Since the onset of Covid from the first quarter of calendar year 2020, there has been an upward pressure on construction costs for projects across all real estate classes, viz., residential, offices, malls and hotels. This has been the sole black spot in the revival story of the real estate industry post lockdown. As per JLL India, construction costs for existing projects have risen by 9% between Q1CY20-Q4CY21, that is, January 2020 to December 2021, while costs for new projects have risen by 13%.
While the increase in prices of commodities such as steel, cement, aluminium and fuel which typically account for 30-40% of overall costs has contributed to this rise, labour costs which typically account for 40% of project costs have also risen over this period owing to labour shortages and increased costs at labour camps due to Covid due to onsite stay, food and adherence to Covid protocols.
While commodity prices are volatile and may increase or reduce depending on global and domestic factors, overall wage inflation is seeing a structural uptrend which is likely to result in upward pressure on construction costs over the medium term.
With an increase in input costs of 10% over the last 18 months, its foolhardy to expect real estate prices to remain stable indefinitely. There has already been marginal price increase of 2-5% in 9MFY22. According to experts, prices may see a single-digit rise over the next 2-3 years annually as inventory levels have stabilised and the Indian residential real estate market has undergone clear signs of consolidation with the market share of larger, organized developers having grown to 25% in FY21 of residential sales value as against 11% in FY17.