Soaring prices for key raw materials like steel and cement have worried property developers, who are struggling to pass on rising costs to customers as they are bound by RERA guidelines. They also don’t pass on cost increases for fear of losing customers.
However, homebuyers should prepare for a 5-8% price increase in 2022 due to inflationary trends in construction raw materials and overall operational costs for developers. Industry players told FE that despite sharp increases in input prices, developers are aware that high property prices will impact demand momentum.
A recent CII-ANAROCK survey found that a price increase of less than 10% would have a moderate to low impact, while an increase of more than 10% would have a profound impact on buyer sentiment. However, if commodity price inflation continues unabated, developers might consider raising the price of new launches by 10-15%.
Niranjan Hiranandani, Managing Director of the Hiranandani Group, told FE: “As a result of geopolitical tensions, market uncertainties, supply chain disruption and the record cost of crude oil, prices for new launches on markets are expected to increase by 10 to 15%.% varying according to geographies, size and scale of projects.”
He said the sharp rise in raw material prices was impacting profit margins with disruptions to logistics, timely deliveries and the absorption of rising costs.
Additionally, the Property (Regulation and Development) Act 2016 states that if developers have sold 50% of their housing stock at a certain price, they cannot charge an escalation. This makes it difficult for developers to pass on cost increases. Nor can they slow down construction, as failure to meet delivery deadlines is penalized by RERA.
Getambar Anand, chairman and chief executive of ATS Group, said the problem was not with new sales, but with rising commodity inflation. “Today, steel is at Rs 80,000 a ton and it is not going to go down anytime soon. Cement is at Rs 400 a bag, and if you have sold 50% of your stock at price X, you cannot not charge an escalation according to RERA. This is where the challenge comes in, because what you have sold, you must deliver. So if the cost of your inputs increases by 30% and your inventory is sold, there is has a problem because the math is completely changing,” he said.
The recent rise in crude oil prices is increasing the costs of key materials such as steel, cement, aluminum, PVC and tiles, which have become 30-60% more expensive over the past two years due to global supply chain constraints.
Harsh Vardhan Patodia, president of CREDAI, said no amount of planning can take into account such an unprecedented increase. “Developers are no longer able to absorb the price spike and will turn to financially unviable projects if the situation is not brought under control immediately,” he said.
Developers are asking to allow an escalation clause in the buyer-seller agreement under RERA and the streamlining of GST rates for certain building materials like steel and cement.
While house prices have remained stagnant for the past five years, analysts believe prices could rise in the mid-single digits over the next two to three years as inventory levels stabilize and the Indian residential real estate market showed clear signs of consolidation.
“Although we believe in a bullish cycle for the residential sector in India, we are of the view that a sustained single-digit selling price CAGR is beneficial for all stakeholders rather than a super cycle similar to FY03- 07 where residential prices rose 3-4x in a short time,” said a recent report from ICICI Securities.