New real estate projects poised to get pricier by 5-10%, in phases

Just when India’s economy was picking up pace, the Russia-Ukraine war is putting the brakes on growth recovery. With the surge in cost of crude oil, metals, and food items, firms see limited options but to raise prices. Against this backdrop, the first of a five-part series looks at the real estate sector
 

Faced with a sharp rise in the input costs of steel, cement and so on, realtors  have started increasing property prices.

Steel prices have shot up by 25 per cent in the last one month and cement prices have gone up by 15 per cent in the last 40 to 45 days, developers said.
 

“We have increased prices by seven to eight per cent in all our new phases to absorb costs,” said Sanjay Dutt, managing director and chief executive of Tata Realty & Infrastructure, adding that if input prices do not settle after a month, the company would need to increase prices by two to four per cent every quarter.
 

Dutt said the price rise has not affected their sales so far.
 

The rise in input costs has also led Tata Realty to defer the buying of materials for a month in the hope that the Russia-Ukraine war would end and supplies constraints would be over.
 

“We hope incremental costs will come down to the levels of last year,” Dutt said. Input prices have gone up 10 to 15 per cent in the last one year and are expected to go up by another seven to 10 per cent, he said.
 

The situation is largely the same with all major real estate developers.
 

Bengaluru-based Shriram Properties, for instance, has increased prices by five per cent in its new projects and is looking to increase them by another five per cent by April this year.

M Murali, chairman and managing director of Shriram Properties, said raising prices was the only way for the company to overcome cost pressures.
 

“We have seen a five to 10 per cent cost increase. Hence, we have increased prices by that much,” he said.

However, Murali said that it is too early to predict a drop in demand for residential housing due to the rise in prices. “There was a good jump in demand in the last six to eight months. On the other hand, supply has come down as the number of players have come down,” he said.
 

“Costs have gone up. The prices of all items used for construction have gone up. Labour costs have also gone up. The selling price of housing has to go up at least by 10-15 per cent if we do not want to go negative (into losses),” said Irfan Razack, chairman and managing director at Prestige Estates, a leading developer headquartered in Bengaluru.
 

Razack said even the 18 per cent Goods and Services Tax (GST) is an additional cost. No offset is available as in the past. This also pushes up the selling prices, he said.
 

“Developers cannot charge escalation for sales already done. The Real Estate (Regulation and Development) Act does not permit that. Only new sales prices can be increased,” Razack said.
 

Ashish Puravankara, managing director at Puravankara, another major real estate firm, said that a periodic price increase in an incremental manner across its brands would offset the increase in input prices, thereby protecting the company’s overall margins.
 

Anuj Puri, chairman of Anarock Property Consultants, said that even before the Ukraine war started and the pandemic was going on, the prices of raw materials like steel, cement, and so on saw a significant upward pressure. For developers, there was a huge rise in the overall cost of construction, in addition to supply chain disruptions.  
 

“For instance, post the war, 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. Developers absorbed these additional costs for as long as possible in order to nurture demand, but now they have no option but to pass on some of the burden to their buyers,” Puri said.

Finance costs

Though top developers say they have not seen an increase in borrowing costs till now, they expect finance costs to go up in future.
 

Atul Goyal, chief finance officer at Bengaluru-based Brigade Enterprises, said that the market is very competitive, and since banks are lending only to good developers, interest rates have not increased till now. “However, if there are any repo changes by the RBI, there will be an increase in interest rates. Increase in home loan rates is not expected to be very sharp and it may not affect affordability for the buyers,” Goyal said.
 

Dutt of Tata Realty echoes the same view. “So far, we are not impacted. But in the next 12 to 24 months, we expect our borrowing costs to go up by 20 to 30 basis points,” he said.