News: Cost of construction up 10-12% year-onyear: Report-29-03-2022
The cost of key materials like cement and steel have risen over 20% yearly as of March 2022. These constitute a predominant share in the total cost of construction. So far, developers have been cautious about increasing prices as the market was recovering from the aftermath of Covid-19.
NEW DELHI: Over the last one year, developers ’ average cost of constructio n has risen 10-12%, owing to higher input cost due to supply-side constraints, according to a recent report by Colliers. This surge in cost comes at a time when developers have been under pressure due to higher debt and liquidity concerns over the last few years.
The cost of key materials like cement and steel have risen over 20% yearly as of March 2022. These constitute a predominant share in the total cost of construction. So far, developers have been cautious about increasing prices as the market was recovering from the aftermath of Covid-19. However, developers have now started feeling the pinch of rising cost and started reviewing their pricing strategy.
“With rising material cost, developers will be compelled to increase prices as construction materials account for about 2/3 rd share in the total cost of construction. Developers have already been operating on thin margins over the last few years. 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% by December 2022," said Ramesh Nair, CEO, India & MD, Market Development, Asia, Colliers.
Residential projects in the affordable and mid-income segments carry relatively lower margins and are price sensitive. Hence, any major increase in input cost can put pressure on developers to pass it on to end-users.
"Developers are facing high cost but are being cautious to increase the price for end-users as it might impact overall demand. However, if the escalated cost persists, developers may have to pass on increased overheads to the end users. Some intervention from the government in the form of lower import duty can provide some relief to developers, especially in segments with low margins," said Argenio Antao, COO, Colliers India.
"Prices of cement and steel have increased sharply over the last two years. Steel price has increased over 100%, whereas cement price has gone up by more than 30% in the last two years. Similarly, be it cost of aluminium materials, electric wire, paints, stone all are up by more than 50% during the same period. This has led to a sharp increase in our per square feet construction cost. We have not been able to pass on the increase in input cost to customers. But relentless rise in input costs is hurting our profit margins in a big way, and forcing us to think about the future course of action," said Saransh Trehan, managing director, Trehan Group.
Overall, in the market, large Grade A developers will be able to withstand the rise in cost and may pass it on depending on the demand dynamics. However, smaller developers may seek to enter joint development agreements for specific projects to tide through the high cost.
