Real estate developers stuck between construction cost wall and soft market

Price rise mainly due to jump in cost of cement, steel, and skilled labour

Rising construction costs are set to pressure real estate developers’ profitability, as passing on the increasing cost to homebuyers has become difficult due to already elevated home prices and a moderation in housing demand.

 

In the cost structure of an average real estate project, construction accounts for around 40 per cent, land costs for 20–30 per cent, and the earnings before interest, tax, depreciation, and amortisation margin hovers around 30 per cent, according to Vijay Agrawal, managing director (MD) — investment banking, Equirus.

 

Agrawal believes that valuations of real estate companies have come down because of the slowdown in sales and rising costs.

 

“The sale prices have been increasing. The listed companies’ average realisation per square foot has gone up. But with the slowdown in the market, developers will not be able to achieve higher realisations. Construction costs are increasing, and this will impact the balance sheets,” he added.

 

According to Colliers, the average cost of construction in residential real estate has gone up from ₹2,000 in October 2020 to ₹2,800–2,850 per square foot in March 2025. The construction sector in India has faced challenges due to escalating costs, limited availability of skilled manpower, and market uncertainties, according to Jatin Shah, chief strategy officer, Colliers India.

 

The increase in costs is mainly due to a rise in cement and steel prices, as well as the cost of skilled labour. 

 

Rajat Rastogi, chief executive officer (CEO), West region and commercial assets, Puravankara, said: “Rising inflation has also contributed to the increase in construction costs. We’ve observed a 5–7 per cent escalation across most materials, with labour emerging as the most expensive component.”

 

According to Colliers, over the past few years, the typical composition of construction cost has largely remained stable, with about 67 per cent comprising construction materials (cement, metals, sand, bricks, wood, etc), 28 per cent labour cost, and 5 per cent fuel cost.

 

“The dual challenge of escalating construction costs and sales deceleration is impacting developers’ profits,” said Santhosh Kumar, vice-chairman, Anarock Group.

 

 According to Anarock Research, in the first quarter (Q1) of calendar year (CY) 2025, housing sales in the top seven Indian cities dipped by 28 per cent year-on-year (Y-o-Y) due to skyrocketing residential prices and geopolitical headwinds. However, prices continued to rise in Q1 CY 2025, increasing by 10–34 per cent Y-o-Y.

 

Further, industry experts believe that premium housing developers are more resilient to rising construction costs than mid-income developers, who must maintain affordability while absorbing costs.

 

“This is most acute for midsized developers who lack the economies of scale enjoyed by larger firms or the agility of smaller boutique developers. Project timelines are extending due to cash flow constraints, adding to carrying costs and further eroding margins,” said Kumar.

 

Moreover, experts believe housing price growth is likely to moderate, considering the sales slowdown, which makes it difficult for developers to pass on additional construction costs to buyers.

 

“Developers have been able to raise some prices, passing on the cost to buyers. But wherever they have already done this, and costs have risen beyond their model, it will impact profitability. The market is concerned that further price increases are probably impossible due to the moderation in sales,” said Agrawal.

 

Vinod Kumar Goenka, chairman and MD, Valor Estate, said: “Goods and services tax (GST) is charged at 5 per cent in real estate without any input tax credit. If the credit were available, it would offset the cost. However, since there is no input credit and 5 per cent GST is still applied to the total value of a flat, the entire tax burden is passed on to the customer.”

 

 The outlook for construction costs remains uncertain amid ongoing geopolitical tensions and global economic events.

 

According to Crisil Intelligence, cement prices in 2025–26 are estimated to rise by 2–4 per cent. Meanwhile, India Ratings & Research expects base metal prices to remain volatile Y-o-Y.

 

“If sales taper further, many developers may experience reduced cash flow efficiency, as project timelines extend due to cost management strategies, further intensifying working capital challenges. Companies with high debt leverage are particularly vulnerable, as prolonged project cycles require sustained financial commitments while returns are delayed. The situation is especially challenging for midsized and smaller developers without substantial financial reserves, forcing many to reassess their development pipelines and capital allocation strategies,” said Kumar.

 

Sanjay Dutt, MD and CEO, Tata Realty and Infrastructure, believes that resolving ongoing geopolitical challenges could help stabilise prices and curb further increases. “However, if these conflicts persist, the pressure on prices is likely to continue escalating.”