High construction costs may hit realty

Realty research firm PropEquity has said that the increasing construction costs are expected to hit the real estate sector.

"Taking into account price increase of the four key construction components - steel, cement, labour and bricks - there is an 18% gross rise in construction cost over the last 2 years [2011 over 2009]. This escalation will corrode the profit margins significantly," PropEquity study said.

The impact of increased delivery commitment along with escalating costs will affect the delivery of residential units on time.

It is estimated that delivery of 480,000 residential units across affordable, mid and luxury housing segments, scheduled for completion during 2011-13, will be delayed in the 11 cities, it added.

As a result, developers are likely to lose interest in projects, making delays in project execution inevitable, it said.

PropEquity has conducted an extensive study of the construction delays in real estate projects and the impact on the industry.

Data points covering over 10,000 projects being executed by over 1,500 developers across 11 cities in prime residential locations have been studied to arrive at the trends contained in the research report.

The 11 cities included Gurgaon, Noida, Greater Noida (North), Mumbai, Navi Mumbai, Thane, Pune (West), Bangalore, Chennai, Hyderabad (South), and Kolkata (East).

To receive timely possession of apartments has become a distant dream for most home buyers. It is a sad state of affairs, with even projects promoted by the biggest names in the industry witnessing delivery delays much beyond committed timeliness, study said.

Delays in projects result in cost over-runs and dilution of customer confidence, thereby multiplying the challenges for the developer. 2010 can be regarded as a good phase for the residential real estate markets with absorption levels scripting a recovery with a huge price appreciation after the Lehman crisis in late 2008.

This recovery, though initially driven by affordable projects also witnessed healthy participation from the mid and premium residential segments more recently.

The last 2 years have witnessed many developers selling a large volume of units, much larger than what they have sold and executed in the past.

This draws attention to the fundamental issue of execution capabilities, questioning the capacity of players to successfully execute on time and to the committed specifications.

This assumes greater relevance since a majority of the delivery commitments are in the affordable segment with relatively thinner margins and in an environment of escalating input costs.