Ketan Patel, Director, Akshar Group, speaks about striking a balance between losses incurred and foreseeable profits, even as the real estate sector battles with rising prices of cement and other raw materials.
How is the current real estate market and how are your projects performing?
The market has opened up. We are expecting a good demand in real estate and are looking for it to lower down in the next two-three years. When we look at the statistics of the buyer, registrations, launches etc., of a quarter, if we try to neutralise the cement, then it comes across as more area- and demand-centric. In metro cities like Mumbai or Bangalore, real estate has to do well because of the demand
for it. More than demand, it is also about migration and work opportunities. As a result an entire ecosystem develops around it, which leads to demand and purchase.
I believe that we are building an asset, but then it comes down to what price point you have entered at, what specifications you are offering, if the zone has the typology requirement – all factors need to be kept in mind to understand the price and demand of that location. Sometimes, a single development from a particular brand and what they are offering changes the demand in a zone. Price, at the end of the day, is a prime factor and this market is centred around it.
Has the cost rise in cement and concrete building materials impacted your profitability?
Yes. Cement price rise has impacted our profitability, making it lower and, in some cases, it has led us to incur some losses, too. For the ongoing projects, where about 60 per cent to 80 per cent of the units are sold, we cannot now go to the buyer and tell them that the cost of raw materials has gone up and the remaining units, of which the construction was pending will be at a higher price. So, that is where we are incurring a low profit or loss per say.
I believe the cost of raw material has impacted on-going projects but for the new projects we are prepared that now the prices have gone up so we must have a 20 to 25 per cent buffer for that.
Are you expecting a change in consumer behaviour as the price of real estate will go up owing to the rise in the cost of raw materials?
Whenever we increase the price of our projects, we see a setback of 10 to 15 per cent in the overall sales funnel. But when we do look at it, the actual sales in the total sales funnel is approximately 10 per cent of the total enquiries. What we have observed over the years is that the number of enquiries go down when there is an increase in price. However, the customer who is looking to buy a house or property or upgrade does come through and convert as a customer.
We saw a trend through the pandemic that people have realised that housing is a very important aspect in their lives, as it was their homes that kept them safe in the difficult times. Demand in established locations has gone up as people want to upgrade.
As the raw material cost for construction is expected to stay volatile in the near future, what is the change in strategy adapted by you to navigate through it or will there be delays in delivery of projects?
We are looking at changing our strategies but we cannot delay any of our projects as that is more expensive than incurring higher prices of raw material for building materials. Waiting for the cost of raw materials to go down will throw us off our schedule and that will be a bigger chaos as the entire line of work will be disturbed. I might end up spending more than I would be saving with the wait duration.
However, with new launches, we can keep control and plan better. But once the project is on the floor, we have to go with the flow and match our deadlines, irrespective of the change in prices of the construction materials.
Tell us about the challenges you have faced with the rise in cost of cement.
We were not expecting the price of raw material to rise so much. We do account for 4 to 5 per cent of inflated prices but when it goes up to 15 to 20 per cent we have had to relook at our strategies. We cannot compromise on the deliveries to our customers, but at the same time we also have to understand how to absorb the cost.
Considerations had to be made if the project price should increase. But that too comes with its own set of challenges with the market price, competitor pricing of projects etc. Those were also the deciding factors on incurring some losses and not being able to transfer the cost to the consumer. However, that will also be averaged out in our future projects.
How is the future of real estate looking with the rise in cost of cement and building materials?
With the rise in cement cost and other building material costs, the same will eventually be carried forward to the buyer. This is a basic entrepreneurial rule. New launches will be expensive. In their initial stages, they may be at a 10 to 20 per cent lower cost, but I am foreseeing a rise in real estate price of about 18 to 20 per cent in the near future.
Materials like steel, cement and concrete are very important in any building. With the price of these materials rising, I have incurred losses in the previous projects, and we will be looking to recover the same in newer projects. This will become a market sentiment as similar challenges will be faced by the developer community.
-Kanika Mathur