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The story so far…
The past two years have been a test of resilience for the economy and by extension the real estate and construction sectors. From the mass labour exodus of March-April 2020 to COVID-19-induced lockdowns exerting pressure on completion timelines, coupled with the supply chain realignment for raw materials; the sector has witnessed, yet overcome, numerous challenges. It has been on a steady road to recovery since mid-2021, on which it had continued despite the Omicron scare and global supply chain disruptions. However, the rising construction material costs following the supply chain bottlenecks, rising oil prices, and the current geopolitical crisis in Europe are factors that could have an impact on the pace of growth.
What is making construction costs rise?
Prices of key input materials such as cement and steel have been under pressure for the past couple of quarters on account of the rising crude oil prices and the consequent dependence of the real estate sector on oil and oil-derived products in construction 1. Also, the January-March period typically witnesses a spurt in the prices of construction materials as developers go into an overdrive to complete existing projects before the expiry of the financial year. However, this year the European geopolitical crisis has exacerbated the pressure on input material prices, leading to a sharp rise in construction costs.
According to an ICRA note, released in March 2022, Russia accounted for about 10% and 17% of the metallurgical and thermal coal trade in CY 2020 2. The international sanctions imposed on the country in the wake of the crisis have led to an increase in the prices of both types of coal, thereby impacting steel producers. In addition, both Russia and Ukraine account for a total 10% of the global steel trade which is also leading to steel shortages around the world. Russia is also a significant producer of aluminium and nickel – both of which are key input materials in construction. Any spurt in their prices due to supply chain issues would add to the pressure faced by the developer community as construction costs are likely to remain elevated. The continued increase in prices of crude oil would have a double impact – crude oil-derived petroleum coke is a key input for cement manufacturing while diesel is used heavily for freight and carrying out mechanical works. However, we also anticipate this pressure on input materials to ease off in the next couple of months as supply chains recalibrate.
What has been the impact on the real estate and construction industries?3
- Steel prices
- Average prices in Q4 2021 grew in the range of 5-10% on a quarterly basis. The increase was much steeper in Q1 2022, as prices rose by an average of
15-20% on a quarterly basis, with the rate of increase varying across cities.
- Mumbai, followed by Delhi-NCR, saw the steepest rise in steel costs during Q1 2022.
- From the pre-COVID-19 period (Q1 2020) until Q1 2022, average steel prices have increased by over 45-65% across all major cities.
- Cement prices
- In terms of cement prices, the impact of the crisis has not been as severe as steel prices. Between Q3 2021 and Q1 2022, average prices increased in the range of 10-15%.
- Delhi-NCR, followed by Mumbai, posted the sharpest rise during this period.
- From the pre-COVID-19 period until Q1 2022, cement prices on an average increased in the range of 20–30%.
- Overall construction costs4
- While steel and cement have seen a significant price increase, raw material costs across the entire construction matrix have also risen. The prices of aluminium, copper, PVC, etc., have also witnessed a sharp rise during this period, pushing up the overall construction costs.
- Other raw materials such as flooring, paints (chemicals), etc. have also witnessed an increase.
- The labour component, which accounts for a sizeable proportion in the overall construction costs, has also seen a considerable increase in recent quarters.
- Factoring in these price pressures, overall construction costs have grown in the range of 15-25% since the pre-COVID-19 period (Q1 2020) until Q1 2022.
So what could this imply for real estate?
In terms of actuals, the rise in construction costs would depend on the construction stage of the project. If a project is at the initial stage of construction, the increase would be significant as most of the cement and steel requirement stems at this stage. For projects closer to completion, the incremental cost outlay would not be as substantial (although it would depend on the positioning of the project / specifications offered).
In terms of its sectoral impact, the increase in construction cost is expected to affect each real estate sector differently:
- Residential projects are already witnessing an increase in capital values considering the growing input costs, which are being passed on to the end-user. This would especially impact affordable and mid-end housing segments where profit margins are relatively tighter and homebuyers price sensitive.
- Rising construction costs would also impact the I&L sector, which is witnessing significant, big box construction activity on account of growing occupier, investor and developer interest.
- Similarly, for commercial and retail projects, it could result in developers seeking higher rentals / capital values for their under-construction projects.
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1 Crude oil-derived petroleum coke and imported coke are key input materials for cement manufacturing. Coking coal and iron ore are some of the key input materials for steel manufacturing.
2 ICRA's "Russia-Ukraine conflict to heighten input cost pressures, but also open up export opportunities for Indian steel companies," 7 March 2022
3 Average of prices across four cities – Delhi-NCR, Mumbai, Hyderabad and Bangalore. Please note that the price ranges could vary across these cities.
4 For a typical mid-end high-rise residential development |
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