Sunday, May 29, 2022

Rising construction costs put developers in a spot

By B. Krishna Mohan

Published: Published Date - 02:31 PM, Wed - 30 March 22

Hyderabad: The construction costs are on an upward spiral due to higher inputs costs due to supply constraints. The rising fuel costs too are increasing the landing costs of materials like the bricks, sand, cement and tiles among others. Further, the increase in prices of copper and aluminum too are impacting the prices of the electrical wiring, windows and doors.

Developers say they are not in a position to pass on the increases to the customers of existing projects. However, the increases will be factored into the new projects. The increase 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 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 sq ft cost of construction increases by Rs 160 to 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 too have increased by about 20 per cent. The increase in copper prices has increased the electric 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 one year. This is mainly due to higher input cost due to supply-side constraints.

Cement and steel have risen over 20 percent 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 cost and started reviewing their pricing strategy, it said.

“With rising material cost, developers will be compelled to increase prices as construction materials account for about two-third 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 it has increased to Rs 2,300 in March 2022. In the industrial segment, the per sqft cost now 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. Increase in construction cost is likely to put an 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.