As the year 2022 recorded an escalation in material costs due to curtailed production amid the pandemic and increased global shipping costs led by supply chain bottlenecks, the overall greenfield (fresh) construction cost increased 5-7 per cent year-on-year in Q3 2022, according to a report by CBRE. The real estate consultancy company expects this trend to continue till the end of 2022.
“Labour cost increased by 8-10 per cent and reinforcement steel prices by about 20 per cent y-o-y during Q3 2022 (reinforcement steel prices dip by 14 per cent q-o-q in Q3 2022). Resolution of certain supply chain disruptions and reduction in price pressures in Q3 2022 brought about a directional swing and reduction in the index across most cities. We expect this trend to continue till the end of 2022,” according to the report.
It added that looking ahead, inflationary pressures are widely expected to abate in 2023. This, alongside the resolution of supply chain disruptions and more active policy intervention from the government, might limit hikes in material prices. The report also highlights that cost pressures are likely to persist in the short term, even as overall cost increase is expected to recede in the coming quarters.
“Amid ongoing geopolitical complexities, it is anticipated that material prices may moderate in 2023, with an expectation of longer-than-usual lead times for material delivery and short-term labor scarcity. The outlook for construction costs remains stable but cautious, as market volatility is likely to persist in 2023 along with monetary tightening, continued high inflation, a possibility of a recession in developed economies and geopolitical turmoil-related challenges going forward,” it said.
CBRE also forecasts a marginal rise in the overall construction costs during 2023 across cities, with Mumbai likely to witness a sharper rise.
It said strong demand for construction is likely to continue to push up employment in the construction sector. Currently, the availability of skilled construction workers remains a challenge despite increased wages, benefits, and incentives being offered by employers.
Anshuman Magazine, chairman & CEO (India, South-East Asia, Middle East & Africa) of CBRE, said, “Despite supply constraints, the demand side of the equation is bolstered this year by rental increases and market demand. Construction demand is likely to remain strong in the near term. We expect a comparatively stable outlook for the Indian economy with the possibility of potential economic slowdown; however, considerable pent-up demand for new construction — including government infrastructure projects — should largely sustain construction activity in India.”
Gurjot Bhatia, managing director (project management- India, SE Asia, Middle East, and Africa), of CBRE, said that as the cost of major materials such as cement and steel has declined q-o-q and a gradual improvement in supply chain bottlenecks was witnessed during Q3 2022, construction cost has stabilised across asset classes and cities.
“Despite headwinds, construction demand is expected to remain strong in the near term. Considerable pent-up demand for new construction should largely sustain the marginal increase in cost construction,” Bhatia added.
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