Small realtors caught in pincers as raw material cost rises: CRISIL

Realtors, particularly smaller ones, are caught in a pincer — with a sharp spurt in raw material cost (especially cement and steel) on the one hand, and subdued demand on the other.

Policy measures to incentivise first-time home buyers and encourage developers to make ticket sizes more affordable are yet to yield results — even as interest rates are headed north.

The upshot is an accentuated impact of rising raw material prices, which typically account for more than half of project construction cost (steel 32 per cent, cement/concrete 38 per cent).

CRISIL SME Ratings has assessed over 1,100 realtors.

As of September 2018, steel prices were up 18-24 per cent year-on-year and about 33-40 per cent higher compared with two years ago. And average steel consumption for a typical building is five to seven kg per square feet (psf). Factoring in a three-to-four per cent wastage of steel typical in the industry, every Rs 10 increase in the steel price pushes up the construction cost above Rs 60 psf. 

This is more painful for small developers of standalone block/buildings of 40-70 units. Large builders, with multiple blocks/buildings of around 150+ units per project, are less impacted, as they have premium-pricing ability and can deploy mechanisation and advanced technologies such as aluminium form-works, which require multiple repetitions for achieving break-even.

This leaves developers with three choices — pass on the cost increase, absorb it, or use alternatives to steel, none of which is easy.

Taking a hit on the margins will exacerbate the liquidity pressure stemming from the escrow mechanism mandated under RERA.

Alternative construction products and their acceptance by the consumer are a challenge. Achieving economies of scale requires deep pockets for upfront capex, which is very tough for smaller realtors.

The choice thus is optimal utilisation of steel by designing efficient buildings, reducing wastage, value engineering and mechanisation.