How to Control Real Estate Prices in a Regime of Rising Civil Construction Cost

Third-largest sector to bring about economic growth, the real estate industry in India is expected to continue its upward trajectory in 2022. It is expected that Indian real estate sector will reach a market size of $1 trillion by 2030 and will account for 13 per cent of India’s GDP by 2025.A number of initiatives have been undertaken by the Government of India with the hope of incentivizing real estate purchases.

Current trend in real estate construction cost

Real estate companies are regaining their pricing power as the stock of unsold houses trends down and building costs, mainly steel and cement, keep climbing. The industry has been petitioning GoI to regulate prices, reduce taxes and allow easier imports of chief construction materials. Now, the leading developers have begun to pass the added costs on to buyers, in some cases by up to 10% of the price of a house, and they are not reporting any adverse effect on sales. The surge in oil prices, once GoI permits its pass-through to domestic fuel consumers, will add to the cost pressure in construction. Transporting civil construction materials constitutes almost a fifth of the expenses in building new apartments, which have already witnessed a 13% escalation in civil construction cost on account of steel and cement.

The pricing approach

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 costs and started reviewing their pricing strategy.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.

How to address the rising input costs in real estate construction

Construction materials account for about two third share in total cost of real estate construction. Developers have already been operating on thin margins. With wholesale price inflation (WPI) and material cost, both seeing a double-digit rise, cost of construction can rise by a further 8-9% by December 2022. Now the only option available is to reduce cost in the balance one third of the civil construction cost. For the developers, way forward for cost reduction is to deploy small contractors for civil construction. Also in the areas of piping fabrication and plumbing, electrical erection, painting etc. resourceful and experienced small contractors should be deployed.Also as a major cost contributor, cement to be sourced from manufacturers using Technologies like Waste Heat Recovery (WHR) power generation systems, reducing or ceasing the use of fossil fuels, using solar energy, as well as converting current fossil-fuel-based facilities into renewable biomass fuel-based units to reduce cost &emissions during cement production.

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