After Russia launched an all-out invasion of Ukraine by land, air and sea, and the United States and Europe promised to retaliate against Moscow with the toughest sanctions possible, experts warned on Friday, February 25, that the unfolding conflict could spell a potential crisis for India's real estate sector.
The impact would be felt in the form of an increase in cost of building materials, including cement, on account of rising crude oil prices and a possible increase in borrowing costs, they said.
Experts said that in the event of a full-blown conflict, the cost of transportation will likely go up, and its effect would cascade through the supply chain. That may push up prices of raw materials further, increasing the cost of construction.
And to tame accelerating inflation, the Reserve Bank of India (RBI) may change its accommodative stance, which would have bearing on the home loan interest rates.
Oil prices have already surged past $100 per barrel, and stock markets have crashed globally. Oil prices have been rising over the last couple of months owing to concerns of disruptions in the global supply chain amid the emerging Ukrainian crisis.
Indian cement makers, who had already been reeling under the pressures of rising costs of raw material and energy, are bound to feel the impact, said Harshvardhan Patodia, president of the Confederation of Real Estate Developers' Associations of India (CREDAI).
“Eventually, the impact will trickle down into the real estate industry as well. While the industry has been resilient, the rise in prices of raw materials by 20-30% has forced developers to marginally increase the prices of projects. Industry forecasts indicate that prices will rise much more in the coming quarter and given the current crisis, the surge may be manifold,” he said.
Economists agreed with the assessment.
“If the Ukraine crisis deepens, then there may be a negative impact on the overall economy and the real estate sector, which is currently witnessing a growth trajectory,” economists said.
“With oil prices crossing the $100 a barrel mark, there may be an impact on the overall economy in terms of cost of manufacturing and supply chain. The price of factor inputs for real estate is likely to go up as a result and real estate developers, who are already operating on thin margins, may not have any option but to push up prices (supply side). On the demand side, due to inflationary pressure on the Indian economy, the RBI may have to change its stance, which may in future lead to an increase in the policy rate (repo rate) as well. If this happens, there is a likelihood of mortgage rates inching up,” they explained.
The impact will be felt on both demand and supply sides, which will not augur well for the real estate sector, they added.
Others hold the view that while the recent escalation of geopolitical tensions may inflame crude oil prices, keeping inflation elevated in the next few months, members of the RBI's Monetary Policy Committee (MPC) appear unlikely to choose to sacrifice growth to tame price pressure.“We continue to expect a status quo in April 2022, given the continuing dovish tone of the MPC minutes. However, policy normalization may need to commence thereafter, with a change in the stance to neutral in June 2022,” said Aditi Nayar, chief economist at ICRA Limited.