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THERE is a common joke in China’s real estate fraternity. When the real estate market is bad, buyers will complain about everything during the property handover. But during a bull market, if you handover a unit without a front door, they would still gladly take possession.
That is the nature of the real estate industry. It is one of the most important sectors in the economy in most parts of the world, not only from an economic standpoint but also from a societal angle.
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Housing for the masses has always been a thorny issue that governments of the day are required to address.
A good government is one that is deemed to have a policy which balances the people’s housing needs versus the vibrancy of the real estate market. This is because real estate functions not only as an asset class but it also serves a greater humanitarian need, a roof over one’s head.
Traditionally, developing economies around the world have higher gross domestic product (GDP) growth percentage in comparison to developed nations as real estate and construction forms a huge weightage in its contribution towards the GDP of a country.
The real estate sector creates far reaching spillover effects where a boom in this single industry results in growth for other sectors along the value chain such as building materials, steel, furniture, logistics and countless others.
However, as a country’s economy transits from developing to developed, one would notice a gradual slowdown in the pace of its real estate projects.
Indeed, real estate, infrastructure and construction is the most direct way in which fiscal stimulus can inject life into the economy but it is never the most sustainable.
This is primarily because it is a debt driven sector where developers, contractors and end consumers rely on loans to fuel its demand. Hence, debts will pile up substantially over time, especially if unregulated.
This brings me to the most pressing issue in the real estate world today; China’s Evergrande Group’s (Evergrande) potential collapse. Evergrande is the second largest real estate developer in China by sales revenue. Another interesting “title” it helms would be the world’s most indebted company.
Evergrande has liabilities amounting to an estimated US$300bil (RM1.26 trillion) from years of aggressive expansion.
To put it into perspective, Malaysia’s total debt as of December 2020 stood at RM1.26 trillion. Imagine a company’s liabilities is equivalent to our nation. Now what if it defaults on its debt obligations and goes under? Until today, China has yet to go through any major recession unlike other economies around the world. Many market commentators are increasingly worried that the potential default by Evergrande would pose a systemic risk to the economy of China.