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Here's Why Real Estate Companies are Struggling Despite an Uptick in Demand

Here's Why Real Estate Companies are Struggling Despite an Uptick in Demand

With the cost of raw materials, labour and logistics skyrocketing, developers wrestle with rising real estate project costs and delays in new launches

Illustration: Nilanjan Das Illustration: Nilanjan Das

It is like sailing in the ocean. Once you are out in the water, you have to complete your journey. You cannot afford to return; neither can you abandon it. No matter what, you need to move forward.” This is how Deepak Kapoor, Director at Noida-based real estate major Gulshan Group and President of the Confederation of Real Estate Developers’ Associations of India (CREDAI), Western Uttar Pradesh chapter, describes the business of real estate construction. A veteran of various ups and downs of the real estate market over the years, and a firm believer in this apt metaphor, Kapoor says that once a developer has initiated construction of a project, seeing it through to completion is the only option available, irrespective of the circumstances. Determined as he is to complete his projects, the current market realities are certain to test his abilities in the coming months. With cost of key raw materials going through the roof and high fuel prices making logistics dearer, even seasoned realtors like Kapoor are feeling the heat now.

Since the pandemic began in March 2020, the costs of key raw materials such as steel, cement, copper and aluminium have risen. As construction activities picked up pace, the ongoing war in Ukraine caused massive disruptions to the global supply chain, further pushing up the prices of these commodities by up to 125 per cent in the past nine months. Its impact is evident. “The costs have gone up significantly and all our calculations on income and profits have gone for a toss,” says Kapoor. Since halting construction at ongoing projects is not an option he considers feasible, the realtor is now trying to cope with the new reality by sacrificing profits to ensure timely delivery of the under-construction projects.

Kapoor is not alone, though. From Mumbai’s Hiranandani Group and Bengaluru’s RMZ Corp to Delhi-based Signature Global and Raheja Developers, the heat of inflation is being felt by all the leading developers of the country.

According to Niranjan Hiranandani, Co-founder and Managing Director of Hiranandani Group and Vice Chairman of the self-regulatory industry body, National Real Estate Development Council (NAREDCO), the surge in prices of construction commodities has resulted in an overall increase in the cost of construction by 15 per cent for real estate developers. “The impact of -this ongoing inflation is now out in the open. Apart from construction materials, the steep rise in fuel prices is a matter of grave concern for everybody,” he says.

A ccording to aditya desai, Executive Director at JLL India, the soup that most realtors find themselves in today is a result of prolonged disruptions. “There have been three sets of price inflation that have taken place since March, 2020. While the first two were related to the two Covid-19 waves in 2020 and 2021, the third one—which is pinching more—is due to the war. Since the March 2020 quarter, the price of steel has gone up by 55-57 per cent, copper by 75-80 per cent, aluminium by 90-94 per cent, and PVC items by 80-90 per cent. But most importantly, it is the rise in fuel prices—45-50 per cent—that is hurting the most,” he says. Furthermore, in the aftermath of the Covid-19 pandemic, the cost of labour has also gone up by 10-15 per cent.

Hiranandani says the burden of increased cost is hurting everybody but its impact may be greater on the affordable housing sector as cost of construction material is higher in such projects.

Pradeep Aggarwal, Founder and Chairman of affordable housing major Signature Global and Chairman of the Assocham National Council on Real Estate, Housing and Urban Development, says the Covid-19-related disruptions were a matter of concern for the developers since prices were going up during 2020 and 2021. But the Russia-Ukraine war has further aggravated the situation. “In the past three months alone, cost of construction has jumped by 5-7 per cent. This is in addition to the 4-5 per cent rise that we witnessed in the previous six months. The only respite is the high demand for residential units that we are witnessing post-Covid-19. Thus, the price hikes that we have implemented so far have been absorbed by the consumers,” he says. For instance, Signature Global’s residential projects in Gurugram that were initially launched at a rate of Rs 4,750 per sq. ft was raised to Rs 5,500 per sq. ft from April 1—a 16 per cent hike. In spite of that, demand has not been affected, he claims.

Like the residential sector operators, the impact has also been felt by commercial property developers. According to K. Jayakumar, Senior Managing Director at RMZ Corp, who leads its commercial business segment, cost of construction has surged by 15-16 per cent since early 2020.

