Real Estate Prices Set To Rise As Construction Cost Jumps, Says Colliers

Real Estate Prices Set To Rise As Construction Cost Jumps, Says Colliers

A surge in construction costs is likely to push up real estate prices at a time the sector is recovering from a prolonged slowdown, according to Colliers.

Over the last year, developers’ average cost of construction has risen 10-12%, owing to higher input costs due to supply-side constraints, according to the property consultancy firm’s report. This surge, it said, comes at a time developers have been under pressure from higher debt and liquidity concerns over the last few years.

The cost of key materials like cement and steel has risen more than 20% yearly as of March 2022, the report said. The cost of labour is also likely to surge with rising inflation. “Given this, developers are reviewing their pricing strategy.”

Homes could turn costlier when developers hoped to sustain a rebound from the pandemic-induced disruption. India’s real estate sector was battling a prolong slowdown when the pandemic struck. Demand surged as lockdown restrictions eased, mostly for some of the large developers. Yet, rising global commodity prices has driven up costs of steel to cement.
“With rising material cost, developers will be compelled to increase prices as construction materials account for about two-third share in the total cost of construction,” Ramesh Nair, chief executive officer, India and managing director, market development, Asia, Colliers, was quoted as saying in a media statement. “The rising cost will impact developers in the affordable and mid-market segments relatively more as they are already operating on lower margins.”

Nair expects the cost of construction to rise by additional 8-9% December 2022 as wholesale price inflation and material cost are increase in double digits.

According to Argenio Antao, chief operating officer, Colliers India, developers are facing high costs but are being cautious to increase the price for end users, as it might impact overall demand.

“If the escalated costs persists, they may have to pass on increased overheads to the end users,” he said. “Some intervention from the government in the form of lower import duty can provide relief to developers, especially in segments with low margins.”

Real estate lobby Credai-MCHI said higher costs will have to be passed on to buyers for many developers’ projects to stay viable.

Cement costs have risen by more than Rs 100 a bag, while steel prices have risen from Rs 45,000 a metric tonne last year to Rs 85,000 today, according to Credai-MCHI.

“While most projects, particularly those in the affordable sector, have wafer-thin margins of 10-15%, the rise in the cost of raw materials has resulted in a cumulative increase of over 15% in construction costs in delivering the same projects, making them unviable at current sale prices,” Boman Irani, president at Credai-MCHI, said in a statement.

Impact On Residential Sector

Under-construction projects are likely to face increased pressure from rising input costs. That’s likely to impact timely delivery of projects, especially if these concerns persist, Colliers said.

Residential projects in the affordable and mid-income segments, according to the report, carry relatively lower margins and are price-sensitive. “Any major increase in input cost can put pressure on developers to pass it on to end-users.”

Credai-MCHI, however, doesn’t expect rising costs to halt construction or delay projects.

Impact On Industrial sector

The industrial and warehousing sector saw heightened activity during 2021, led by higher demand from e-commerce players. Most cities saw a rise in rentals, with a majority of the micro markets seeing a year-over-year increase in the range of 5-12% pan-India.

“An increase in construction cost is likely to put an upward pressure on rents due to limited availability of quality assets,” the report said.

According to Colliers, while large Grade A developers will be able to withstand the rise in cost and may pass it on depending on the demand dynamics, smaller developers may seek to enter joint development agreements for specific projects to tide through the high cost.

Source : Bloomberg Quint

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