Real Estate

Homes could get costlier by upwards of 10 per cent as construction costs increase

Abishek Law | | Updated on: Jan 15, 2022
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Construction cost are north-bound, up 15 per cent or so, with key building materials and labour charges witnessing inflationary pressures

 Homes could get pricier by 10 per cent or more in 2022, as developers eye price hike on the back of increased construction costs, consistent supply and stable demand. Construction cost are north-bound, up 15 per cent or so, with key building materials like steel, cement and labour charges witnessing inflationary pressures.

Building material companies – especially large and branded ones – are expected to benefit with an uptick in real estate sector.

Cost of material and its freight account for 50-60 per cent of construction budgets.

Construction costs

In October – December period of 2021, construction costs were up 8 - 9 per cent on an average for existing projects and interior fit-out ones and between 10 and 12 per cent for new / greenfiled ones; while home-buyers had to fork out 3- 8 per cent more because of “graded price rise by developers”.

Mumbai, Delhi and Bengaluru - three key housing markets in India - have seen highest construction cost increase; while impact was moderate in Hyderabad, market sources said.

In absolute terms, cost of materials went by by 45-60 per cent y-o-y (Oct-Dec 2021 vs Oct-Dec 2020); labour charges up 10 -15 per cent for the same period under review.

Price Hikes

The probability of a price hike at the end-user level is likely to come into effect towards the latter half of 2022, once some clarity emerges on demand post Omicron-induced disruptions. Developers are not willing to spook demand immediately.

Omicron and rising Covid cases in the country have already led to some supply hiccups, issues on availability of labour in some micro-markets, and a reduction in buyer queries at the site-levels. However, the virus is yet to have direct impact on sales.

According to Ravindra Pai, MD, Century Real Estate, price hikes are most likely to be ‘graded’ with premium properties witnessing an increase first, before developers look at hiking prices in affordable or mid-priced offerings.

“As of now, premium apartment projects are doing well and the upgrade markets are strong. If developers get comfortable with the demand trends, there could be some price hikes in the latter part of the year,” he said.

Harsh Patodia, National President, CREDAI – the apex body of realtors – anticipates a “10 per cent plus rise in home prices for 2022”. Construction cost trends are already inflationary.

Rise in Cost

On the other hand, since January – March 2020, steel prices are up 45-47 per cent to around ₹ 62,300 / MT; copper is up at 70-75 per cent to ₹ 745,000 / MT; aluminium prices have seen a 55-50 per cent increase to ₹203,385 / MT; PVC items have seen an increase of 80-90 per cent to ₹ 165,000 / MT; while fuel / diesel cost are up over 43 per cent to ₹94 / litre.

Contractors are increasing the overheads, anticipating the uncertainty in the market.

Cost of labour, which is up 10-15 per cent, y-o-y, is attributed to the knock-on impact of Covid-19 protocols and its associated costs. This include costs related to compliance to new protocols like RT-PCR tests, idle time until test results, more accommodation space for the same amount of labour, quarantine facility and sanitation measures. In addition, there are additional labour retention and transportation costs.

Consultancy major JLL in a recent report said, while upsurge in construction cost per sq ft for existing projects and new projects was at par 105 per cent; new project cost went up substantially, from 105 per cent in Oct – Dec 2020 to 113 per cent in the last three months of 2021, translating to an 8 per cent hike

“While the markets continue to be volatile, it is anticipated that by Q2-Q3 CY 2022 (April – September) the construction prices will stabilize. The price rise that we have witnessed is going to be the new normal,” it said in the report adding that supply chain breakdown (post the second wave) is the key reason.

According to brokerage firm, ICICI Securities, building material companies that include tile majors like Somany and Kajaria are likely to see a volume CAGR of 17 – 18 per cent in FY21-24 (vs 0.2 – 1.6 per cent CAGR during FY 18-21); plywood majors are likely to witness volume CAGR of 17 – 20 per cent CAGR during FY21-24 (vs -0.1 – 4.3 per cent during FY 18-21); and pipe companies could see 9 – 16 per cent CAGR during FY21-24.

Published on January 15, 2022

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