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If steel, cement and brick prices continue to soar, developers will be forced to pass the increase on to buyers

If steel, cement and brick prices continue to soar, developers will be forced to pass the increase on to buyers

Commodity prices are rising, and that’s bad news for Indian real estate as the sector makes a comeback after the pandemic. Mortgage rates are at historic lows and there is significant pent-up demand in the market, which has put the sector on solid footing. But all of that is gradually changing as the world returns to normal.

In this scenario, rising commodity prices such as cement, bricks, steel, etc. should entail an additional cost for promoters. That could ease the overall growth juggernaut the industry has been experiencing for the past few months. Soaring cement prices will have a negative impact on the rapidly recovering real estate market.

In March 2022, cement prices were around ₹395 per 50 kg, increasing by around 11% on a yearly basis. In April, the price per bag spiked further by around ₹25-30 per bag, putting pressure on property developers.

In addition to the growing demand for cement, rising input costs such as coal and crude prices are also affecting cement prices. Given that the upward trend in coal prices will continue for some time to come, the challenges for developers aren’t going to dissipate anytime soon.

As with cement, steel prices have also steadily increased. Most major steel producers have raised prices in recent quarters. In April, the price of one ton of Hot Rolled Coil (HRC) reached around ₹76,000-79,000. This jump in steel prices is attributed to the increase in the cost of iron ore, crude oil and cooking coal.

Industry insiders believe that the accelerated growth in the price of steel will continue over the next two to three months. The Russian-Ukrainian war also changed the world price of energy.

Apart from cement and steel, the price of other crucial components is also increasing. The cost of clay bricks sold in April 2021 has increased from ₹6-7 each to ₹11-12 per brick. Although it has since corrected, an increase in international coal prices will continue to weigh on brick prices. Currently, brick prices range between ₹6-10 per brick. Upward trends are also visible in other categories such as sand, concrete mix and coarse aggregate.

In a fix

Developers with good cash flow may not immediately raise property prices. However, even they will not be able to offer additional discounts and offers.

After the pandemic, Indian real estate is indeed booming. In such a favorable market, the developers would not wish to increase the price. However, if the cost of raw materials continues to rise, they will have no choice but to pass on the higher prices to end users. Developers are already reeling from labor shortages and cash shortages. Another rise in commodity prices will be the last thing they want to face. Buyers who have been thinking about investing in the sector for a long time may want to make the most of the current situation. Real estate would only be more demanding.

something to look for

On the bright side of all this, the impact of the possible increase in the price of raw materials on the whole industry in certain regions will be bearable. The demand for real estate will continue to boom in Tier 1 and Tier 2 cities in India, which will result in an overall increase in revenue from real estate business in India.

The lockdown has taught people the importance of buying a home and that only increases the demand for housing. India’s huge infrastructure pipeline is also giving a boost to the real estate sector. A bull market will definitely overtake this difficult trend.

The author is the founder of SpaceMantra.

what can happen

Pratik Kataria, Director, Sainath Developers, and Chairman, NextGen Committee, NAREDCO Maharashtra, says, “Key commodities have grown by around 12% to 15% over the past two years. When the escalation of these raw materials exceeds a certain parameter, it certainly affects the feasibility of the project in addition to affecting the cash projections of the project. In addition, these factors lead to significant delays, which in turn affect the promoter’s repayment schedule to the banks, if the project is mortgaged. The implications of these delays lead to a vicious cycle, which the developer must break either by selling inventory at a discounted rate or by strategically reducing the bottom line of the project.

Vivek Rathi, Research Director, Knight Frank, India, says: “Over the past few years, the general level of inflation has increased. This has been continuously reflected in rising prices for steel, cement, bricks and labour. Now, this comes with rising project construction costs. But consumers’ resolve to invest in real estate should remain strong.

The author is the founder of SpaceMantra.