Costinflation expected to cool down by the end of 2022 and largely moderate bymid-2023.

Driving Value in the ‘New Normal’ Era’. The report examinesthe current market landscape and deliberates on factors influencing cost trendsacross key asset classes.

Theyear 2022 recorded an escalation in material costs due to curtailed productionamid the pandemic and increased global shipping costs led by supply chainbottlenecks. The overall greenfield construction cost increased by 5-7 per centin Q3 2022 Y-o-Y. Labour cost increased by 8-10 per cent, and reinforcement steelprices by about 20 per cent Y-o-Y during Q3 2022 (reinforcement steel prices dipby 14 per cent Q-o-Q in Q3 2022).

Resolutionof certain supply chain disruptions and reduction in price pressures in Q3 2022brought about a directional swing and reduction in the index across mostcities. CBRE, in its report, expects this trend to continue till the end of2022.

Lookingahead, inflationary pressures are widely expected to abate in 2023. This,alongside the resolution of supply chain disruptions and more active policyintervention from the government might limit hikes in material prices. Thereport also highlights that cost pressures are likely to persist in the shortterm, even as overall cost increase is expected to recede in the comingquarters. Amidst ongoing geopolitical complexities, it is anticipated thatmaterial prices may moderate in 2023, with an expectation of longer-than-usuallead times for material delivery and short-term labour scarcity.

Theoutlook for construction costs remains stable but cautious, as marketvolatility is likely to persist in 2023 along with monetary tightening,continued high inflation, a possibility of a recession in developed economies,and geopolitical turmoil-related challenges going forward. Therefore, CBREforecasts a marginal rise in the overall construction costs during 2023 acrosscities, with Mumbai likely to witness a sharper rise.

However,strong demand for construction is likely to continue to push up employment inthe construction sector. Currently, the availability of skilled constructionworkers remains a challenge despite increased wages, benefits, and incentivesbeing offered by employers. Fuel price volatility may also impact the overallinput costs in 2023.

Thereport also suggests that the overall impact of costs related to healthinitiatives, such as sanitization, periodic check-ups, labour maintenance, andadditional insurance requirements will subside in 2023. CBRE anticipates thatfor 2022-2023, the impact of health and wellness initiatives on the overallcost will further reduce by around 1.5-2.0 per cent.

AnshumanMagazine, Chairman and CEO – India, South-East Asia, Middle East and Africa,CBRE, said, “Despite supply constraints, the demand side of the equation isbolstered this year by rental increases and market demand. Construction demandis likely to remain strong in the near term. We expect a comparatively stableoutlook for the Indian economy with the possibility of potential economic slowdown;however, considerable pent-up demand for new construction — includinggovernment infrastructure projects — should largely sustain construction activityin India.”

GurjotBhatia, Managing Director, Project Management – India, SE Asia, Middle East,and Africa, said, “As the cost of major materials, such as cement and steel, hasdeclined Q-o-Q and a gradual improvement in supply chain bottlenecks waswitnessed during Q3 2022, construction cost has stabilised across asset classesand cities. Despite headwinds, construction demand is expected to remain strongin the near term. Considerable pent-up demand for new construction shouldlargely sustain the marginal increase in cost construction.”

Key observations from the report

Construction industry poised for a stronggrowth

-    With the government’s continued focus onboosting infrastructure, improving real estate activity and the housing sectorrecording an uptick in terms of both units launched and sold, constructionactivity has remained buoyant.

-         Key indicators of construction activity– steel consumption and cement production – reported a strong growth in H12022. In addition, owing to sustained recovery in contact-intensive sectors,gross value added (GVA) at basic prices for construction services expanded by16.8 per cent Y-o-Y in Q1 2022-23 and was 1.2 per cent above the pre-pandemiclevel.

Cost impactof health and wellness initiatives

-         The overall impact of costs related tohealth initiatives, such as sanitization, periodic health check-ups, labourmaintenance, and additional insurance requirements on construction cost during2020-21 was to the tune of 4-5 per cent.

-         Relaxation in lockdown restrictions in2021 resulted in lowering of the costs related to maintenance of COVID-19protocols in 2021-22 and the impact of health and wellness initiatives on theoverall costs came down to 2-3 per cent.

-         Owing to the mass vaccination drive, CBREanticipates that for the year 2022-23, the impact of health and wellnessinitiatives on the overall cost will further come down to around 1.5-2.0 percent.

Strong supply pipeline across asset classesto aid construction activity

-         CBRE anticipates construction activityin the office sector to strengthen in the coming years as developers line up astrong supply pipeline exceeding 100 million sq. ft. in the next two years.

-         Construction activity in the residentialspace remained in the top gear through 2022 – nearly 261 million sq. ft. ofproject launches were witnessed during the year while 222 million sq. ft. werecompleted. CBRE expects developers to sustain this growth momentum in thecoming years.

-         A sharper growth graph for constructionactivity is expected in the retail sector in the times to come as more than 12million sq. ft. of mall space is likely to become operational over the next twoyears.

-         While warehouse space addition hasremained relatively slow this year, CBRE expects it to pick up pace in Q4 2022.Moreover, gradual recovery in construction activity seems to be on the cards inthe coming years, with almost 50 million sq. ft. of warehousing space expectedto be added in the next two years.

Greenfieldconstruction costs stabilised across asset classes

-         As the cost of major materials, such ascement and steel, declined Q-o-Q and a gradual alleviation of supply chainbottlenecks was witnessed during Q3 2022, greenfield construction costs alsostabilised across asset classes and cities.

-         The situation is likely to remainunchanged going forward; however, a cascade effect of the current geopoliticalsituation and global inflationary pressures is anticipated to impact thegreenfield construction costs marginally going forward.

Lookingahead: Cost of building across key asset classes

ESG:The cost implications of sustainable initiatives for any project usually vary,but the cost can be reduced if sustainable components are included in the earlystages of building design. In addition, developers and occupiers can alsobecome eligible for green financing by reaching certain sustainability andemissions milestones throughout the lifecycle of a project.

Technology:Organizations that are fast-tracking digitization by augmenting their digitalcollaboration capabilities, automating low value-added activities, and sharingdata for insight-driven decision making are likely to not only find operationseasier going forward but also control costs. CBRE expects a wider use of techin construction and construction management in the future for ensuring long-termefficiencies and cost savings.

Cost reportfindings

-         Materialprices moderating post-H1 2022.

-         Labourshortage to persist in the short term.

-         Fuelprices to remain volatile amid geopolitical crises.

-         Greenfield costs are expected to go upby 4-5 per cent in 2023.

“Despitesupply constraints, the demand side of the equation is bolstered this year byrental increases and market demand. Construction demand is likely to remainstrong in the near term.”

-     AnshumanMagazine,

Chairman and CEO – India, South-East Asia,Middle East and Africa,

CBRE.