For all its opacity, China is seen as the pre-eminent BRIC property market. So what has it got that India has not? Shayla Walmsley finds out.

Of the four BRIC economies, China and India have pretty compelling similarities, notably, huge populations and significant GDP growth. But the comparison is a cursory one, according to Joshi Aniruddha, executive director of Mumbai-based developer Hirco. If you must choose two BRIC economies, compare India with Brazil, he says.

"Brazil went through years when it was very socialist, then it started to privatise. Now it's embracing a knowledge-based economy. There are probably more similarities between India and Brazil than between India and China."

In any case, there's a discrepancy even in the most obvious Sino-Indian similarity - the demographic dividend. China's population is ageing rapidly. In contrast, ILO data suggest that by 2050 only 19% of India's population will be over 65, compared with 39% in the US and 67% in Japan.

The pattern of India's population growth will spur demand for residential. "It's a bankable sector in a robust financial situation," says S Sriniwasan, CEO of the Mumbai-based Kotak Realty Fund.

Yet Aniruddha points to a "lack of synchronisation, of coherence" between successive governments' attitudes towards the demand side versus the supply side. On the demand side, it wants Indians to own homes, offering loans via banks' priority lending. "But on the supply side, in its attitude towards developers, it has stifled them with a lot of complex bureaucracy," he says. "If you have easy credit on the demand side, but you choke the supply side, it drives up prices."

Especially in supply-constrained markets such as Mumbai, prices could increase beyond affordability, acknowledges Sriniwasan. "But prices are currently at reasonable levels. If prices did rise beyond affordability, there would be a pull back by the consumer because they just wouldn't be in a position to pay those prices."

If you look at where enterprise is happening in India, it is not in city centres but in anchored townships attached to major cities - in Gurgaon, rather than Delhi, for instance. This makes a difference to how the residential market is structured. "But it's unlikely that India will develop the US model of a city centre with towns around," says Aniruddha. "We can't afford it. It won't be single-family homes. It'll be high-rises."

There is growth in India - 8.5% GDP growth, in fact - but there's also hype. A couple of years back, at least one call centre operator acknowledged off the record it was thinking of pulling out because labour arbitrage had declined significantly. The English language advantage that India had been perceived to have over China was always more than slightly fictitious - at least once you left the hotel lobby, and sometimes not even then.

In terms of education, India lags China significantly. Only 12.4% of 240m Indian young people are tertiary educated against a government target for the next decade of between 30-40%. Of 240m Indian schoolchildren, 45% never even get through secondary education.

Of course, that creates opportunities for infrastructure investors. China opens a new university every month, each one accommodating 20,000-30,000 students. India's government reckons it needs to add 700 new universities and 35,000 colleges to its existing 480 and 22,000, respectively.

"China's advantage is that its economy is essentially planned and can government can quickly implement policy - such as its infrastructure," says Alessandro Bronda, head of investment strategy at Aberdeen Property Investors. "In a democracy, it's more difficult. China is rich. It doesn't have deficits and it doesn't need foreign money." India's weaknesses in Aberdeen's SWOT analysis include, tellingly, democracy.

At a June conference sponsored by the US-India Business Council in Washington, David Rubinstein, co-founder of the Carlyle Group, pointed out that in China, "a centralised government authority can get things done much more easily", especially when it has US$2.4trn in foreign reserves.

The Chinese Communist Party's ability to hold on to its monopoly on political power in the long term is far from assured, however. In 20 years China will be a middle-income country: per capita income will likely be around $6,000 (€4,763) by 2020. With hiked expectations and increased economic clout, "it's possible that there will be pressure for independent courts and for an independent civil society, and even the possibility of organised political opposition," says Kerry Brown, a senior fellow with the Asia programme at Chatham House.

"In contrast to the Soviet Union, where the Communist Party collapsed, China has tended to focus on economic development and put everything else on hold. It is a high-risk strategy and it could fail but so far it has delivered growth without major instability. For the Chinese Communist Party, the problem is that it will have to deliver more complicated social outcomes in the future, and that's where it becomes problematic," he says.

Paralysis in the face of strikes by unpaid workers, and hurried attempts to legalise the status of internal migrants (hitherto devoid of any claim on state services), already suggest the future fault-lines of social discontent. Unelected, lacking a coherent ideology, the legitimacy of the current government depends on it delivering increasing living standards. Yet boosting domestic consumption - in the short or long term - will require some measure of redistribution.

Especially given the underestimated perpetual renegotiations between central government and the periphery, local government officials are disinclined to favour a net loss - that is, to give up their vested interests. (Yiyi Lu, of Nottingham University's China Policy Institute, has pointed to the government's inability even to solve the ‘three public' problem - local officials' unpopular misuse of expense accounts.)

"This is one reason the government is so desperate to avoid a downturn," suggests a former central bank economist now living in China. "They're playing for higher stakes than elected governments but now they're playing a capitalist-ish game together with poor regulation, corruption, and a tendency to believe their own propaganda."

