If you have been thinking of buying a home this year, get ready to pay more.
Over the last one year, the average cost of construction has surged by 10-12 per cent on an average because of the increased input costs, according to a report by Colliers.
The prices of key components, such as steel and cement, have increased annually by 30 per cent and 22 per cent, respectively, and that of copper, aluminium and oil by 40, 44 and 70 per cent, respectively, further pushing up construction costs, the report says.
Till now, developers were absorbing the increased cost in view of the slump in the real estate market because of the Covid-19 pandemic. But now, they might have to increase the prices in view of the higher debt and liquidity concerns over the past few years, Colliers said in a press release.
“With rising material cost, developers will be compelled to increase prices, as construction materials account for about two-third 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 per cent by December 2022,” says Ramesh Nair, CEO, India, & managing director, market development, Asia, Colliers.
The report adds that while large developers might be able to absorb the increased costs, and may or may not decide to pass it on to buyers depending on various factors, small developers might consider entering into joint agreements for specific projects to tide over the crisis.
“Residential projects in the affordable and mid-income segments carry relatively lower margins, and are, therefore, price sensitive. Hence, any major increase in input cost can put pressure on developers to pass it on to end-users. On the other hand, Grade A industrial and warehousing facilities are already seeing robust demand from e-commerce players. Increase in construction cost is likely to put an upward pressure on rents due to limited availability of quality assets,” the report says.
According to the report, industrial projects will also face the brunt of rising construction costs. The average cost of construction per sq. ft increased from Rs 1,900 in March 2021 to Rs 2,100 as of March 2022. For residential projects, the increase was from Rs 2,060 to Rs 2,300.
“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,” says Argenio Antao, chief operating officer, Colliers India.