Invest or hedge? That is the dilemma confronting Ramesh who wants to have a small, comfortable nest in the city. Just when he thought he would buy one some months ago, property prices went north as the input cost went up. “I was planning to buy a house in the city. But now I am having second thoughts as I really can’t afford one. I will perhaps wait and watch before zeroing in on a flat on the city’s suburbs instead,” he says.
According to a ballpark estimate by T Chitty Babu, national secretary of the Confederation of Real Estate Developers’ Associations of India, “The price per square feet of flats in the city has gone up by Rs 150 to Rs 200 due to the spurt in the cost of cement and other building materials.” Take cement. “We were expecting its price to decline to Rs 230 for a bag of 50 kg due to monsoon. On the contrary, it shot up to Rs 340 at the retail end. Ditto steel. A ton of steel, which was earlier priced at Rs 18,000, now costs Rs 58,000,” points out Babu. Manpower cost too has spiraled.
Though the cost of cement dipped a tad in the North and neighbouring Andhra Pradesh due to the monsoon, there has been no change in its price tag here, says R Radhakrishnan, former national president of the Builders Association of India and chairman of The Southern Builder’s Charitable Trust.
Sand too is acting pricey. After a court-imposed a ban on the existing sand mines, which triggered scarcity, Chief Minister Jayalalithaa ordered opening of new sand mines to meet the demand. Yet, the market has not cooled down. At present, fine sand costs around Rs 50 per cft as against the coarse variety, which is priced around Rs 32 per cft. Those who cannot afford fine sand buy the coarse one and put it through a sieve to get fine sand. In the process, 50 per cent of the material is lost, says Madhavan, a builder based in Ambattur.
All that has had a cascading effect on the end product. Among the worst hit are property builders. “We build flats after fixing the price and entering into an agreement with customers. Since the spurt in prices came after we struck a deal with customers, we can’t pass it on to them,” rues a spokesperson of Embassy Group, which has completed developing over 5.3 million sq ft of residential spaces. The rise in cement prices and building materials, including sand, has resulted in 10 to 15 per cent jump in the cost of constructing a building, he says.
Babu describes the cement price rise as artificial and blames the manufacturers for below capacity production. “Cement factories are producing only 40 per cent of the capacity, which is why there is a shortage,” he claims. As if that was not enough, cement firms are mulling over a fresh increase in price to factor in the hike in freight rates because of the recent jump in diesel prices. Can’t really expect a price cushion from them.
Small builders, like Ganesan of Sri Ganesh Builders, too are feeling the pinch. He says the rise in cement prices affected business for people like him in a big way. For, small builders often borrow money to build flats, hoping to make handsome profits during their subsequent sale. They are now struggling due to the big rise in construction cost and want immediate government intervention to arrest the artificial rise of cement prices.
According to real estate consultant K K Raman, the rise in material cost has hit the city’s suburbs harder because that is where a lot of construction is happening. Since flats are sold at fixed, pre-determined prices, they put pressure on the builders’ profit margins, he argues.
Then there is this nagging worry that builders could compromise on quality to offset the rise in cost - if they cannot pass it on to the buyer - to keep their profit margins intact. After all, developers are not doing it for charity, isn’t it, goes the logic. Radhakrishnan concurs. More than private constructions, it is the quality of workmanship at government infrastructure projects that could really be compromised, he fears.
The Builders Association of India intends to take up issue of cement cartel with Prime Minister Manmohan Singh, says Radhakrishnan. The association also plans to pressure the Union commerce ministry to waive excise duty on import of cement. “This will deflate the cement price and a 50 kg bag that now costs Rs 340 will slip to Rs 250,” he adds. “Last time when such a situation arose, the government intervened. We expect decisive intervention again,” says Babu.
So, invest or hedge? It’s a no brainer; people would rather hedge than invest in such a situation, right? Wrong. There has been no impact on the real estate sector here, claims CREDAI. “The demand for dwelling units continues. It won’t decline as the State is still facing shortage of houses,” adds Babu. Siva Krishnan, head of residential services (Chennai), Jones Lang LaSalle India, says Chennai is still the best city to invest in despite lack of quality land and rise in construction demand. “Land prices are rising as the supply of good land is limited,” he says.