Real estate developers saw a strong recovery in the January-March quarter. However, the second wave of COVID-19 and rising raw material costs have put them in a catch-22 kind of situation.
Demand is expected to be muted in the current April-June quarter due to the surge in coronavirus infections and lockdowns imposed in various states. Typically, developers launch offers and promotions to woo consumers when sales are slow. But, now there is also a concern over rising prices of cement, and iron and steel.
For instance, price of hot rolled coil (HRC) in the domestic market has averaged Rs 63,633 per tonne in May, up 9 per cent month-on-month and 75 per cent from a year ago, according to CARE Ratings. Steel prices have surged over the last several months as global demand has risen even as supply remains tight. Iron ore prices, too, have more than doubled year-on-year and hit $230 per tonne in recent weeks.
Elsewhere, rising petcoke, coal and fuel costs as well as freight rates have driven an increase in prices of cement, which is another key raw material for real estate companies. According to JM Financial Institutional Securities, all India cement prices in April were up 6 per cent on an average quarter-on-quarter. In the east India region, cement prices surged almost 21 per cent in the same period.
Developers say prices of plastics, polymers and resins used in things like piping and insulation have gone up, too. This rise in raw material prices is bound to have an impact on companies’ bottomline.
“In the last three months the iron prices have increased by Rs 20,000 per tonne, which is almost a 50 per cent increase. Apart from this, copper and aluminium prices have also increased which has impacted the construction cost,” pointed Ashok Mohanani, president of Naredco (National Real Estate Development Council), Maharashtra.
This rise in raw material prices will “put the brakes on the recovery of the real estate sector” at a time there is already a pressure of the second wave of the pandemic and the restrictions in states, added Mohanani.
Developers say they may be unable to reduce prices or offer promotions further due to the unprecedented raw material price increase, even though sentiments remain muted due to the pandemic. Rather, prices may only start going up in a few quarters if the COVID-19 crisis is controlled, add some.
“The current temporary slowdown in housing demand because of the second wave has got expectations going for a price correction. The reality is that developers will eventually be forced to increase property prices if the current rising inflationary trends continue. While, demand may be low, the operating costs for developers have already gone up hugely,” said Anil Pharande, chairman and MD of Pharande Spaces.
The shortage and the hike in the prices of raw materials will not only impact the construction cost but will also increase the lead time, according to Bhushan Nemlekar, director, Sumit Woods.
