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Can real estate developers afford to increase residential prices now?

Builders say they will have to raise prices as the cost of raw material has shot up, increasing construction costs. However, a price hike may have a chilling effect on sales of new units, which are still tepid


Real estate builders’ body Confederation of Real Estate Developers’ Association of India (CREDAI) has expressed concern over the sustained increase in price of raw materials, including cement and steel, and said that housing prices may increase by 10-15 percent to offset the increased cost of construction.

At a time when residential sales are still lower than pre-Covid-19 levels and there is a construction ban in Delhi-NCR due to high levels of pollution, can developers afford to increase housing prices?

Inventory overhang

According to some real estate experts, there are still around 11 lakh unsold residential units in the country, of which only 1 lakh are ready units. Considering that the two waves of Covid-19 have not led to a reduction in unsold inventory by half despite fewer launches and the reduction in construction activity, this inventory overhang is huge. Also, with pressure from lenders to improve cash flows by disposing of unsold inventory, builders may be forced to not increase prices, at least not immediately, they say.

Pankaj Kapoor of Liases Foras is of the view that currently, under-construction projects contribute 92 percent of the unsold inventory in the country, which is around 53 months of inventory. The 1 lakh ready-to-move-in units make up about 15 months of inventory.

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“Such an inventory overhang in under-construction projects suggests that builders do not have much scope to increase prices right now as this may impact demand adversely. The builder community has been talking of a price hike since the last six months but has not been able to do so because the inventory overhang is high. Even though there are healthy sales numbers getting reflected in the sales data, these are still at pre-pandemic levels,” he explains.

There is better traction in the resale market as these are ready-to-move-in units. However, the ready inventory with builders currently stands at only about 8 percent. The real estate market still depends on sale of under-construction properties.

Elastic market

“While some established developers may have the wherewithal to increase prices, the market currently is highly elastic to price rise, so much so, that if prices go up, there may be a dip in sales. Earlier, prices and sales would increase in tandem because it was a speculative market driven by investors but today it is an end-user market. Any increase in prices today may have a direct impact on affordability for the buyer and on sales. Considering that the real estate market recovery today is driven by concessions, stamp duty waivers and discounts, any increase in prices may adversely impact housing sales,” said Kapoor.

While some builders say that an increase in residential prices is imminent, others are of the view that a balanced approach should be taken so as not to make housing units unaffordable.

“Prices of raw material have gone haywire, including basic commodities such as cement and steel. The price of every single commodity, even doors and windows, is up. Inflation has caught up and the cost of construction has increased. There is no choice but to factor in the increase in pricing in the new offerings,” Irfan Razack, Chairman and Managing Director of Prestige Group, told Moneycontrol.

"As for properties that are ready, we may have to strike a balance and see at what price the unit can be sold. But for new projects, one may have to factor in the increase in costs," he said.

“A balance will have to be struck so as to ensure that there are positive cash flows and the project is completed in time. At the same time, we will have to keep an eye on costs so that the project does not become unaffordable,” he added.

“We have been consistently witnessing a sharp increase in raw material prices over the last one year and it does not seem that they will be decreasing or stabilising in the near future. Developers may not be able to absorb escalating costs and unfortunately may have to pass the burden on to homebuyers. CREDAI urges the Government and relevant Ministries to address this issue and tackle the price rise at the earliest,” said Harsh Vardhan Patodia, President, CREDAI National.

"Raw material costs like cement and steel have gone up significantly in the last few months. Given that most developers are operating on very thin margins in the present market conditions, there is huge pressure on pricing. We are evaluating our input cost. If need be, we will also have to increase the price," said Anubhav Jain, CEO, SilverGlades Group.

Have cement prices increased?

According to commodity experts Moneycontrol spoke to, backchannel checks have suggested a slight decrease (Rs 10 – Rs 15/bag) in cement prices, especially in the northern region, on account of the ban on construction due to high pollution levels.

In view of high pollution levels in Delhi, the city's Environment Minister Gopal Rai said on November 17 that his government had decided to extend the ban on construction and demolition activities till November 21.

There is a ban on construction activities in Haryana, too.

Commodity experts told Moneycontrol that the first hike in cement prices took place on November 1 and the second was to take place from November 16 onwards but was rolled back on account of softening of demand in the Northern region following the construction ban.

Once demand stabilises, prices may also improve, they said, adding that new prices for cement are generally announced in the first week and third week of every month.

They said that since September end, prices have increased by Rs 30-35 per bag and on November 16 prices were reduced by Rs 10-15 per bag. However, since the same suppliers are distributing cement in other markets, the rollback in the northern markets may create pressure on other markets too.

“To sustain market share they will try and reduce prices in other markets, too, and benchmark cement prices. However, this is a temporary phenomenon,” they said.

There was no response from Ambuja Cement and ACC.

According to an analysis by CARE Ratings in October, with seasonal demand picking up in October 2021, cement companies have hiked prices across regions in the range of Rs10-15 per bag to counter the adverse impact of elevated costs. With cost inflation having firmed up unabated and impacted all players, it is unlikely that the entire increase will be passed on.

For the month ending September 2021, the key cost constituents pet coke, international coal and diesel were up 20 percent,111 percent and 21 percent, respectively, from March 2021 levels. The combined impact of higher input costs on the production cost of cement is expected to be around Rs.275–290 per tonne. "While there is heightened focus on efficiency measures, we believe it would still be insufficient to fully offset the higher energy and freight costs," the CARE Ratings analysis had said.
Vandana Ramnani
first published: Nov 18, 2021 09:38 am

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