With the cost of construction material such as cement and steel going through the roof in the aftermath of Russia’s invasion of Ukraine and lockdowns imposed in China, several real estate developers have increased residential prices with effect from April. These rising costs will hurt developers especially in the affordable and mid-market segments who operate on thin margins and play the volumes game.
The cost of construction can rise by 8-9 percent more by December 2022, real estate experts said. Inflation measured by the wholesale price index and construction material costs are increasing at a double-digit pace.
Have all developers been impacted by rising construction costs and increased prices?
Realtors say a hike in housing prices depends on several factors. It depends on the stage of construction a project is in. If it is an under-construction project where the structure is not yet ready, the impact of the rise in prices of steel and cement would be higher. If the tower is in a finishing stage, then the impact of increase in prices on tiles, copper and so on would be greater.
“Till date there has been an impact of almost Rs 500 to Rs 800 per sq. ft on the unit price on account of all these factors,” said Amit Modi, president CREDAI (Western UP) and director, County Group, adding it’s not only about the cost of construction, it’s also about decisions with regard to procuring raw materials slowing down. CREDAI is the Confederation of Real Estate Developers' Associations of India.
“We have now to negotiate with vendors at every stage and that has delayed the decision making process,” Modi said.
Developers also say a buyer who has a budget of Rs 40-45 lakh will try and negotiate hard to drive a good bargain because the Rs 5 lakh increase on account of the rise in commodity prices will hit him the harder compared to a buyer purchasing a Rs 3 crore unit.
“A unit priced Rs 10,000 per sq and above is still easier to sell as one can sweeten the deal by providing more amenities to the buyer who will comply. It’s not the same for buyers whose budget is restricted to Rs 40 to Rs 45 lakh,” said a builder.
According to real estate experts in Mumbai, several developers are going slow in increasing prices because they have the resilience to absorb the hike in costs for the time being due to the gains they on the stamp duty cut last year. If the Ukraine-Russia crisis persists longer, the situation may change.
Some developers have already increased prices by 6-8 percent in cities across the country. Besides, increasing prices, builders are considering slowing down the pace of construction to handle input cost pressures, said Harsh Vardhan Patodia, president, of CREDAI (National).
Real estate prices have increased 5-8 percent due to a rise in the cost of construction, and rates are expected to rise further by 5-7 percent, taking the total increase to 10-15 percent across India, he said.
“The decision of a builder to increase prices depends on the appetite and scale. A small developer may not be in a position to hike prices because his volumes may be less. There are several factors at play and these include the ticket size, the demand and supply dynamics in a micro market, the stage at which the inventory is in, the location etc.,” explained Ritesh Mehta, head of residential property sales at property consultant JLL.
In some markets, it may not be possible to increase prices. For example, if a micromarket commands a price of 20,000 per sq ft and there are primarily large unit sizes of 3,000 sq ft available for which there is not much demand, it may not be possible for a builder to increase prices, he said.
It, therefore, boils down to the configuration and demand in the market, the builder’s financial wherewithal and so on, he added.
The development cost of projects has increased by double digits due to the rise in prices of copper and aluminium besides cement and oil in the last six months. There has also been the impact of increasing labour costs, said Anckur Srivasttava of GenReal Advisers.
Anyone planning to construct a house would earlier work with a budget of Rs 50 lakh in mind; the person would now have to arrange not Rs 55 lakh but Rs 65 lakh, an additional contingency amount of Rs 10 lakh, keeping in mind the construction plan for the next three years because commodity prices are bound to increase.
According to CREDAI, the price of steel has gone up by 40-45 percent; cement by 35-40 percent and that the overall cost of construction by 35-40 percent. Prices too have increased by 10-15 percent which amounts to an increase of around Rs 700-800 per sq ft.
Having said that, no one is stopping construction because that is not a solution. “We are governed by RERA rules and in the current scenario there is no clause for price escalation in RERA,” said Gaurav Gupta of SG Estates and joint secretary, CREDAI (NCR). RERA is the Real Estate Regulatory Authority.
“We are currently witnessing an extraordinary situation wherein the construction cost has increased beyond 30 percent and we are of the opinion that RERA needs to be amended. A basic cost index should be made part of each agreement so that in the event of material prices increasing beyond 10 percent, the developer should be permitted to charge the increased cost to the customer,” he said.
For the time being, several developers are absorbing the price rises, especially on unsold inventory, but if this situation persists, they may not be in position to hand over the project, especially if it becomes unviable, he added.Will demand for smaller units return on account of rising construction costs?
