Rate hike prospects may slow down investments in real estate

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New Delhi, March 12

 Rising commodity costs triggered by the Russia-Ukraine war and likelihood of tightening of monetary policy by the Reserve Bank of India are likely to keep potential real estate investors at bay in times to come.

Crude prices have been spiralling — even touched over a decade high of over $130 per barrel. "Unwillingly developers will have to increase the property price to maintain the profit margins. So, we see an increase in property prices because of inflationary pressure," said Sransh Trehan, Managing Director of Trehan Group, adding that inputs cost like steel, cement, labour charges and so on are on continuous rise for the last couple of years and current global situation is expected to fuel the inflation further.

Rising crude oil prices may push the monetary policy committee to raise interest rates in the upcoming bi-monthly meeting in early April in order to manage inflation.

"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.

At the same time, prices of steel, a key commodity for the sector, rose by about 17 per cent in just a week, with cement prices rising too.

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.

On being queried whether the recent sell off in equity will make investors diversify their portfolio towards realty, Puri said: "Previously, when the stock market was bullish, and investors made money they looked to put their gains into real estate but now with stock markets plummeting significantly they would rather prefer to hold on to their stocks and thus refrain from buying into real estate."

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 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 Rs 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.

In deviation to others, Harish Sharma – CEO of realty advisory firm Plinthstone REMA says, volatility in the equity market will crowd in investments in the realty space. "Investors usually get scared with high volatility (in equity). Real estate markets, due to low liquidity also tend to be less volatile. So in this period of uncertainty, we will see investor interest increasing for real estate and also helped by the fact that pricing is still low and affordability at an all-time high," Sharma said.
 

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