Over the last few days, people have witnessed the anxiety of war across the globe, something we always read in books as part of our history lessons or chapters. The stock market has already seen the biggest correction since the start of the pandemic, and crypto currency crashed like there is no tomorrow. Interdependence in the world of business today means, every large event has an international consequence. This unprecedented occurrence of nations going for war on this scale is going to cause a negative outcome across the world and the Indian real estate is definitely no exception.
While the budget recently introduced multiple provisions to draw large investments to the real estate sector and it seemed that the sector would start its recovery from the pandemic; the Russian invasion of Ukraine has suddenly changed a lot of calculations. The battle itself has now subsumed global businesses, with multiple western MNCs moving out of Russia and its ally Belarus, due to the mounting pressure from the governments and public opinion in their home countries.
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With India taking a neutral stand on the conflict, western MNCs may put their larger investment plans on hold till a clearer roadmap emerges. Though the threat seems temporary in Indian context, and should pass once the conflict is over; however, it is undeniable that uncertainty is indeed the biggest threat to business. With a majority of investors turning cautious, investments like Gold and Dollar are likely to benefit, while the stock markets may be the biggest loser.
The principal threat is indeed the sudden rise in oil prices; Brent has already touched a high of $139.13 a barrel; which is its highest in over a decade. An ICRA report has suggested that the current account deficit of India is likely to increase by 14 billion dollars for every $10 rise in crude prices. The government has so far avoided an increase in oil prices, but with the elections completed, the government is likely to review its decision going forward. The direct impact will also be seen on the cement industry. The industry is likely to pass the escalated input costs like increased energy costs, raw material costs and transportation costs to the consumer. Steel prices have also seen a rapid rise with domestic prices already up by over Rs 5000 per tonne and similarly the prices of aluminium have escalated rapidly.
These are definitely going to affect the real estate industry with several input cost escalations. The property construction cost is definitely going to increase. On the hindsight, interest rates on mortgages have dropped for a brief period which makes real estate a lucrative option for investment at this time. Real estate undoubtedly can become a very strong investment tool for wealth creation portfolio.
RBI will have to step in at some time to check the rising inflation, which could mean that there can be risk of home loan interest rate revision in future. As much as inflation impacts all businesses and segments, the impact can be severe on real estate too. While industry developers, consultants have been working day and night to bring the sector back to momentum, more support is needed from the government, RBI, in terms of fund infusion and to lower the interest rates for consumers. This is needed, so that war-led inflation does not hit the sector going forward. While increase in raw material prices can lead to increase in property prices, low home loan interest rates and volatility in stock markets can make real estate a great investment option at this point of time.
(By Shrey Aeren, Managing Director and Country Head of Berkshire Hathway Home Services Orenda)