New Delhi: Over the past year, developers’ average construction cost has increased by 10-12%, due to rising input costs due to supply-side constraints. This cost spike comes at a time when developers have been under pressure due to higher debt and liquidity issues in recent years.
The cost of key materials like cement and steel increased by more than 20% per year in March 2022. These constitute a predominant part of the total cost of construction. So far, developers have been cautious about raising prices as the market recovers from the aftermath of Covid-19. However, developers have now started to feel the pinch of rising costs and have begun to revise their pricing strategy, Colliers said in a report.
“As the cost of materials increases, developers will be forced to raise prices as construction materials account for around 2/3 of the total cost of construction. Developers have already operated at low margins over the past few years. years.
“Rising costs will have a relatively greater impact on developers in the affordable and mid-market segments, as they are already operating at lower margins. With wholesale price inflation (WPI) and the cost of materials, which both experiencing double-digit increases, the cost of construction may rise another 8-9% by December 2022,” said Ramesh Nair, CEO, India and Managing Director, Market Development, Asia, Colliers.
Residential projects in the affordable and middle-income segments have relatively lower margins and are price sensitive. Therefore, any major increase in the cost of inputs can put pressure on developers to pass it on to end users.
On the other hand, Class A industrial and warehousing facilities are already seeing strong demand from e-commerce players. Rising construction costs are likely to put upward pressure on rents due to the limited availability of quality assets.
“Developers are facing high costs but are cautious about raising the price to end users as it could impact overall demand. However, if cost escalation persists, developers may need to “Be able to pass the increased overhead on to end users. Some government intervention in the form of lower import duties may provide some relief to developers, especially in low-margin segments,” Argenio said. Antao, Chief Operating Officer, Colliers India.
Overall, in the market, the large A-grade developers will be able to withstand the cost increase and can pass it on depending on demand dynamics. However, smaller developers may seek to enter into joint development agreements for specific projects to overcome the high cost.