Real Estate Cost Escalation Affecting Project Quality

The Covid pandemic impacted the world in every imaginable aspect. The most significant of this impact was the standstill that it brought to the global economy, which in turn affected all commercial businesses.

India too felt the sharp pinch of the pandemic in its economic activities, and underwent 2 years of instability in all commercial sectors. The real estate industry was also among the other business activities which were affected. However, the Indian real estate industry proved itself to be highly resilient to such turbulent times and it restabilized in the wake of the pandemic.

Cost Escalation in Real Estate

The disruption of the global supply chain that occurred earlier this year began a cycle of turbulence and volatility in manufacturing costs, which posed a new challenge for real estate. Another downside of this has been the cartelization and arbitrary prices levied by manufacturers, because they are aware of the high demand that is there in the market. These factors are working in alliance with one another to escalate building material costs.

The Impact of Cost Escalation on Developers

As per reports, building material costs for commodities such as cement, steel, tiles etc. have witnessed a year-on-year escalation of approximately 35%. This raw material price increase has caused the cost of construction to rise by approximately Rs. 500 per square foot, as per gathered statistics.

Real estate businesses operate within a delicate network of their stakeholders, each of which are looking out for their personal interests. Developers construct projects which are in turn purchased by consumers, and hence they mutually benefit one other. If either side of this nexus is impacted, the entire system faces a threat.

The Conflict for Developers

The main source of profit for developers in the business stems from the financial surplus that they can generate through the sales of their projects versus the costs that they incur in constructing it. Construction is not the only cost that developers have to bear with respect to a project, since they also have to invest in marketing it well. Hence it is essential for developers to maintain a financially viable difference in their construction costs and selling costs in order to stay afloat in the business. In the present scenario, the developers have been exposed to the stark reality of ever-increasing construction costs. They are now faced with a difficult choice, about whether they should expose their consumers too to these high prices, or bear the costs themselves.

Can Cost Escalation affect Project Quality?

With respect to the first alternative, it is imperative that developers price their projects in accordance with the prevailing real estate price trends. Consumers are demanding properties within certain price configurations, and if developers choose to exceed that, they will be faced with a dip in the demand and sale of their properties. Developers are hence avoiding passing on the excess costs onto their consumers, in an attempt to retain the present real estate sales velocity. This has affected their profits, especially in segments such as affordable housing which are designed and priced with low profit margins.

The remaining alternative for developers then is to keep their project pricing the same, but decrease their own construction costs so as to keep up a profitable difference between the two. The only way for them to do this despite the raw material price increase is to compromise on the quality of their constructions. By altering the quality and quantity of raw materials that are used in a project, the construction costs can be altered in a way that even with the higher prices of commodities and the same prices for property, developers can earn the similar margin of profits.

Why Developers are not Compromising on Quality?

Altering project quality is not a realistic and preferable option for developers since their reputation in the market is directly linked with the quality of their construction. If the quality of projects is compromised, developers might be able to survive in the short-term, but it is not a sustainable pattern to follow. Besides this, there are also rules and regulations which developers have to abide by in terms of construction quality.

How can Developers Overcome the Cost Escalation

It is evident that in the interest of thriving in the real estate industry, developers can neither increase their project pricing nor can they deteriorate the quality. However, with the right project and pricing strategy, they may be able to overcome this cost escalation and maintain their profit margins. It is essential for developers to have a thorough understanding of the market trends, pricing trends, consumer demands and insights of various micro-markets so that they may be able to create and sell properties that are well-suited for the market demands, and earn revenue in the process.

BeyondWalls- an integrated proptech ecosystem for real estate in India can help developers with accurate and data-driven planning and strategizing. It can provide end-to-end services for real estate marketing and sales.