There's an amusing uniformity to real-estate scams across the world
23-Sep-2021 •Dhirendra Kumar
By now, all my readers would have heard of the collapse of the giant Chinese real-estate company 'Evergrande'. If you go through the details of the Evergrande affair, you will realise that from pandemics to real-estate scams, the scale of everything that happens in China is flabbergasting. Evergrande has 1,300 real-estate projects in 280 cities in China. There are 16 lakh apartments for which it has taken whole or part payments from customers but which it seems unable to deliver. To fund its business, it also operates 'wealth-management products', in which people have $6 billion tied up (could be more, this is what the company itself has admitted to, so far). The sheer variety of sources from which this company has borrowed is breath-taking. It has borrowed from banks, both foreign and Chinese, from individuals, from western hedge funds and even from its own employees.
How did it manage to borrow from employees? It made them, to use a phrase from The Godfather, an offer they could not refuse. If they wanted to keep their bonuses, they would have to give their employer a short-term loan. The loan was packaged as a safe, high-interest deal. Chinese social media has stories of employees who borrowed from friends and families and even banks to lend to their employer. Honestly, in decades of hearing about all kinds of financial malfeasance, these employee borrowings are probably the strangest thing I have heard. Scamsters of the world must be tipping their hat to the Evergrande management. As that ad said, 'What an idea!' Hopefully, despite the scale and a few worldwide side-effects, we in India will escape any severe fallout of the Evergrande disaster.
The biggest question that this raises in my mind is, 'Why is it always real estate?' From system-wide failures like the 2007-08 one which started with housing in America to myriad scams in India like Unitech, Saradha and others, to Evergrande. Regardless of which part of the world it is and what the scale of the scam, real estate is especially suited to such activity. One major reason of course is the special place that real estate holds in the hearts and minds of savers. There's a deep desire to own one's own piece of the earth in almost everyone. Coupled with longstanding myths about real estate always being a good investment, the sector is always ripe for scams.
These factors result in a unique characteristic of the modern real-estate industry which is true everywhere in the world. This is one industry where manufacturers do not seem to care about the cost of the biggest input! Evergrande bought land at absurd prices across China because buyers would borrow and pay in advance anyway. Does this sound familiar? Of course, it does. This same behaviour played a big role in bringing so much trouble in India upon buyers in hundreds of projects across the country. Developers shuttle advance payments from one project to another, buying land at ever-more inflated prices. While the going is good, buyers immediately pay up, often with home loans. At some point, the prices become so absurd that the market dries up and some people (in China, a lot of people) are left with ruinous losses and loans.
What happens to Evergrande doesn't matter to us. The Chinese government is playing some kind of a game with many of the big businesses in that country that doesn't interest us much. It's the universality of these problematic themes in real estate that we need to be constantly aware of. With RERA, the worst of this should be behind us in India, but given the nature of this business, one never knows. When it comes to buying a home, savers need to keep a cool head on their shoulders and not get swayed by dreams that seem too sweet.