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Construction costs of greenfield projects climbed 5-7% in Q3 2022: Report

CBRE says to build a green real estate sector the integration of environmental assessments and real estate planning is crucial.

Mumbai saw the highest range of overall greenfield construction costs across residential, office space and warehousing sectors in the third quarter (Q3) of 2022. In Q3 2022, the construction costs of ongoing greenfield projects increased by 5-7 percent, a report titled Project Management 2.0 - Driving Value in the New Normal Era by Global Commercial Real Estate Services (CBRE), said.

"Owing to a sustained recovery in contact-intensive sectors, gross value added (GVA) at basic prices for construction services expanded by 16.8 percent year-on-year (YoY) in Q1 2022-23 and was 1.2 percent above the pre-pandemic level," the report added.

While labour costs increased by 8-10 percent, reinforcement steel prices climbed by about 20 percent YoY during Q3 2022, the report added. Further, the report added that greenfield costs are expected to go up by 4-5 percent in 2023.

CBRE forecasts a marginal rise in the overall construction costs during 2023 across cities, with Mumbai likely to witness the sharpest rise.

Construction demand to remain strong

Gurjot Bhatia, Managing Director, Project Management, India, South East Asia, Middle East & Africa, CBRE, said at the conference the construction sector contributes 8 percent to India's GDP and there has been a constant rise in foreign direct investment (FDI) in real estate and construction.

Amid ongoing geopolitical complexities, CBRE anticipates that material prices may moderate in 2023, with expectation of longer-than-usual lead times for material delivery and short-term labour scarcity. "The outlook for construction costs remains stable but cautious, as market volatility is likely to persist in 2023 along with monetary tightening, continued high inflation, possibility of a recession in developed economies and geopolitical turmoil-related challenges, going forward," the report added.

"During the pandemic, we surveyed the impact of health and wellness initiatives on overall construction costs. This includes direct costs, restrictions imposed during Covid time and the costs it incurred, which we calculated was somewhere between 4 percent and 5 percent of the construction cost in 2020-21. Today, after a fresh survey it came down to 1.5 percent to 2 percent, in a new normal," Bhatia added.

Strong pipeline across assets

Bhatia said the office sector will have a strong supply pipeline exceeding 100 billion square feet (bsf) over the next two years. For the residential sector, it will be nearly 261 million sq feet (msf) of project launches in 2022, and 222 msf has been completed. In retail, 12 msf of investor-friendly came into the market. Additionally, 50 msf of space is to enter the warehousing sector over the next two years.

Ram Chandnani, Managing Director, Advisory & Transactions, CBRE India, added that today Tier II and Tier III cities continue to see increasing demand for real estate and construction.

Integration of environmental assessments and real estate

Dr Muthukumar, former chairman of CII Karnataka & Managing Director of Bhorukha Power, said at the conference, "Digital technology will play a key role in infrastructure building and construction project management. Sustainability and wellness have taken centre-stage in green real estate."

Several natural and man-made calamities like the Bengaluru flood and GRAP III air pollution prevention measures in Noida continue to halt construction activities every year leading to financial losses and loss of labour force.

Bhatia told Moneycontrol, "One approach can be to look at water management in city planning across states and incorporate that into real estate planning."

“We have master plans and city plans across states. However, we need to make sure these are implemented holistically,” he added.

Bhatia pointed out the need for integration of environmental assessments and real estate planning not just in individual projects but also across cities to solve the problem. "We are looking at every project within four walls, but outside that the project is connected to the city network. There has been a rapid pace of urbanisation, and we need to re-look at the town or city planning and incorporate them into real estate, especially with the overwhelming climate change today," he added.

Bhatia said the feedback of independent developers must be considered by the government. "The gap exists because investments are not being made at the necessary rate. Right now we are creating pockets of growth and going back to it to cope with infrastructural demands," he added.
Souptik Datta Sub Editor at Moneycontrol
first published: Nov 23, 2022 10:42 pm