Over the last one-year, average cost of construction is estimated to have risen up to 11%, mainly due to a significant surge in labor costs coupled with a moderate price increase in construction materials like sand, brick, glass, wood etc.
Notably, the cumulative effect of rise in the prices of four key construction materials including cement, steel, copper and aluminum have been relatively low. In fact, average cement prices have seen a steep decline of 15%, while average steel prices have witnessed a marginal 1% decrease over the last 12 months.
“While rise in prices of key construction materials was relatively modest over the last year, labour costs have been driving the overall cost of construction upward. With labour accounting for more than one-fourth of overall construction cost, a 25% annual rise in labour costs has stretched construction budgets and impacted operational expenses. Moreover, the need for skilled labour and the associated costs for training, safety and regulatory compliance further adds to spiraling labour costs.” said Badal Yagnik, Chief Executive Officer, Colliers India.
As of October 2024, cost of construction in the residential segment saw an estimated 11% increase YoY. Amongst various real estate segments, construction cost escalation has been relatively sharper in the residential segment.
Interestingly, increasing built quality consciousness and the growing demand for amenity rich gated communities have persuaded residential developers to upscale their real estate offerings in general and thus led to higher cost of construction cost in the residential segment.
“Despite rising construction cost across real estate segments, the commercial and industrial & warehousing segments have witnessed robust new supply during 2024. For instance, the Indian office market saw 37 million square feet of new completions in the first nine months of 2024, while the industrial & warehousing segment saw about 22 million square feet of new supply. Amidst healthy demand especially for Grade A developments, project completions are expected to be largely on schedule across major cities. Real estate developers, meanwhile, are likely to step-up technology and sustainability adoption across asset classes.” says Vimal Nadar, Senior Director and Head of Research, Colliers India.
To navigate the steady rise in overall construction cost and associated challenges, developers are optimizing cost by reassessing budgets. They are also looking at improving supply chain management by diversifying suppliers and opting for localized sourcing of key construction materials.
Additionally, real estate developers are increasingly making investments in training and automation to address challenges related to volatilities in the availability of skilled manpower, which in turn can potentially facilitate better project scheduling. Going ahead, a greater adoption of circular economy will not only optimize construction cost but also improve efficiency and support sustainability.
