Rising construction costs put developers in a fix
Hyderabad: Construction costs are on an upward spiral due to higher input costs following supply constraints. The rising fuel costs have increased the landing costs of materials like bricks, sand, cement and tiles among others. Further, the increase in prices of copper and aluminum too are impacting the prices of electrical wiring, windows, and doors.
Developers say they are not in a position to pass on the rise in prices to the customers of existing projects. However, it will be factored into new projects and this could be about ten per cent – implying that a unit priced around Rs 50 lakh now will go up to Rs 55 lakh in a year or so. Members of the real estate lobby body Credai have called for a meeting this week to discuss the issue.
“Steel prices are now between Rs 81-90 per kg compared to about Rs 60 last year. Most projects are being constructed using concrete walls. With the increase in prices of steel, the per sqft cost of construction increases by Rs 160 to Rs 200 as six to nine kg steel is used for that,” said V Rajashekar Reddy, Credai Hyderabad General Secretary.
According to him, the prices of ceramic tiles have increased by about 20 per cent. The increase in copper prices resulted in an increase in electrical wiring costs, he said. The cement rates are now about Rs 300 per bag. The prices for some time touched Rs 400 a bag, rising from Rs 250 a bag. Now, they are averaging Rs 300 a bag, he said.
“The real estate developers and builders do not have an escalation clause. So, the developers will have to bear the rising costs from their margins. Also, the market is not conducive for a price hike now. However, new projects will be marked higher,” he said.
Real estate services company Colliers said the developers’ average cost of construction has risen 10-12 per cent over the last year mainly due to higher input costs following supply-side constraints. Cement and steel have risen over 20 per cent yearly as of March 2022. These constitute a predominant share in the total cost of construction. Developers have now started feeling the pinch of rising costs and started reviewing their pricing strategy, it said.
“With rising material costs, developers will be compelled to increase prices as construction materials account for about two-thirds of the total cost of construction. The rising cost will impact developers in the affordable and mid-market segments relatively more as they are already operating on lower margins. With wholesale price inflation (WPI) and material cost, both seeing a double-digit rise, the cost of construction can rise by a further 8-9 per cent by December 2022,” said Ramesh Nair, CEO India, Colliers.
The average cost of construction (excluding GST) in the residential segment was Rs 2,060 per sqft in March 2021 and that has increased to Rs 2,300 in March 2022. In the industrial segment, the per sqft cost is about Rs 2,100, up from Rs 1,900 in March 2021, Colliers said. These values are for a standard Grade A residential building of 15 floors and for a standard pre-engineered Grade A industrial building.
Residential projects in the affordable and mid-income segments are price sensitive. On the other hand, Grade A industrial and warehousing facilities are seeing robust demand from e-commerce players. An increase in construction costs is likely to put upward pressure on rents.
Large Grade A developers will be able to withstand the rise in cost. However, smaller developers may seek to enter joint development agreements for specific projects to tide through the high cost, Colliers said.
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