The sharp rise in prices of key raw material like steel and cement has worried real estate developers, who are finding it hard to pass on cost escalations to customers as they are bound by RERA guidelines. They are also not passing on increases in costs for fear of losing customers.
However, homebuyers should brace for a 5-8% price increase in 2022 due to inflationary trends in construction raw material and overall operational costs for developers. Industry players told FE that despite the steep input price increases, developers are cognisant of the fact that high property prices will impact the demand buoyancy.
A recent CII-ANAROCK survey found that an increase of under 10% in prices would have a moderate-to-low impact, while an increase of more than 10% would have profound repercussions on the buyer sentiment. However, if the commodity price inflation continues unabated, developers may look at increasing the price of new launches in the range of 10-15%.
Niranjan Hiranandani, managing director, Hiranandani Group, told FE, “In the wake of geopolitical tensions, market uncertainties, disruption in supply chain and record high crude oil cost, prices of new launches across the markets are estimated to be escalated by 10-15% varying on geographies, size and scale of the projects.”
He said the sharp rise in raw material prices is impacting profit margins with disruption in logistics, timely deliverables, and absorption of hiked cost.
Moreover, Real Estate (Regulation and Development) Act, 2016, says if developers have sold 50% of their housing stock at a certain price, they cannot charge an escalation. This is making it hard for developers to pass on the cost increases. They cannot slow down construction either, because missing delivery timelines is penalised under RERA.
Getambar Anand, chairman and managing director, ATS Group, said the problem is not with new sales, but the rising inflation in commodities. “Today, steel is at Rs 80,000 a tonne and it is not going to come down in a hurry. Cement is at Rs 400 a bag, and if you have sold 50% of your stock at price X, you cannot charge an escalation as per RERA. That is where the challenge comes in, because what you have sold you have to deliver. So, if your input cost is increasing by 30%, and if your stock is sold then there is a problem because the mathematics completely changes,” he said.
The recent rise in crude oil prices is adding to costs of key material like steel, cement, aluminium, PVC and tiles, which have become 30-60% costlier in the last two years due to global supply chain constraints.
Harsh Vardhan Patodia, president CREDAI, said no amount of planning can factor in such an unparalleled increase. “Developers are no longer able to absorb the spiralling prices and will be staring at financially unviable projects if the situation is not controlled immediately,” he said.
Developers are asking to allow an escalation clause in the buyer and seller agreement under RERA and rationalisation of GST rates for some construction materials like steel and cement.
While property prices have remained stagnant over the last five years, analysts believe prices may see a single-digit rise over the next two-three years annually as inventory levels have stabilised and the Indian residential real estate market has undergone clear signs of consolidation.
“While we are believers in an upcycle for the residential sector in India, we are of the view that a sustained single-digit sales price CAGR is beneficial for all stakeholders rather than a super cycle similar to FY03-07 where residential prices went up by 3-4x in a short period,” said a recent ICICI Securities report.
