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Current trend in real estate growth in India

The industry has recently witnessed revival in demand from urban housing sector. The real estate construction industry in India is expected to continue its upward trajectory in 2022-2023. In India it is third largest sector of the economy. It is expected that Indian real estate construction sector will reach a market size of $1 trillion by 2030 and will account for 14 per cent of India’s GDP by 2030. A number of initiatives like Pradhan Mantri Awas Yojana, Smart Cities Mission etc have been undertaken by the Government of India with the hope of incentivizing real estate purchases.

Current trend in higher input costs to affect Real Estate construction Projects

The surge in oil prices has added to the cost pressure in construction. Transporting civil construction materials constitutes one 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. An increase in price of raw materials (lime, cement, petcoke & aluminum powder) has also increased cost of light weight Construction Blocks.  Light weight Concrete Block prices have increased due to Petcoke prices have increased by about 70 %. Lime and Aluminum prices have increased by about 25 % and 60 % respectively. Overall inputs have increased by almost 35 %, thus pricing of all building materials have shot up significantly over past 12 months.

Real Estate Pricing

Real estate companies are regaining their pricing power as the stock of unsold houses trends down. 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.

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. Details of such small contractors are available at digital B2B platform: www.indiak2c.com. Also as a major cost contributor, cement to be sourced from manufacturers using Technologies like Waste Heat Recovery 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.