New Delhi [India], April 7 : Rising crude oil prices linked to tensions in West Asia could increase construction costs and create supply chain pressures for India's real estate sector in the near term, according to an analysis by EY.
The analysis noted that while the sector remains largely stable for now, developers are beginning to face cost pressures on key construction materials.
"Construction activity continues normally, impact currently limited to cost pressure and supply chain monitoring," the report said.
It added that rising crude prices are already affecting the cost of several inputs used in real estate projects.
"Rising crude prices will have an adverse impact on cost of production of various industries like cement, steel etc which form a significant cost of a real estate development," the analysis said.
The report highlighted that certain materials are already facing supply pressure. "Steel, PVC, wires, pipes and glass supply [are] facing pressure. Ceramic and tile manufacturing [is] impacted due to fuel constraints," it said.
However, the report noted that the overall sector remains relatively stable because most construction materials are produced locally. "Developers [are] starting to see supply chain disruptions. However, sector still largely stable because most raw materials are domestically produced," it added.
The analysis also pointed to challenges in raising funds amid market uncertainty. "Equity fund raising by companies through IPO, Qualified Institutions Placement (QIP) etc already impacted due to uncertainty," the report highlighted.
It added that developers may increasingly turn to borrowings, which could raise costs. "Funding the gap through borrowings and foreign currency debt... is likely to get expensive and may lead to increase in finance cost for the sector," the analysis said.
Companies operating in engineering and construction projects in the Middle East could also face operational disruptions.
"Companies in the Engineering, Procurement and Construction (EPC) segment and having a large workforce/projects in the Middle East face working capital issues and erratic work schedules with impact on the project timeline and increase in fixed cost," the report said.
In the short term, rising logistics and construction costs may push up project expenses across the sector.
"Rising crude prices, increase in logistics and cost of inputs for construction and real estate sector. Project costs likely to rise in the short term," the report noted.
The analysis also warned that inflationary pressures could affect the housing market.
"Higher inflation... may result in delay in interest rate cut or a potential increase in interest rates, impacting home loan affordability and cost of capital-intensive real estate development," it said.
The report further noted that overseas buyers from the Middle East may adopt a cautious approach due to ongoing uncertainties.
"Non-resident real estate buyers/investors specially from West Asia may slow down due to uncertainty and post war impact on their economy," it said.
However, in the long term, the geopolitical situation could also create opportunities for India's real estate sector, particularly in the data centre segment.
"Major cloud companies are reportedly exploring plans to redirect data centre workloads from parts of West Asia to locations in India for short term solution," the report said.
It added that this could accelerate the development of new digital infrastructure in the country. "There could be acceleration of setting up of data centres in India in the near future," the analysis said.
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