scorecardresearchHigh commodity prices are putting a strain on real estate developers
The construction industry, which was recovering after the outbreak of COVID-19, will soon come to a standstill as the anticipated increase in fuel cost will further raise the cost of construction

High commodity prices are putting a strain on real estate developers

Updated: 14 Mar 2022, 01:08 PM IST
TL;DR.
The construction industry has to bear the brunt of the increase in steel and aluminium price. With steel prices up by 65% and aluminium and copper prices by 30% in the country in the last 18 months

Average house prices were expected to rise 7.0 percent next year and in 2024, driven in part by rising input costs for new homes as oil prices rose further as the Russia-Ukraine crisis worsened.

According to a Reuters poll of property analysts, Indian house prices will rise faster this year and next than predicted just three months ago, aided by the country's economic recovery from the pandemic.

Average house prices rose only 2.5% last year, according to Reuters calculations based on the Reserve Bank of India's House Price Index. That compares with double-digit gains in nearly every other property market.

Input costs have risen

Real estate developers are concerned about the significant rise in costs of critical raw materials such as steel and cement, as they are unable to pass on cost increases to clients due to RERA restrictions. For fear of losing clients, they are likewise avoiding passing on cost hikes.

Metal prices have been soaring since the invasion of Ukraine by Russia on February 24 and the economic sanctions slapped against the latter by the US and European countries.

Russia is a big producer of steel, aluminium and nickel, besides oil, and supply disruptions have caused prices of these commodities to surge.

Global steel prices have risen over 20% in a week while aluminium prices are up by 40% this year. Nickel prices are at an all-time high of over $48,000 per tonne on the London Metal Exchange, up by over 100% since January. Copper and zinc prices too have gone up.

The construction industry has to bear the brunt of the increase in steel and aluminium price. With steel prices up by 65% and aluminium and copper prices by 30% in the country in the last 18 months, the cost of construction has gone up, said Builders Association of India vice president Neerav Parmar.

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%.

According to Muhammed Noorsha, managing director of steel manufacturer Kalliyath Group, the price of thermo mechanically treated (TMT) bars used in the construction industry has gone up by 20,000 per tonne to around 80,000 tonne now.

“The construction industry, which was recovering after the outbreak of COVID-19, will soon come to a standstill as the anticipated increase in fuel cost will further raise the cost of construction,’’ he said.

"In just two weeks, Brent oil prices have risen 29 per cent. A continuous increase in crude will push up the domestic fuel prices. This will have a bearing on the transportation costs that account for up to 20 per cent of the total construction costs," said Ramesh Nair, CEO, India & Managing Director, Market Development, Asia at realty consultant Colliers.

As per reports, cement companies have hiked prices by 5-12 rupees per 50-kg bag in Delhi, Rajasthan, Uttar Pradesh, and Haryana, due to higher input costs. "The combined impact of this surge in input costs is likely to escalate cost of construction and thus impact pricing in the real estate sector."

Overall, the increase in raw material costs can lead to price escalation, especially for under-construction projects and thereby could dent sentiments in the market at a time when the residential sector has been seeing a revival in demand across the segments.

"Moreover, in the absence of strong incentives in the recent Union Budget 2022-23 for developers, they may need to pass on the likely hike in raw material costs to the end-users. Overall, there could be a cautious sentiment amongst homebuyers until prices settle."

Even before the war started and the pandemic was ongoing, prices of raw materials like steel, cement saw significant upward pressure. "Ever since the war has started, the prices of raw materials like aluminium, steel/TMT bars have shot up by around 25-30 per cent.

This is a major increase in cost for developers and will have an adverse impact on the real estate sector," said Anuj Puri, Chairman of realty consultant Anarock.

In addition, he sees petrol prices rising at a double-digit pace in the coming days thereby putting inflationary pressure on the economy at large. "This will eventually compel RBI to increase repo rates, invariably leading to an increase in the home loan interest rates. 

This will thus end the present lowest-best low-interest rates regime. All in all, it could be a double whammy for homebuyers," Puri added.

Notably, FY22 has been a fairly good year for the realty sector so far.

Established residential realtors sold 34,000 crore of inventory in the first nine months of the current fiscal ending March 31, which is equivalent to the entire sales reported in FY21, rating agency CRISIL said.

Improved affordability and preference for larger homes owing to a surge in remote working driven by the Covid-19 pandemic have fuelled this boom.

Steel and aluminium exports benefit

Steel and aluminium manufacturers stand to gain through higher exports because domestic prices are still lower than global prices.

Russia and Ukraine are big exporters of steel to Europe and other countries, but that supply has been disrupted by the conflict.

“There is a shortage of 3-3.5 million tonnes of steel a month in Europe and Middle East and North Africa (MENA) countries which we hope to fill,” said V R Sharma, managing director of Jindal Steel & Power Ltd.

While steel prices are around $1,200 a tonne in Europe, Indian prices are around $900-950 a tonne.

“So, there is a net advantage of $200 to 250 per tonne for us,’’ he said.

This could spur steel exports which have been looking up since last year. Steel exports from India rose 29% to 10.78 million tonnes in 2020-21.

In the current financial year, in the April-November period, shipments rose by 24% year-on-year to 9.5 million tonnes, according to industry estimates.

Sharma said nickel substitutes such as vanadium, niobium, titanium and manganese can be used in carbon steel production, which make up the bulk of steel output in the country, to offset the runaway increase in the price of nickel.

“This may not be possible for stainless steel manufacturers who require a higher ratio of nickel. It is time they shifted to nickel-free stainless steel, popularised by Japanese company JFE,’’ he said. JFE Steel Corp. is one of Japan’s biggest steelmakers.

Russia’s absence in the aluminium market will also favour India. “Russia’s export of aluminium to Europe and the US has been hit. This has opened these markets for India,” said Harsha Shetty, chief marketing officer of Vedanta Ltd.

He expects global aluminium prices, currently around $ 3700 per tonne, to cross $ 4,000 in the coming days. “It will definitely impact the cost of execution of projects.

But India will have a higher GDP as all the natural resources will have a higher value. This and the higher export value of metals will compensate for the increased cost and surge in the oil import bill,” Shetty said.

How commodities affect stock prices?
How commodities affect stock prices?