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Coronavirus adds to woes of India’s property developers



On the highway to Greater Noida, a sprawling extension of India’s capital city New Delhi, a stretch of unfinished apartment buildings runs for kilometres, the empty shells testament to a property slump that is being prolonged by the coronavirus pandemic.

Vinod Kumar, one of more than 200 construction workers waiting on the kerb to be picked up for a day’s work, says that hundreds of buildings are in limbo. Daily labourers like him are working just 15 days in the month, down from 20 before the pandemic hit.

“Our wages have gone down,” says Mr Kumar, wearing a black face mask and a faded brown shirt. “We go to work yet we come back empty-handed.” 

The fortunes of the workers reflect the deep malaise among India’s property developers, who binged on a lending spree that ultimately crashed five years ago and contributed to a crisis in the country’s financial sector. 

Today, apartments worth Rs2.8tn ($38bn) are “stranded”, meaning they are still under construction and not being completed, jeopardising loans worth Rs1.2tn ($16bn), according to a recent report by investment researchers Kotak Institutional Equities. 

From boom to bust. . .

India’s real estate turmoil was years in the making. A decade ago, when the country was one of the world’s fastest-growing large economies, developers took loans from non-bank lenders and private equity firms to launch building projects that would cater for a booming middle class. 

Many flats were sold to homebuyers before they were built. When such “off-plan” sales were at their height, between 2010 and 2013, 400,000-450,000 new residential units were launched every year. This was more than three times the number from just five years before, leading to an unprecedented build up in inventory. 

The bubble popped after a series of events put massive pressure on developers, some of which were already struggling to complete projects that off-plan purchasers had already paid for.

One was the introduction of the Real Estate (Regulation and Development) Act in 2016, which sought to protect people from widespread malpractice in the sector, including delivery delays and multiple bookings for the same property. 

Then came demonetisation, when the Indian government made the sudden decision in late 2016 to ban high-value banknotes to fight corruption, and the introduction of a new goods and services tax regime in 2017. Both reforms squeezed the amount of black money circulating in the property sector, severely restricting liquidity. 

Finally, the collapse in 2018 of the country’s biggest non-bank lender, IL&FS, led to funding for new projects drying up as non-bank financial institutions — a key source of credit for property developers — came under scrutiny.

The combination of new regulation with a broad economic slowdown in India has landed one-third of developers with ratings below investment grade, says the Kotak report, adding that “Covid-19 induced disruptions have dealt another crushing blow”. 

“These events broke the back of a lot of developers, they couldn’t service their debt, that’s the story of the real estate sector,” says Samir Jasuja, chief executive and founder of PropEquity, a real estate analytics firm. 

Hundreds of thousands of people are waiting for their investment to materialise, says Mr Jasuja. “I’m one of them,” he admits. “I bought a flat in Bombay that hasn’t been delivered in the past seven years. There is nothing you can do except wait and watch and hope the developer doesn’t go under.” 

The slowdown in the property sector, which contributes around 6 per cent of India’s GDP and is a significant source of employment, led to 421 real estate developers filing for bankruptcy in 2019 — twice as many as in 2018. 

. . . and back again?

However, there are signs that consumers are looking to buy from developers with strong balance sheets and that appetite is growing for flats that are ready to move into. 

Measures introduced by the Reserve Bank of India in October to make home loans cheaper may bolster that appetite, but analysts warn that it will take years for the market to recover because of the pandemic.

Chart showing that India's property sector could start to recover after 2021

“[The measures] will make a difference at the margins and help push up demand,” says Madan Sabnavis, chief economist at CARE Ratings. “[But] housing is the only sector that shows promise — commercial real estate is down as people work from home.” 

Launches from developers perceived as being in good financial health, such as Sobha, are seeing signs of a revival, though sales are “substantially below peak sales”, according to real estate analyst Amit Agarwal at brokerage Nirmal Bang in a recent note.

The commercial market has been hit particularly hard by the pandemic. Entire office blocks in the New Delhi area and the country’s tech hub of Bangalore have “for sale” signs plastered on their windows, as companies ask employees to work from home while coronavirus cases continue to rise. 

Yet some private equity firms have concluded that this is the right time to scoop up office space. 

Canadian asset manager Brookfield plans to acquire 12.5m sq ft of offices and co-working spaces from developer RMZ Corp in a deal valued at $2bn, RMZ statement said last month. Private equity firm Blackstone, one of the largest owners of commercial real estate in the country, is also reportedly close to finalising a $2bn deal with Prestige Group. 

In Noida, however, the cranes over the buildings remain immobile. Mr Kumar and other workers may be in for a long wait before work picks up again. 

With additional reporting by Jyotsna Singh 

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Emerging Markets

Bolsonaro faces investigation over election fraud claims




Brazilian politics updates

Brazilian president Jair Bolsonaro’s legal problems have multiplied after a court opened an investigation into his unsubstantiated warnings of voter fraud in presidential elections next year, a probe which could lead to him being disqualified from running.

