of years.

The Chinese model, though, is different from ours. An SEZ in China is not a small affair. There, entire cities are part of these zones, which is why there are only four SEZs in China "" Shenzhen just across the border with Hong Kong, Zhuhai, Shantou and Xiamen. Apart from these, there are enterprise zones at a subsidiary level.

The manner in which projects are financed is different too. In India, the IPO market for real estate developers has just opened up. "There was a phase in the '90s when there were several IPOs in the Chinese real estate market. After that, till 2003, it was dry and, since 2003, the size of transactions has been growing. A typical IPO in 2005 would be valued at $200-215 million while in 2007 it has gone up to even $1 billion-plus. The size of transactions has more than doubled in 12 months," says Anthony Ryan, head of real estate and investment banking at JPMorgan.

"China is more an IPO and pre-IPO market, and real estate funds are starting to come in now. In China it is possible, today, to do corporate level debt equity financing or pre-IPO financing to get a push to raise funds for new projects," says Ryan.

"In India, pre-IPO financing is limited and the pressure to go into an IPO is stronger, which is why we see many companies hitting the market today," adds Kaustubh Kulkarni, ED, investment banking, JPMorgan.

In 1988, the Chinese government took some very bold steps. It removed all restrictions on foreign money coming into the country, and saw investors from all across "" Singapore, Hong Kong, Japan "" moving in.

Foreign investment got in a lot of expertise and modern techniques into the real estate sector. That is what is likely to happen in India now, says Leung, with FDI flowing into India's real estate sector.

One of the apprehensions about allowing foreign investment in the sector is the fear that they will overshadow domestic real estate investments by local companies. Leung clears the point by saying that real estate investments are mostly domestic.

In Hong Kong, most investment is local. Of the hundreds of cities in China, there are no foreign investors in 600 cities. Of the ones that do have foreign investment, they make no more than 15 per cent of the market.

"Even if India opens up further, the situation is going to be pretty much the same. No market will ever be dominated by foreign investors. An open door policy, in turn, will allow competition and better expertise," he says.

Ryan feels the scale of development might end up a lot larger in India than even China. The ability to get large tracts of land is limited in China. All land in China is owned by the government, every inch of it, with the exception of a cathedral in Hong Kong that is on a long-term lease.

In communist China, most developers are pretty new. There are no traditionally wealthy families who got into the real estate business leveraging family land banks, which is the case with many companies in India.

The scale and number of developers, though, is larger in China. There are a huge number of real estate developers. India is a two-speed market with small and large players. In China, the size of companies is more uniform and there is huge competition. No developer dominates more than 2-3 per cent of any market.

According to reports, in China, for every $1 being invested, there is $12 of investment waiting to be invested. In India, for every $1, there $8-10 of investment waiting.

For the moment, there are chances that investors will prefer China over India. In the near term, there is a chance that the Chinese currency (RMB or Yuan) will appreciate and over the next few years investors would want to invest equity to get additional appreciation.

Apart from the growth in real estate prices, an investor will be able to benefit through currency appreciation. "Since India's political system is more defined, investor appetite in India is longer term "" 6-10 years, says Kulkarni. In China, equity investors are more likely to commit to three years," says Ryan.

Overall, net and gross profit margins are lower in China and profitability is higher in India. Net profit in China for listed companies ranges from 15-25 per cent while in India it could be 30-40 per cent or, in some cases, even higher.

Some experts feel that corporatising in India is at a nascent stage and as the market matures, as it has in China, profit margins will come down.

There are more margins to be made with larger developments but the Chinese government regulates how much land it gives out and at what price. There is also increased regulation on how much affordable housing needs to be provided.

Vincent Lottefier, country head, Jones Lang LaSalle, says the Chinese government has started implementing land policy initiatives that provide the first steps toward the creation of a national land use planning and sustainable development policy framework for managing urban growth.

These include adoption of local comprehensive plans, zoning maps, integrated land development reviews and also distribution of various types of land uses.

"Some first tier cities have their own urban planning bureaus that are responsible for their master planning and even more detailed planning (area or precinct based). For instance, the Shanghai government has its Shanghai master plan 1999-2020. As for land-use, the government pre-specifies the use of each plot which will be transferred in the following years (at least five years)," he says.

Whether the Chinese real estate sector will sustain itself in the long run will depend on several factors. The environment will be one of the biggest of them. Beijing and some cities don't see clear skies for days on end.

Environmental pollution is massive owing to the large manufacturing hubs. India's IT buildings doesn't pollute as much, actually not even close to the kind of pollution there is from manufacturing units in China, say developers here.

Why, there is also a plan to shut down factories around Beijing for weeks before the Olympic Games in 2008 for participants to enjoy the blue sky!