How Increase in the cost of Raw Materials will Impact Real Estate Prices?

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By Nidhi Aggarwal

Raw material prices are jumping upwards, and this might be bad news for Indian real estate. Indian real estate has made a remarkable comeback after a period of continued floundering in the face of the pandemic. Home loan rates are at their all-time low and there is ample pent-up demand in the market, which has put the industry on a strong footing.

However, the rise in prices of raw materials such as cement, bricks, steel, etc. might result in cost overrun for developers. If the growth continues, the developers will be forced to pass on a part of the rise to the home buyers. This might soften the overall growth juggernaut that the industry is witnessing in the months.

The rise in cement prices

The surge in cement prices will entail an adverse impact on the rapidly recovering Indian real estate. In March 2022, cement prices reach around INR 395 / 50 kg, rising by around 11% on a yearly basis. In April, the price per bag further spiraled by around INR 25-30 / bag, thereby pressurising real estate developers.

In addition to the rising demand for cement, the increased input costs such as coal and crude prices are affecting cement prices. Given the uptrend in coal prices will continue for some more time, the challenges for developers are not going to dissipate soon.

Steady growth in Steel Prices

Just like the cement prices, cement prices have been steadily rising. Most of the major steel producers have increased steel prices in recent quarters. In April, the price of a ton of Hot Rolled Coil (HRC) reached around INR 76,000- 79,000/ tonnes. The jump in steel prices has been rooted in the increase in the prices of iron ores, crude, and coking coal.

Industry insiders believe that the accelerated growth in steel price will continue to unfold for another 2-3 months. Thereafter in case of de-escalation of the Russia-Ukraine war and attempts to curb the global energy price, a correction in price might be observed. However, till then the developer fraternity will have to face the heat of a price hike.

In addition to cement and steel, the price of other crucial components is also increasing. Cost of clay bricks picked last year in April, reaching INR 11-12/ brick from once INR 6-7/ brick. Although it has corrected thereafter, an increase in international coal prices will continue to weigh on the brick prices. Presently brick prices are in the range of INR 6-10/ brick.

Ascending tendencies are visible in other categories such as sand, concrete mix, coarse aggregates, etc.

The expected rise in Property Prices

After facing the whiplash from the pandemic, Indian real estate is soaring. Amidst such a favorable market, developers would not wish to raise the price. However if the cost of the raw materials will continue to be on an upswing, they will be left with no option but to pass on the price jump to the end users. Developers are already reeling under labor shortage and liquidity crunch. A further jump in raw material prices will be the last thing they will like to deal with.

Developers with good cash flow might not immediately increase the property prices and will try to absorb the jump. However, even such developers will be unable to give additional discounts and offers.

The Silver Lining

The silver lining is that the possible rise in raw material prices will have a limited impact on the overall industry. The demand for real estate will continue to thrive in Tier 1 and Tier 2 cities in India, translating into overall higher revenue for the real estate business in India.

The lockdown has taught people the importance of buying a home and this is pushing the demand upwards. India’s massive infrastructure pipeline (USD 1.4 trillion) is also giving a buying boost to the real estate sector. A bullish market will absorb growth in raw material prices.

Moreover, in a vast country like India, there is no dearth of suppliers with varied price ranges. This gives developers the privilege to choose the right vendors/ suppliers that can help them optimize their input cost to some extent.

(Authored by Nidhi Aggarwal, Founder, SpaceMantra)