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Commodity inflation will dent project viability

Commodity inflation will dent project viability

by Dr. Niranjan Hiranandani is Vice Chairperson NAREDCO and MD Hiranandani Group

Real estate is not just about square feet of constructed space, it also reflects on the design form, creating poetry in concrete. The past few months have seen this expression of creativity in concrete get impacted by rising costs of raw materials. It is not just this aspect, across construction sites, one finds equipment which is being utilized in the process of construction – some of which is rented – also getting impacted by the surge of inflationary pressures. The result, on site, is that while labour and material costs have risen, so has rental charges of equipment used at construction sites.

This inflationary trend is hitting real estate hard – on one hand, there’s the regulatory aspect which holds the developer to a pre-set completion date. In effect, high costs of rental equipment during any point in time doesn’t have the simple option of delaying the process till rentals reduce, simply because the date of possession is pre-determined. Effectively, this leads to a scenario where deadlines must be met; and the developer has no choice but to opt for the equipment despite the higher-than-normal rentals. Obviously, this situation impacts margins; but consider this from the perspective of overall project cost and this takes on a serious turn. If one adds up enhanced costs of labour, raw material and rental equipment, the total impact project viability.

The Covid-19 pandemic has already created major challenges over the past two years, and real estate has been bravely battling the series of new challenges which keep coming up. The buyer sentiment, impacted by the pandemic, also means that the past two years saw no probability of construction cost hikes being passed on to the end user, ie, the consumer. Effectively, the situation is fast developing into one where the home buyer is probably unaware of the stark difference in terms of construction costs, as compared to the price points at which homes were booked two years ago. The developer is stuck because of the regulatory aspect which does not allow for changed price points, the rising cost of construction needs to be viewed in this perspective.

The challenge would not have been so severe, if any one of the three aspects – labour, material, and equipment – had witnessed hiked costs; the level of challenge has been raised with all three reflecting hiked costs. In most on-going projects, the developer, who factored in deviations in costs while launching the project never have imagined that the impact would be across all three factors which are needed for construction. One can look at inflationary trends which are global and domestic; or the aspect of pandemic impacting the economy or even the Ukraine conflict impacting global supply chains – the net result is that cost of construction has shot up in a very short time, and real estate, as an industry, is unable to deal with then challenge without impacting the overall project cost estimates.

Given this, the industry has, through bodies like NAREDCO, appealed to the authorities to play a supportive role and help. Hopefully, issues like cartelization by raw material suppliers will be dealt with by authorities; and some of the pain points may be reduced. Until that happens, there is the aspect of labour at construction sites – the post pandemic changed work scenario translates into ensuring a more safe and secure working environment, lesser quantum of productivity vis-à-vis the norm prior to the pandemic and higher wages. Effectively, these are Tsunamis of the costing aspect, and the impact on project viability is severe.

The manual aspect of construction is being supplemented by use of equipment, and customer delight is a result of better finish and quality of construction. This rented construction equipment covers practically all aspects of the project work. From excavators and loaders to graders, compactors and bulldozers, the list is long. Scaffolding equipment and cranes are a part of the modern construction site. Tools and equipment are also rented at some construction sites simply because it makes the process easier. It had been a cost-effective method which did away with the need to maintain and store the equipment between the life cycles of projects. Present day, the rising costs of renting such equipment have created a major impact on the construction costing.

In this scenario, there are no quick-fix remedies. The impact of hiked costs of material, labour and rented equipment has impacted project viability, and the hope is that authorities will find some way in which the challenge can be met. Real estate and construction support more than 250 ancillary industries; is the second largest provider of employment in the Indian economy – most important, it provides the basic need, shelter. Given these aspects, one hopes that there will be light at the end of the tunnel and that the grim situation will get resolved.

 




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