Average construction costs for estate developers have bumped up 10-12 percent year over year in March, a report by Colliers India said.
Residential costs have gone from Rs 2060 per square foot in March 2021 to Rs 2300 per sq ft in the same period this year and industrial expenses from Rs 1900 to 2100 per sq ft.
The cost of key materials like cement and steel, which account for a large share of construction expenses, has risen over 20 percent.
Developers, who have been cautious about increasing prices as the market recovers from the virus, are now reviewing their pricing in the face of rising costs, the report noted.
“With rising material costs, developers will be compelled to increase prices as construction materials account for about two-thirds of the 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 more as they are already operating on lower margins. With wholesale price inflation (WPI) and material cost seeing a double-digit rise, the cost of construction can rise by a further 8-9% by December 2022,” said Ramesh Nair, CEO, India and Managing Director, Market Development, Asia, Colliers.
Residential and industrial sectors to face most impact
Residential projects in the affordable and mid-income segments clock lower margins and are price sensitive. Hence, any major increase in input costs will pressure developers to hike prices.
On the other hand, Grade A industrial and warehousing facilities are already seeing robust demand from e-commerce players. Increase in construction costs is likely to bump up rents due to limited availability of quality assets.
“Developers are facing high costs but are being cautious to increase the price for end users as it might impact overall demand. However, if escalated costs persist, developers may have to pass on increased overheads to 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, chief operating officer, Colliers India.
Overall, in the market, large Grade A developers will be able to withstand the rise in costs. However, smaller developers may enter joint development agreements for specific projects to tide over the high costs.