Sunday, June 15, 2008

Chennai's realtors skid on fuel price hike, inflation

CHENNAI: Promoters of ongoing real estate projects, worth over Rs 4000 crore, are reworking their pricing strategies as rising inflation and the fuel price hike have pushed up input costs.

Steel prices, already northbound, has shot up by over 30 per cent since fuel costs went up, Builders Association of India office-bearer MK Sundaram told reporters.

Transportation has become more expensive with petrol costing Rs 5 more per litre, and diesel Rs 3 more. Other items like sand are dearer by nearly 40 per cent, he said.

The situation has been trickier for promoters by the 8.24 per cent inflation that many had not factored into their contracts.

Subsequently, cost overruns have become common, and several projects have become unviable. With contractors beginning to lose money, Sundaram said some projects have had to be deferred and labour laid off.

"Who will buy a flat pegged at Rs 2,500 a sq ft at double the price when the cost of funds also go up while salaries don't?" Sundaram asked. "The price hikes have hit the industry hard."

Construction major HIRCO, which has a huge project under way in Chennai's southern suburbs, is likely to rework prices for sales of completed projects by at least 20 per cent, company officials said on condition of anonymity.

"We will have to assess the sentiments of buyers, especially in the light of rising cost of funds and several other fiscal parameters," a HIRCO official said.

While the HIRCO project, spread over 500 acres is expected to have a total outlay of at least Rs 800 crore, Puravankara, another construction major, has at stake a project worth Rs 3 crore at current prices, according to independent estimates.

Other construction projects - Chennai's version of London's Tube and flyovers - may also suffer due to huge cost overruns, industry sources said.

Chennai Metro Rail Limited - a public sector company owned by the state government - has worked its cost at a little under Rs 1000 crore at current prices. This could go up by at least 50 percent when work begins in 2009.

And, by the time it's completed in 2014, the cost may have escalated 300 percent, sources at Larsen and Toubro, another construction major said.

The reasons are not difficult to fathom.

The Tamil Nadu government's takeover of sand quarrying, citing profiteering by private contractors, resulted in a temporary shortage, sending prices higher by almost 45% within a span of two months.

The fuel price hike has only worsened matters.

Present indications of a further fuel price hike may render several projects financially unviable, said non-resident Indian financial expert R Rao, currently on a visit to India from the US.

"We seem to be planning for day before yesterday. Lack of infrastructure and short-sighted planning render whatever is created financially unviable," Rao told IANS. "Consumers do not get their money's worth."

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