The judicial inquiry comes as the far-right leader’s ratings are on the slide following accusations of his incompetent handling of the Covid-19 pandemic, which has claimed the lives of more than half a million Brazilians.

Rising living costs and allegations of corruption in vaccine procurement within his administration have damaged Bolsonaro’s standing further.

With political pressure building, the populist has increased attacks on the electronic voting system in recent weeks, reiterating calls for the adoption of printed paper receipts in order to avoid manipulation.

Opponents fear the former army captain is seeking to cast doubt on the legitimacy of the vote, in preparation for refusing to recognise a potential defeat. A group of 18 current and former Supreme Court justices have defended the current ballot system, which was introduced in 1996, insisting that Brazil had eliminated election fraud.

The Superior Electoral Court this week opened an administrative probe into Bolsonaro over his claims, for which he has provided no evidence. It also asked the Supreme Court to investigate whether the president had committed a crime by disseminating fake news about the voting system.

The president hit back on Tuesday. “I will not accept intimidation. I will continue to exercise my right as a citizen, to freedom of expression, criticism, to listen, and to meet, above all, the popular will,” Bolsonaro told supporters in Brasília.

The electoral court’s intervention showed the judiciary was striking back against Bolsonaro’s attacks, said Carlos Melo, a political scientist at Insper in São Paulo. “He [Bolsonaro] is harming the rules of the game, of democracy and the institutions,” he added. “It’s not different to what [Donald] Trump did, and demagogues in other countries. His intention is to question the electoral process without proof.”

Both moves by the electoral court could in theory eventually pave the way for Bolsonaro being barred from standing in the 2022 poll.

“There is a long way until this can bring actual legal consequences against the president which might affect his eligibility,” said Rogério Taffarello, a partner in criminal law at Mattos Filho and professor at the Getúlio Vargas Foundation. “[This] does not mean, of course, that the existence of such investigations cannot generate political consequences”.

The president is already the subject of a criminal investigation into whether he failed to act on warnings about alleged irregularities by public officials in negotiations over vaccine purchases. Bolsonaro and the government deny any wrongdoing.

Protesters have taken to the streets in cities over the past two months calling for the impeachment of Bolsonaro, who in polls is trailing former leftwing president Luiz Inácio Lula da Silva, also a likely frontrunner in next year’s election.

Bolsonaro had long promised to present evidence of cheating in elections, even claiming that the 2018 ballot he won was tampered with. Yet last week he admitted to not holding any proof, only “indications”.

Despite his falling popularity, Bolsonaro retains backing in Congress from an amorphous grouping of centre-right political parties known as the Centrão, or “Big Centre”. Analysts said for now this support appeared to be holding.

Additional reporting by Carolina Pulice

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South Korea looks to fintech as household debt balloons to $1.6tn




South Korea Economy updates

After her family business of ferrying drunk people home was hit by closures of bars due to Covid-19 curfews and social distancing, Lee Young-mi* found herself juggling personal debts of about Won30m ($26,000).

The 56-year-old resident of Suncheon in South Korea was already struggling to pay off or refinance four credit cards, but now faces the prospect of those debts rapidly multiplying after her husband was diagnosed with cancer.

“We’ve had little income for more than a year as not many people are out drinking until late into the night,” said Lee. “Now my husband won’t be able to work at all for the next three months after his surgery.”

Lee’s story is playing out across Asia’s fourth-largest economy as self-employed workers, who make up nearly a third of the labour force, have seen their incomes reduced sharply due to coronavirus restrictions. Now, after struggling for years to keep a lid on household debts that hit a record Won1,765tn ($1.6tn) in March, Seoul is looking to fintech companies and peer-to-peer lenders for answers. 

Chart showing increase in South Korea's household debt

Among them is PeopleFund, which touts tech-based investment products backed by machine learning that allow borrowers to refinance their higher-interest loans from banks and credit card companies.

The company has loaned at least $1bn to more than 7,500 customers since it was established in 2015. Its products allow borrowers to switch their debts to fixed-rate, amortised loans at annual interest rates of about 11 per cent, a change from the riskier floating rate, interest-only loans common in South Korea. 

PeopleFund has received about Won96.7bn in financing from brokerage CLSA, and along with Lendit and 8Percent is one of the first among the country’s 250 shadow banks to win a peer-to-peer lending licence. 

“The country’s most serious household debt problem is with unsecured non-bank loans, whose pricing has been too high. We can offer more affordable loans to ordinary people unable to receive bank loans,” Joey Kim, chief executive of PeopleFund, told the Financial Times.

The proliferation of digital lenders and fintechs in South Korea, where higher-risk borrowers are often cut off from bank financing, has been encouraged by the country’s government.

“We hope that P2P lenders will help resolve the dichotomy in the credit market by increasing the access of low-income people to mid-interest loans,” said an official at the Financial Supervisory Service.

