Rising cost of raw materials: Affordable housing in a Catch-22 situation

By Raghavendra Kamath

The rising cost of raw materials, which could accentuate post the Russia-Ukraine war, is expected to severely impact margins of affordable housing projects, several developers told FE.

Affordable housing projects already have a lower margin of 15-20% compared to 25-35% for other segments. Steel prices have shot up 25% in the last one month and cement prices by 15% in the last 40-45 days, developers said.

“Commodity price increases have already led to an increase of Rs 250-300 per sq foot in input costs. Due to the Russia-Ukraine war, fuel and metal prices have shot up. All this will have a spiralling effect on real estate projects,” Sriram Mahadevan, MD at Joyville Shapoorji Housing, a joint venture between the Shapoorji Pallonji Group and investors such as Actis, ADB and IFC, said.

Mahadevan added that margins are already low in affordable housing projects and with the current inflationary push, it would make matters worse. “We are trying to find out ways to handle the impact,” he said.

Balaji Raghavan, a senior finance professional who is looking to launch an affordable housing project near Mumbai, agrees. “If you are selling at Rs 6,000 a sq ft and the construction cost is around Rs 2,500, with GST, land and marketing costs you end up making 15-20%. But if input costs go up from Rs 2,500 to Rs 3,000 per sq ft, how would you make money?” he asks.

Prashant Thakur, director and head of research at Anarock Property Consultants, feels that even if input prices come down, it would take six months to see the actual impact.

“Developers who are struggling with wafer thin margins will find it difficult to pass on the price hike to buyers. If prices go up by 20%, buyers would hold their purchases,” Thakur said. He added developers would be in a catch-22 situation due to this. “They have to increase prices in double digits to maintain margins but if they do that there would be resistance from buyers,” Thakur said, adding that if the Reserve Bank of India increases rates subsequently, it would create problems for buyers from both sides.

He further added that the government’s push on infrastructure spending would put upward pressure on input prices.

However, there are optimists as well. Pradeep Aggarwal, chairman of NCR-based affordable housing company Signature Global, said the the price rise is a short-term issue. “The price rise will definitely impact margins of affordable housing projects. But when prices settle down, this issue will be solved,” Aggarwal said. Some experts also said that if input prices don’t stabilise soon, it would defeat the central government’s agenda of promoting affordable housing in the country. The Union government has been giving various tax breaks and incentives for buyers and developers to promote affordable housing in the last previous years.