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Rise of construction cost affects the real estate sector

Rise of construction cost affects the real estate sector

by Aakash Shah, Director - Business Development, Urban Space Realty

The Indian economy suffered a massive jolt yet again as the spread of the virus escalated in April, leading to a slew of lockdowns across the country. While the second wave was expected, the scale of infection caught everyone off-guard leading to an unanticipated crisis on the health and economic front. Just when the economy seemed back on track after a dismal FY 2020-21, Indian took several steps backward as the second wave unexpectedly arrived. Real estate sector hasn't been immune to the phenomena and lockdowns are adding to the woes. Rising fuel prices are aggravating concerns in an industry which is already seeing acute shortage of migrant labourers yet again. The resulting increase in transportation costs will have an overbearing effect on the real estate sector as transportation of building material becomes expensive.

The cost of steel has increased significantly and will lead to escalation in cost making a number of projects infeasible. Coming at a time where the economy is fragile, real estate developers have reasons to hesitate while passing on the costs to customers. The demand for property is already drying up as a second wave of lockdown grips the country and uncertainty looms. Passing on the additional project costs owing to higher transportation and raw material charges to the end consumer may dampen the customer sentiments and reduce demand even further.

Cement is another major raw material used in construction activities which has a direct impact on project outlays. The increase in the cement prices has put pressure on developers' margins. While the stamp duty reduction in the last financial year motivated the buyers to book houses, the increasing cement prices coinciding with discontinuation of stamp duty reduction is complicating the buyer behaviour.

Major metros like Mumbai and Delhi are under strict lockdown resulting in shortage of labour. The real estate sector saw a replay of the migrant labour crisis as workers moved from major metros to their hometowns. The construction activities in the country have come to a screeching halt, delaying projects and affecting livelihoods. Moreover, the developers who still have labourers at their disposal have difficulties moving them from one project to another on account of lockdown rules prohibiting the movement.

Lockdown directly translates into drying up of leads. Sales that get disrupted on account of lockdown aren't easy to recover. The construction sector breathed a sigh of relief as government interventions and demand led to high sales in the fourth quarter of FY 2020-21. However, the relief was short-lived and developers who planned to fund their construction organically may find the going difficult. The uncertainty which is instilled into the buyer will delay decision-making unless there is greater clarity on lifting of lockdown.

Construction costs going forward will be heavily impacted by the macro economic factors including the prevailing interest rates, lockdown situation and fuel prices. The industry as a whole is looking ahead to a time when the second wave of virus is behind us. However, the road ahead is not easy as severe shortage of vaccines raises the possibility of a third wave which may disrupt construction activities and take the sector back to square one.

With the Union Government claiming that India is nearing the peak of the second wave, the real estate sector is raring to come back out of its slumber and continue at a faster pace in upcoming weeks.



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