South Korea’s household debt situation has become more pressing since the onset of the pandemic, with increases in borrowing for mortgages, to cover stagnating wages and to invest in the booming stock market. South Korean households are among the world’s most heavily indebted, with the average debt equal to 171.5 per cent of annual income.

South Korea’s household debt-to-GDP ratio stood at 103.8 per cent at the end of last year, compared with an average 62.1 per cent of 43 countries surveyed by the Bank for International Settlements.

Much of the new debt has been risky. Unsecured household loans from non-bank financial institutions were Won116.9tn as of March, up 33 per cent from four years ago, according to the Bank of Korea, much of it high interest loans taken out by poorer borrowers.

Getting on top of the problem has taken on national importance. In a rare warning in June, the central bank said the combination of high asset prices and excessive borrowing risked triggering a sell-off in markets and a rapid debt deleveraging.

“If financial imbalances increase further, this could dent our mid-to-long-term economic growth prospects,” BoK governor Lee Ju-yeol said in July.

The country’s economic planners, however, are struggling to contain debt-fuelled asset bubbles without undermining South Korea’s fragile economic recovery.

The government has attempted to address the danger by tightening lending rules. Regulators in July lowered the country’s maximum legal interest rate that private lenders can charge their customers from 24 to 20 per cent.

Economists caution that rising debt levels increase South Korea’s vulnerability to an economic shock. 

They also warn that the asset quality of financial institutions could be hit by a jump in distressed loans when the BoK rolls back monetary easing, expected in the fourth quarter.

“Monetary tightening is needed to curb asset bubbles but this will increase the household debt burden, holding back consumption further,” said Park Chong-hoon, head of research at Standard Chartered in Seoul. “The government is facing a dilemma.”

For Lee Young-mi, however, the 11 per cent rate offered by the PeopleFund is still too high. “I am not sure how to pay back the debt.”

*The name has been changed

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European and Chinese stocks rise after calming words from Beijing




Chinese equities updates

European shares chased gains in China after calls from Beijing for greater co-operation with Washington helped sooth jitters over a regulatory crackdown in the world’s biggest emerging market.

Europe’s Stoxx 600 index rose 0.7 per cent on Monday to hit new all-time highs, while the UK’s FTSE 100 rose 1 per cent led by economically sensitive stocks including banks and energy groups. London-listed lender HSBC gained 1 per cent after it reported second-quarter figures that easily beat analysts’ expectations.

The gains came after the China Securities Regulatory Commission, Beijing’s market regulator, called on Sunday for closer co-operation with Washington, stressing the country’s efforts to improve transparency and predictability after a crackdown on tutoring groups obliterated the market value of the $100bn sector’s biggest companies.

Chinese listings in the US have become a geopolitical flashpoint as Beijing has sought to exert greater control over the country’s powerful tech sector. The US Securities and Exchange Commission said on Friday that Chinese groups that sought to sell shares in America would be subject to stricter disclosures.

Shares in China rebounded after their worst month in almost three years, with China’s CSI 300 benchmark of Shanghai- and Shenzhen-listed blue-chips rose 2.6 per cent on Monday, while Hong Kong’s Hang Seng index added 1.1 per cent. The city’s Hang Seng Tech index, which tracks big internet groups including Tencent and Alibaba, reversed early losses to rise 1 per cent. Futures tracking Wall Street’s benchmark S&P 500 index climbed 0.6 per cent.

Last month, China’s cyber-security regulator announced plans to review all foreign listings by companies with data on more than 1m users after top leaders in Beijing called for an overhaul of how the country regulates initial public offerings in the US. The crackdown came just days after the $4.4bn listing of ride-hailing group Didi Chuxing.

The intensifying scrutiny of how Chinese groups access capital markets has pummelled stocks, delivering the worst month for China tech groups listed in the US since the global financial crisis. The Hang Seng Tech index fell 17 per cent last month.

“While we do not consider it prudent to completely avoid investments in China, further volatility can be expected until the first quarter of 2022, by which time we believe most regulatory changes may already be in place,” analysts at Credit Suisse wrote in a note on Monday.

Meanwhile, data released by China at the weekend showed that factory activity grew at the slowest pace in 15 months in July as demand contracted for the first time in more than a year.

Government bonds were steady with the yield on the benchmark German 10-year Bund, which moves inversely to its price, gaining 0.01 percentage points to minus 0.45. The equivalent US 10-year yield was steady at 1.234 per cent.

Bond yields have been falling in recent weeks, despite higher than expected inflation readings in the US and indications from the US federal Reserve last week that it was moving a step closer to the day when it would start tapering its $120bn in monthly asset purchases.

The euro rose 0.1 per cent against the dollar to $1.1885, while the pound gained 0.1 per cent to purchase $1.3924. Prices for global oil benchmark Brent crude fell 1 per cent to $74.66.

Unhedged — Markets, finance and strong opinion

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