“If prices increase again, the demand for 2BHK may return as price of a basic 2BHK may go up from Rs 50 lakh house to Rs 60 lakh and that worth Rs 60 lakh may cost Rs 70 lakh, impacting affordability. In the long run, new launches may not get impacted but the configuration of units certainly will,” he added.
Also, in the short term, the first casualty will be affordable housing; the selling price in this segment is capped but builder will still have to pay for the increase in construction material costs.
How can the situation be salvaged?
Experts say that even if the war were to stop, inflationary pressure on raw materials will continue. “Don’t forget that the war-ravaged Ukraine would have to be rebuilt and that would require huge amounts of steel and cement. This means that the pressure on cement and steel prices will persist even later,” said one expert.
Realtors say that the situation can be salvaged if the Goods and Services Tax (GST) on cement, which is 28 percent, is brought down to 18 percent.
“This may help in better absorption of increased prices. Also, a commodity regulator should be set up to keep a check on prices of steel, cement and raw materials just as the telecom regulator. The price of cement was Rs 285 per bag six months ago and the current price is Rs 390 per bag (OPC whole sale rate). Something needs to be done about it,” added Gupta.
Brokers in the National Capital Region (NCR) told Moneycontrol that units that were retailing at Rs 4,800 per sq ft in February are now being sold for Rs 5,450 per sq ft and those in the range of Rs 8,000 per sq ft at Rs 9,000 per sq ft, clearly showing that it is the high end which will witness higher price increases.Rising costs and affordable housing – This is where it hurts the mostAsk developers who have all along focused on affordable housing units priced below Rs 45 lakh and they would tell you that units for which prices are capped will experience the maximum pain.
“The impact on affordable housing units whose prices are capped at Rs 4,200 per sq ft is where maximum pain is being felt. Right now the impact is bearable as we have taken into account contingency provisions but going forward, any further hike in commodity prices will make affordable units unviable,” said Pradeep Aggarwal, chairman, Signature Global.
Having said that, if one were to consider the response to the call for applications for affordable housing projects by the Haryana government, the response was negligible, which means that fewer builders are coming forward to focus on affordable housing as it has become an expensive proposition.
In such a scenario, the government should consider increasing the density limit and prices for affordable housing units should be made more dynamic, he added.
Increase in commodity prices a global issue
Post COVID-19, even finishing material costs have been impacted as lockdowns have disrupted supplies from China, which is the factory to the world.
“These disruptions have not helped. Developers primarily sourced tiles, electric items, chillers etc. from China and with that supply being restricted, finishing costs have also gone up phenomenally. With regard to the Russia-Ukraine war, the impact on steel prices is a global issue whose repercussions are being felt in the Indian market and considering the fact that huge amount of steel and cement would be required to rebuild Ukraine, the pressure on requirement of steel and cement is not going down any time soon,” said Prachish Vasudeva, managing director and lead – real estate & construction, Alvarez & Marsal.
So, what are the strategies that developers may adopt in such a scenario?
Luxury projects may help salvage the situation to some extent as construction costs are a relatively smaller component of the overall sale price. Also, the unsold luxury inventory can be sold by developers at an increased price of Rs 1,000 to Rs 1,500 per sq ft thus fully absorbing the construction price increase.
This is also a good opportunity for developers to pick up stalled projects where the structure is almost complete.
“Developers can start looking at such projects and pick up good bargains. The additional FSI (floor space index) and the location (some of these being located at strategic locations) can help mitigate losses on account of increase in commodity prices,” Vasudeva said.
There are also opportunities for homebuyers to scout for homes in their budget. “Those thinking of buying real estate should think of expediting their decision as prices will rise by 10-15 percent in the short to medium term. Interest rates may also inch up as inflation kicks in,” he added.
As for launches, a robust demand pipeline exists for the next six to eight months but once prices increase and so do interest rates on housing loans, developers may decide to go slow in case demand is hit after about three quarters, he said.
Vasudeva also said markets in the South will behave differently from those in the North. Bengaluru may be the least impacted market as it is led primarily by end-user demand unlike NCR, which faces perception issues and has a huge amount of supply that still needs to be sold.“After three quarters, the drop in demand will be least in Bengaluru, higher in NCR, moderate in Hyderabad and MMR (Mumbai metropolitan region). If housing prices rise by 10%, affordability will be dented, and buyers will start tempering their decisions. Inventory overhang will be the least in Bengaluru,” he added.