Commodity Inflation Hits Real Estate Sector
Rising raw material prices have worsened the problems for the real estate sector amid the pandemic-driven disruption.
Steel and cement have turned costlier in the past year. Developers said that has pushed up costs by 3-8%, impacting the sector that generates the highest level of employment and is considered one of the indirect benchmarks for the economy.
Developers may not be able to pass these on as the sector is still reeling under the pandemic’s disruption. While the top cities did show a pick-up prior to the second wave, that was largely due to incentives. And smaller cities are yet to see signs of a rebound.
To be sure, companies across sectors have cited rising input prices as a concern. And going by management commentary after the fourth-quarter earnings, most cut costs to manage commodity inflation.
Here’s how input prices have risen for the real estate sector.
Prices of hot and cold rolled coils, the benchmark for steel, have nearly doubled since 2020 as the economy recovered from the last year’s national lockdown and the alloy turned costlier globally.
Wire rod prices have also doubled during the period, while rebar has turned costlier by 57%, according to a Motilal Oswal report.
Domestic steel supplies remained tight due to higher export bookings, Motilal Oswal said. As domestic prices trade at a discount to import prices, local mills have raised prices Rs 3,000-5,000 a tonne in June alone.
Hot-rolled coil is at a 10% discount to import parity compared to 15-20% in May last year.
Wire rod and rebar TMT prices have surged by more than half during the period to Rs 46,000 and Rs 47,500 per tonne in June.
According to Motilal Oswal, while the cement demand has been impacted by the lockdown, average prices held steady in May. They are up 6% so far in the first quarter sequentially, led by increases in east, south, and Maharashtra.
- Prices in East, after rising March and April, prices have been stable in May at Rs 328 for a 50-kilhram bag.
- In South, cement prices continued 4% month-on-month in May to Rs 420 a bag
- In the western region, the prices are stable month-on-month and rose 5% over the preious quarter.
- North and Central India saw non-trade prices fall by Rs 20-30 to hover around Rs 377 per bag. This has again increased the gap with trade prices to Rs 60–70 a bag versus Rs 40–50 as of March.
Harsh Vardhan Patodia, president at Confederation of Real Estate Developers’ Associations of India, said cement prices are up 20-25% over the levels before the second Covid wave struck.
High cement prices make affordable housing unviable, Credai said in a statement. It suggested that the goods and services tax on cement be reduced from 28% to 18%.
BloombergQuint awaits responses to queries emailed to the Cement Manufacturers Association, and the Indian Steel Association.
Construction cost has risen 3-5% because of an upsurge in the prices of steel, cement and other raw materials, Patodia, said in an emailed response. Affordable housing may surely take a hit if this situation persists since developers are working on very thin margins, he said.
Sharad Mittal, chief executive officer at Motilal Oswal Real Estate estimated the increase in construction cost at 5-8% depending on project configuration.
In absolute terms, the cost has risen by Rs 200-250 per square feet, said Anand Gupta, chairperson of Housing and RERA Committee of Builders Association of India. That means 500 sqft apartment will see a cost escalation of Rs 1-1.25 lakh.
Developers Face Catch-22
Prices of ready or near-completion housing projects have fallen during the past year even as inventory reduced because of incentives like stamp duty cut in Maharashtra. Developers, however, won’t risk demand by increasing prices.
“Rising cement and steel cost is definitely a pain point for many builders,” said Pankaj Kapoor, Founder and Managing Director, Liases Foras. “But the question is whether they will be able to pass on this cost to the consumers. There was a recovery after the first wave and now it has halted again. Builders therefore have very limited scope to increase the prices.”
Mittal agrees. “Unlike some of the other products wherein part of it or fully can be passed on to the consumers, unfortunately the cycle that we are coming out of in the residential real estate, it is difficult to pass on to the consumer.”
According to Niranjan Hiranandani, national president at Naredco, it is no longer about profitability but project viability. “New launches are being impacted; and in turn, this will result in supply shortages in the future. The Covid-19 pandemic as also the lockdowns have increased the ‘difficulty quotient’ for real estate.”
There’s another worry. Rising prices can lead to disputes between builders and contractors, Gupta said. “The projects can get delayed, and this can also have an impact on the financial institutions.”