Full Video Transcript Below:
From about 2004 to 2019, approximately 20 million people a year moved into Chinese cities from the countryside. This led to one of the world’s greatest building booms but potentially also to one of the greatest busts. For many years, the widespread view that China was building too many apartments was questioned because, in fact, they were required. However, like all good booms, things eventually got out of hand just when the migration started to slow. This was most noticeable in Chinese developer balance sheets. Financial leverage was preferred as a means of balance sheet strength since more traditional metrics such as debt to equity are too easily manipulated at times like these.
Country Garden, one of China’s more respected developers, saw its leverage rise from a modest two times to five times between 2008 and 2015. Not disastrous, but beginning to show signs of becoming unhealthy. Country Garden’s leverage exploded from five times to 12 times by 2017, and the slightest slowdown in the industry was game over for them.
The next great migration is suspected to be upon us, coming in India. Urbanisation there is around 35%, about where China was at the turn of the century. The only question is how quickly that moves to where China is today. The demand for urban housing in India is coming, whether it reaches 20 million a year, equivalent to about 5 million households, is unknown. In recent years, Indian developers have struggled to make 500,000 apartments in the top cities, so the potential to grow that dramatically is enormous.
DLF Limited, one of India’s largest developers and the largest in New Delhi, is also one of the longest-listed companies and one of the few survivors from the last boom and bust in India back in 2007. At that time, its leverage peaked at a rather scary seven times, but they soon saw the light, and mindsets changed dramatically, allowing them to save themselves. Today, their leverage is around two times, a very modest level, in common with much of Indian developers and indeed the broader Indian corporate sector.
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