Chinese government management of the property market is "nothing new", according to Stanley Chin, director of portfolio management for Asia at Henderson Global investors. Speaking at the company's recent annual summit on property, Chin credited the Chinese government with creating a property market was "the most attractive in the region".

A report published in April by McKinsey claimed India's urban population would increase from 340m in 2008 to 590m by 2030. That will create "gridlock and urban decay" without US$1.2trn in infrastructure spending over 20 years.

Professionally managed infrastructure and real estate have emerged pretty much simultaneously in India. Hirco's townships, for example, provide their own: infrastructure sizing is done for the township - but it is scaled up as the apartments are sold off. "We had to learn to run a hospital. We had to learn to run a supermarket. We had to learn to run a school. There was no one else to outsource it to," says Aniruddha. "Increasingly that option is opening up. Equally, Hirco could package up its management of five hospitals in five townships and spin it off as a core competence."

If China doesn't need overseas cash for infrastructure, the cash is all India wants - that, and skills towards its domestic capacity-building. "The real estate market has a lot of foreign participation but it's mainly financial, rather than managerial," says Aniruddha. For long-term investors, and investors in the long term, this could be problematic. Large European pension funds are unlikely to be satisfied with joint ventures in which they have very little operational say about how their assets are managed.

With the advantage of local familiarity, Indian investors are effectively pre-empting their foreign counterparts. First, they have developed domestic capability. (Aniruddha points to five successfully privatised Indian airports, with advice from Frankfurt.)
Second, Indian investors can access rupee funding so they don't have to worry about the exchange rate. Third, and crucially, they are better at assessing local risks.

"They view certain risks differently than foreign companies," says Aniruddha. In the process of getting approvals in dealing with local communities, Indian investors are more likely to have the experience, the people, and the language skills to do it. "Some things foreign companies would consider risks Indian companies might not see as risks - or they'd have ways of mitigating them," he adds. ("They know who to bribe," says a UK private equity investor.)

It isn't necessarily that the risks of Indian property market have grown bigger - it's just that now western investors know what risk is, according to Sriniwasan. When the market opened up to institutional investors in 2003-05, "they didn't know the meaning of the word risk", he says. "Over the past two years, most of them have gone away. The risk-return profile will eventually bring them back but that could be years away."

A switch of US foreign policy affection away from China, such as it was, towards India is not unthinkable. Michael Witt, a professor of Asian business at INSEAD, the French business school, offers the "far-fetched" possibility that India will pull ahead of China as the latter comes into conflict with the US. In short, the recent brinkmanship over China's exchange rate - provoking Goldman Sachs head of economics Jim O'Neill publically to wish "Washington could shut up for five minutes" - presages things to come.

In his analysis of China and India's long-term prospects, Witt suggests that the dragon and the elephant will be replaced, over time, by the tortoise and the hare as symbols of the two powerhouses. The challenge to China's economic development comes not from stalled per capita income growth but from a lack of necessary institutions and operational norms. "It is hard to predict which of them, if any, will succeed in scaling this wall of institutions," he says.

In the meantime, the question is not only whether but how they will come back. Among the factors that brought investors to India and China was the promise of non-correlation. William Fong, manager of the Baring China Growth Fund, acknowledges that the European debt situation is putting pressure on Chinese exports, but notes the government's switch from infrastructure spending to domestic consumption as a growth stimulus.

Arguably, this counter cyclicality is already disappearing. Although property in tier two and three cities with growth driven by domestic demand are likely to remain uncorrelated, Aberdeen estimates that over the next decade prime property in tier-one cities will synchronise.

Where there has been investment, it has been largely via joint ventures or funds - and Aberdeen claims indirect investment is still the only viable option for any but the largest investors. But funds are not necessarily what investors are after.

"There is a Dutch saying that goes: never disturb a brooding chicken. When it comes to new regions, managers at this point are looking at how to proceed," says Richard van Ovost, director of international real estate at a MN Services, which manages the portfolios of the €34.4bn Pensioenfonds Metaal en Techniek (PMT) and the €24bn Pensioenfonds van de Metalektro (PME).

"In these times, we're no longer interested in products that are already completed. We don't want to be reliant on a [general partner - fund manager] - we want to diversify our risk. And we don't want to be investing with investors where the decisions are made on another level - I don't want to be scratching my ear, waiting to see what happens next."

Even the largest investors are rethinking their emerging market exposure - at least in the short term. "Investing in India hasn't come up much in real estate discussions with the board," says Clark McKinley, a spokesman for the $213bn (€160bn) CalPERS scheme.

"Everyone is saying you don't want to put too much in developed markets and that there are more opportunities for growth in emerging markets. But we're not in a great position to be talking about going out of the box at this point. We're still wringing leverage from the portfolio."
 

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