In the affordable housing space, passing on additional costs to homebuyers is not that easy, though. With a pre-decided cap on the rate by state authorities, developers are bound to deliver homes at the stipulated rate. Developers such as Signature Global, which primarily operate in the Haryana market, have got some respite from the state government. To offset the additional costs, Aggarwal of Signature Global says, the Haryana authorities’ move to add balcony area in calculating the floor size helped. The cap of Rs 4,000 per sq. ft on the affordable housing space was also raised to Rs 4,200 per sq. ft. Together, these two measures have led to a 7 per cent rise in prices of affordable homes in the state, and increased the price of a Rs 25-lakh unit to Rs 27.5 lakh. Further, the area that can be used for commercial development in an affordable housing project has also been increased to 8 per cent of the land from 4 per cent earlier.

These measures have neutralised the overall rise in the cost of affordable homes in Haryana. “In the residential homes segment, I feel the 10-15 per cent price hike that has already been affected has been absorbed by the market,” says Aggarwal. According to him, there is a positive sentiment prevalent in the residential real estate market after the pandemic due to a surge in demand from actual home occupiers and not just investors. It has become a major factor in helping the sector tide over the crises so far.

PAIN POINT: Realtors will have to absorb rising costs for projects that have already been sold but not completed.

According to a recent analysis by Housing.com, lack of demand in the sector since 2013 had kept the price of residential units stagnant. It was only in FY2021-22 that developers managed to increase prices amid better demand. “Since 2013, prices of residential units have increased at the fastest pace in the last financial year—growing by 7 per cent. Our analysis indicates an uptick of approximately Rs 400-500 per sq. ft in construction costs in the top eight cities. As the profit margins are thinning, developers have no option but to pass on this increase to the homebuyers. Several notable developers have increased their residential prices with effect from April. If the situation continues, the hike in property prices may impact the recovery rally of the sector for the coming quarters,” says Ankita Sood, Head of Research at Housing.com.

Experts like Desai of JLL say that while companies do plan for uncertainties and keep a buffer in their cost planning, the exorbitant rise—to the tune of 40-100 per cent—was beyond anybody’s estimate. However, the ongoing phenomenon has the potential to cut both ways—by impacting the supply of residential properties and its demand too—in the market. In the past two years, the affordable synergy that the market and the overall ecosystem have offered to the homebuyers has led to a significant surge in demand for homes. From record low home loan interest rates and reduced registration fees to stagnant home prices, fence-sitters have been greatly incentivised to take the leap. But with unsold inventory coming down gradually and new supplies getting delayed due to record high costs, eventually homes will become premium again.

“We normally factor in a 4-5 per cent rise in the cost of construction in any commercial project as a contingency. We had written our budget; after Covid-19 we had to renegotiate and rewrite our budget and reset our numbers. There is very little opportunity to do any value engineering now, as it may dilute the product,” says Jayakumar of RMZ. Amid challenges arising from the ongoing work-from-home culture, office absorption is subdued. Thus, the additional cost burden now feels heavier as rental income is falling short. “Some correction may happen in the coming years but currently it is in a very fluid state,” he says. Jayakumar is now bracing for a 70-80 per cent office occupancy rate starting from the July-September quarter, but it may still not be enough to meet the shortfall in income.

According to Nayan Raheja, Director at Delhi-based Raheja Developers, over the past several years, the number of active developers in the country’s second largest market—the National Capital Region—has come down significantly, impacting the overall supply. “So, currently the supply is low and the demand is high. We are making representations to the government to intervene as it is becoming unfeasible to run a business with such a high cost of raw materials. Anyway, affordability of the consumers is impacted due to the all-encompassing price hikes,” he says. The developer is currently implementing a 10 per cent hike in prices for new projects, while absorbing the additional costs for projects that are near completion. Raheja, who is closely monitoring the situation, says the demand is so far stable—thanks to a lack of sufficient supply.

While for the projects that have already been sold, realtors would have to absorb the added cost, but for the new projects, further price hikes are imminent. With no end in sight, real estate prices are likely to go up by another 10-15 per cent in the next three quarters—taking the overall price hike to 20-25 per cent—between late-2020 and 2022, says Hiranandani. This, say experts, would take residential homes out of the reach of most willing buyers who have got enough motivation to enter the market post Covid-19. According to Kapoor of Gulshan Group, if the trend continues, most of the developers would be left with no other option but to halt construction because increasing prices to meet the entire cost burden would make the projects unviable.

“We have to absorb the additional costs in our ongoing projects and thus it is unlikely that we will make any profit this year. So, if the situation continues to prevail, most of the developers would have to shelve their products or stop construction. This is beyond anybody’s means to complete a project which is already sold and rates are fixed, as input costs have gone through the roof,” he says.

 

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