Real estate developers experienced a strong recovery during the January-March quarter. However, the second wave of COVID-19 and rising raw material costs have put them in a catch-22 situation.
Demand is expected to be reduced in the April-June quarter due to the surge in coronavirus infections and lockdowns imposed in various states. Typically, developers run deals and promotions to appeal to consumers when sales are slow. But now there is also a concern about the rising prices of cement, iron and steel.
For example, the price of hot-rolled coils (HRC) in the domestic market averaged Rs 63,633 per tonne in May, up 9% month-on-month and 75% from a year ago. one year, according to CARE Ratings. Steel prices have jumped in recent months as global demand has increased even as supply remains tight. Iron ore prices have also more than doubled year over year, reaching $ 230 per tonne in recent weeks.
Elsewhere, rising petroleum coke, coal, and fuel costs as well as freight rates have driven up prices for cement, which is another key raw material for real estate companies. According to JM Financial Institutional Securities, all Indian cement prices in April rose 6 percent on average quarter over quarter. In the eastern region of India, cement prices jumped nearly 21% over the same period.
The developers say the prices of plastics, polymers and resins used in things like piping and insulation have also increased. This rise in commodity prices will inevitably have an impact on companies’ bottom line.
“Over the past three months, iron prices have increased by Rs 20,000 per tonne, which is an increase of almost 50%. Apart from this, the prices of copper and aluminum have also increased, which has had an impact on the cost of construction, ”said Ashok Mohanani, chairman of Naredco (National Council for Real Estate Development), Maharashtra.
This rise in commodity prices will “put the brakes on the recovery of the real estate sector” at a time when there is already pressure from the second wave of the pandemic and restrictions in the states, added Mohanani.
The developers say they might not be able to cut prices or offer more promotions due to the unprecedented rise in commodity prices, although feelings remain muted due to the pandemic. On the contrary, prices could only start to rise in a few quarters if the COVID-19 crisis is brought under control, some add.
“The current temporary slowdown in housing demand due to the second wave has raised expectations for a price correction. The reality is that developers will eventually be forced to raise house prices if the current upward inflationary trends continue. While demand may be low, operating costs for developers have already increased significantly, ”said Anil Pharande, President and CEO of Pharande Spaces.
The shortage and rising prices of raw materials will not only impact the cost of construction but will also increase lead times, according to Bhushan Nemlekar, director of Sumit Woods.