Construction cost up 8-9% on existing greenfield projects in Q4 2021 compared to Q4, 2020: JLL

12 Jan 2022 , 02:41 PM

Construction cost of existing greenfield and interior fit-out projects has increased by 8-9% in Q4 2021 (Oct-Dec) as against Q4 2020 (Oct- Dec), as per JLL’s Q4 2021 Construction Price Report.

This is primarily driven by procurement challenges, leading vendors to procure from the first available source at a higher price, increased cost towards health and safety and skilled labour availability. The major impact has been on services, especially Long Lead imported items where there is limited local sourcing of materials. Long Lead Item refers to items whose delivery/supply time is longer as they may be imported from other countries like China, Malaysia and so on. They may also be items that are built as per design. Therefore, these items are not bought off the shelf and take a longer time to reach construction sites.

The impact of the first wave of the pandemic on market benchmark rates has been neutral to significant depending on the asset classes. There are a few challenges like idleness of plant and machinery along with enormous market competition which is compelling contractors to discount their margin as they bid for new projects. This discount is not sufficient to offset the overall hike in construction material and labour costs.

The second wave has given an overall image that the Covid-19 restrictions are there to last for years and with lockdown, transportation, manufacturing challenges, all the stakeholders are anticipating material cost increase for the forthcoming months. The cost impact post-second wave has been significant. The cost of new projects is up by 10-12% while the existing projects went up by 8-9%. The supply chain breakdown is the key reason as the cost of material and its freight account for 50-60% of construction budgets. 

“With the combination of market re-emergence and survival from the hard-hit of Covid-19, construction prices been quite volatile since Q1 2020 that has made investors, developers, contractors take cautious decisions, although the price surge was far above all the assessments. As the market slowly started to recover, the long wait for projects to start have begun, there is always hope for prospects. The Indian construction industry is the key area of global real estate investments, the recovery pace can double fold in the upcoming quarters which will help all the stakeholders to narrow down the loss made in the previous quarters since the Covid-19 outbreak. The volatility is here to stay for a while until industry shows a steady sign of recovery along with other sectors like manufacturing, hospitality, FMCG, infrastructure, leisure and so on,” said MV Harish, Executive Managing Director, Project Development Services, JLL India.  

Spike in raw materials cost and labour cost leading to costlier homes

The findings of JLL’s report demonstrates a price increase of overall 10-12% for new projects and 8-9% for existing projects. Contractors are increasing the overheads and profit, anticipating the uncertainty in the market majorly due to labour and material challenges.

The cost of labour has risen 10-15%, besides the regular increase, due to the knock-on impact of Covid-19 protocols and its associated costs. This includes costs related to compliance to new protocols like RT-PCR tests, idle time until test results, increased accommodation space for the same amount of labour, quarantine facility and sanitation measures. In addition to that, additional labour retention and transportation costs put together have contributed to the increase.

Since Q1 2020, steel is up 45-47% to INR 62,300/MT, copper also at 70-75% to INR 745,000/MT, followed by aluminium at 55-50% to INR 203,385/MT, PVC items by 80-90% to INR165,000/MT, and last, but not the least, fuel (primarily diesel) by a whopping 43-47% to about INR 94/liter.

Overall Cost Impacts- the Ups and Downs

Source: JLL PDS

While upsurge in construction cost per sq. ft for existing projects and new projects was at par (105%) in Q4 2020, new project cost went up substantially, from 105% in Q4 2020 to 113% Q4 2021 translating to an 8% hike.

While the markets continue to be volatile, it is anticipated that by Q2-Q3 2022 the construction prices will stabilize. The price rise that we have witnessed is going to be the “new normal”.

*Greenfield projects — These are new constructions including the base building and its interiors. For examples — Residential projects, commercial buildings, hotels, schools, manufacturing plants, warehouses and so on. Interior Fit-outs — This refers to the interiors done typically for corporate offices. For example, may include office space for say big tech companies and so on.

The views and opinions expressed are not of IIFL Capital Services, indiainfoline.com