Realtors now face contractor shortage

The real estate sector may be booming, but these are not easy times for developers. For one thing, costs have increased by 10-15 per cent annually on account of building contractors raising their fees.

Against the backdrop of the real estate boom and a shortage of contractors resulting in work overload, realty firms have lost the edge of being able to negotiate their fee with contractors.

"Contractors have been able to improve their margins by 15 per cent year-on-year. There is a reversal in trend now -- it is the developer who has started chasing the contractor," says Sanjay Chandra, managing director, Unitech.

Factor in the rise in cement and steel prices, and the total cost of construction has gone up by as much as 15-20 per cent.

While developers have had to absorb some of this cost, a significant portion is also being passed on to the consumer.

"We factor in all these increasing costs at the time of launching a project. Our final price to the consumer is based on the projections of construction becoming more expensive," says Pranav Ansal, director, Ansal Properties and Infrastructure.

"When I told my contractor that I was planning a commercial project, he told me to quickly place the order. My architects had not even designed the building, but the contractor still wanted me to hire him. He warned me that if I took too much time, his work load might not let him do my construction. That is how serious the problem is," says a large builder from Kolkata.

With contractors having their order books full, industry experts say that they are able to literally pick and choose the projects they want to execute. In this scenario, it is the small developers who are suffering the most.

"Three years ago, I had launched 1,400 square feet apartments in Gurgaon at Rs 1,600 a square foot. But now, the cost of construction has escalated to roughly Rs 1,700 per square foot. My margins have almost disappeared," laments a Delhi-based developer.

Another small realty firm, the Delhi-based Best Group, has seen its returns decline from about 25 per cent to between 8-10 per cent net on account of increasing costs.

Chandra says contractors prefer the bigger developers as they get to work on larger projects which have better returns. "They would rather have fewer orders of big buildings and townships, as opposed to a larger number of small buildings," he says.

To combat the problem posed by the lack of contractors, a few realty firms have forged joint ventures (JV) with foreign construction companies. DLF Ltd last year set up a 50:50 JV with Laing O'Rourke, an infrastructure-cum-construction company based out of the United Kingdom. Recently, Emaar MGF forged a JV with Leighton, an Australian construction company.

Ansal Properties and Infrastructure is now scouting for a JV partner. "We need to address the problem of contractors having too much workload. This is why we have decided on a foreign joint venture," says Ansal.