Moneycontrol Pro Panorama | Realty developers get a reality check

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Inflation has reached the real estate sector. There is a direct increase of approximately 20 percent in construction costs due to the increase in prices of construction materials, which has had a direct bearing on real estate prices.

Reports say real estate prices have increased 5-8 percent due to a rise in the cost of construction, and are expected to rise further by 5-7 per cent, taking the total rise to 10-15 percent across India, according to realtors’ apex body Credai.

Prices of cement have risen by more than Rs 100 a bag while steel prices have shot up from Rs 45,000 per metric tonne last year to Rs 89,000 per metric tonne currently.

Though Credai is hoping that steel prices will come down to around Rs 50,000 a tonne, demand for steel in India is likely to remain high, as pointed out here.

A large part of the rise was absorbed by developers as they did not want to slow the growth in the real estate sector. Pent-up demand, low interest rates and support in the form of incentives by various state governments resulted in higher demand from home buyers.

However, developers are now feeling the pressure of rising prices and need help from the government to curb prices.

A Credai survey found out that nearly 40 percent of real estate developers feel that they will not be able to deliver their projects if the government did not take immediate steps to provide relief to them from a sharp hike in prices of construction raw materials.

However, there is little the government can do to control prices that have globally gone out of control. The IMF in a report concluded that Russia’s war in Ukraine will severely impact global recovery and increase inflation that can cause grave risks to the financial system. It has revised its global growth projection for 2022 from 4.4 percent to 3.6 percent and for 2023 revised it from 3.8 percent to 3.6 percent.

For India, the IMF has lowered its growth projection from its January estimate of 9 percent for 2022 to 8.2 percentage. For 2023, growth projection is lowered to 6.9 percent as against 7.1 percent earlier. Despite the lower projections, the multilateral body seems to be more confident about the Indian economy than the RBI, as pointed out in this article.

On inflation, the IMF has projected 5.7 percent for advanced economies and 8.7 percent for emerging markets and developing economies.

Given the rise in oil prices and ferrous and non-ferrous metals prices globally on account of the Russia-Ukraine war and supply chain issues, it is unlikely that construction raw material prices are likely to come down anytime soon. In such a scenario, the biggest impact will be felt on the smaller unorganised players who will find it difficult to raise funds and absorb a sustained high level of prices. ​

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Shishir Kumar Asthana
Moneycontrol Pro