Is cost escalation forcing builders to compromise on quality?

[ecis2016.org] The sharp hike in raw materials is forcing builders to have little choice but to either hike prices or compromise of quality.

“Do I have a choice? Now that there is cartelisation of cement, steel and other raw materials, my input cost has escalated by 20%. I am left with two uncomfortable choices – either pass on the burden to the buyers and weather a prolonged spell of slow sales, or I compromise with the quality,” says an agitated builder in Noida, requesting anonymity. 

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The increase in input costs, has resulted in a catch-22 situation for real estate developers. As per industry estimates, the input cost of various construction raw materials has surged by 20%-35% in the last 12-18 months. Property prices have not increased proportionately. In most of the micro markets across India, prices during the said period are at a standstill.  

No one has a clear answer as to what is the way out. Both the possible solutions on the table – compromise on quality or hike prices – have their own flip side. If developers hike the prices, the already slow sales velocity would be further affected, resulting in cash flow challenges for builders. If they compromise on quality, the brand’s reputation would take a hit and it affect their future projects, as well. 

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For the projects at the initial stages of construction, compromising on quality would amount to sacrificing the strength of the building. After all, cement and steel consumption are at the maximum during the initial stages only. For projects nearing completion, compromising on finishing materials like electrical switches, sanitary ware, etc., would invite buyers’ wrath. 

Real estate price hike vs construction quality

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Ramesh Sahu, a home buyer in Mumbai, was recently disappointed when he visited the housing project site to book the house. A couple of months back his friend had booked a 2BHK apartment over there at a price of Rs 1.40 crores. However, Ramesh was told that since raw material prices had escalated, the project would cost an additional Rs 10 lakhs now.

Soniya Sharma was quite impressed with the previous projects of the developer in Bengaluru. Known for the backward integration model and state-of-the-art craftsmanship, the developer’s under-construction project was expected to be the replica of his past impressive track record. However, she was disappointed with the quality of the external visible area of the new project. It was quite apparent that the developer had compromised with the quality, to cut corners this time around. 

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Will rising raw material cost increase property prices?

Vinit Dungarwal, director at AMs Project Consultants, points out that housing developers’ profit margins were already wafer-thin and the rising inflationary trend of basic input costs such as cement, steel and labour, will add to their woes. With developers finding it increasingly difficult to offset the pricing, most of them will look at passing on the burden to the home buyers, rather than cutting corners, he says. 

“At the current levels, it will be difficult for affordable housing developers to launch budget homes. This is a price-sensitive market and the upswing in raw material costs and EMI getting dearer will have some bearing on the market. We believe that future price hikes are inevitable, as developers will not be able to absorb these constantly increasing input costs without them impacting their businesses. On the brighter side, the demand for housing has increased significantly after the first wave of the pandemic and increased demand invariably supports the price hikes,” says Dungarwal.

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Aditya Kushwaha, CEO and director Axis Ecorp, believes the surging input costs are impacting the cost of the construction. There are regulations in place through which the developers may look at increasing the prices of even sold inventory. For now, most developers are looking at recovering the costs from unsold inventory, but if the prices continue to mount, developers will have to consider other measures.  

“Compromising on quality or deviating from the plans is never an option as there are a lot of regulatory compliances in place. No developer would want to resort to such short-term gains. For us, it is paramount to maintain the quality standards that we are known for. This is not the first time that raw materials prices are increasing. The prices have been on an upward swing for the last 10 years. All reputed developers are aware of these trends and plan accordingly. The prices have indeed increased by multiple folds in the previous year but compromising on quality is not an option,” maintains Kushwaha.

How can developers deal with rising input costs?

This also brings to the table whether there is a third possible option. After all, developers have already threatened to halt construction as a mark of protest against an alleged raw material cartelisation. So, is this a viable option? A Noida-based developer who did not want his identity revealed, said that he was in no position to share the camaraderie with his peer group and halt construction. For him, the choice is to bear the additional pressure of Rs 2 crores with costly raw materials or delay construction to cough up Rs 4 crores with his operating expenses and interest cost.

Hence, there seem to be only two obvious uncomfortable choices for developers. Developers are trying best to work on the alternatives that can help them optimise costs and make the most of the given resources, while adhering to set timelines. Compromising on quality may end up doing more harm than good. From a long-term perspective, it is always advisable not to resort to such measures. 

Affordable housing projects nevertheless are really pushed to the corner since they work on volumes and their profit margins are thin. In contrast, the luxury developers have the luxury to offset the input cost escalation since the margins over there are on the higher side. 

(The writer is CEO, Track2Realty)

Source: https://ecis2016.org/.
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Source: https://ecis2016.org
Category: Lifestyle