EC Harris Research | International Focus on India | Summer 2011

CONSTRUCTION SECTOR
POISED FOR FURTHER
GROWTH AS INDIAN ECONOMY
FORGES AHEAD
The Indian economy was, on the
whole, unaffected by the global
economic slowdown and over the past
few quarters has been riding a high
growth curve, relying primarily on
domestic consumption and services
growth. GDP is forecast to increase by
8.6% in 2011 compared to 7.4% in 2010
and the expectation is that the Indian
economy will see double digit growth
during 2012, with the construction
sector being a key contributor, alongside
telecommunications, infrastructure
and financial services.
The ongoing delivery of major construction
projects in India is expected to be boosted
by the continued growth of the economy,
by foreign direct investment and an influx
of international businesses and corporations.
Foreign capital continues to flow into India
which remains an attractive proposition
for multi-national investors. The increasing
presence of a large number of international
firms, especially those within the financial
services sector is helping to drive forward
the real estate market.
Richard Warburton - Location leader, India

All the indicators are that underlying consumer and producer

sentiments in the country will continue to be upbeat.
Investors in India have traditionally been amongst the most
optimistic in the Asian economies due to robust domestic
consumption, supported by a pan global recovery.
However India has a high level of fiscal deficit and rising
inflation which is posing a potential threat to the current
growth cycle. If inflation picks up, there is a danger of a cut
in government spending which would, in turn, reduce public
GDP contribution and construction workload.

Indian construction sector - overview

The Indian construction industry is an integral part
of the economy and is poised for solid growth due to
industrialisation, urbanisation and economic development
together with peoples expectations of improved living
standards. The construction sector employs approximately
31 million people, accounts for some 6-8% of GDP and, after
agriculture, is the largest employment sector in the country.

EC Harris Research | International Focus on India | Summer 2011

The construction industry in general has been growing at

9-11% year on year, primarily due to the strength of increased
domestic and international manufacturing activities and
industrial growth. There have also been increased levels of
investment - especially by the Government - in infrastructure
and real estate projects.
Growth rates for the construction industry sectors are
currently expected to exceed overall GDP growth over the
next 2 years, underlying a continued strong demand.

Indicative costs per m in India (US$ per m)

Industrial Sheds
350

280

Purpose Built Industrial Units

380

320

A/C Business Park

540

400

Foreign Investment in the real estate

sector
The Indian Governments decision to allow 100% Foreign
Direct Investment (FDI) in the real estate industry has
stimulated construction activities throughout the country.
Foreign capital continues to flow into India which remains an
attractive proposition for multi-national investors. In 2010 the
net FDI inflow was US$20 billion, up 11% on the previous
year. However early figures for 2011 indicate a slowdown,
with FDI in January nearly 50% down on a year earlier.
Going by the trend, it appears that India will receive less FDI
in 2010-11 than in the previous year. Foreign investors want
the government to open up further sectors such as retail,
insurance and real estate to outside money, but there has,
to date been no response.
Foreign investment is perceived as being vital for India,
which needs to fund a US$1 trillion expenditure over the
next five years to overhaul its dilapidated ports, airports,
highways and other infrastructure which are seen as key to
boosting economic growth. The sectors worst affected by
a falloff in investment are construction, real estate, mining,
and business financial services.
There are a number of reasons for the slowdown in foreign
investment, from changes in policy to corruption scandals
to delays in implementation. The Government is aware of
the urgent need to push ahead with reforms and is putting
in place a number of measures to improve the investment
climate.
There was substantial foreign investment in the real estate
sector during 2010, indicating demand growth for higher-end
commercial property. A number of other sectors are also
receiving substantial foreign funds, including rail, road, and
power etc. Infrastructure improvements are making Tier II
cities such as Hyderbad, and Chennai and Tier III cities such
as Jaipur commercially viable options for the relocation of
large corporations.

A/C High rise offices

700

580

A/C Medium rise offices

615

480

Supermarkets Shell
280

220

Shopping Centre - Mall

300

480

Leisure Centres (dry sports)

430

300

Swimming / Leisure Pools

450

640

Private Housing - estate housing

300

400

Private Housing - high quality detached

400

540

Apartments - private high quality

490

380

Apartments - luxury
500

620

Note: The costs shown above are based on the Study of International
Building Costs which EC Harris carried out during the first quarter
of 2011. The figures represent typical guideline ranges of built costs
that a client could expect to pay and are based on cost per m data
provided by EC Harris sources on the ground in India. Costs are for
Tier 1 cities; costs in Tier 2 cities are usually cheaper.
Costs are given in US$ per m of gross floor area, measured to the
internal face of the external walls.
Note that the figures exclude land costs, professional and legal fees,
etc and VAT, which should be added to the costs in this study. VAT is
currently 12.5% on construction projects in India.

EC Harris Research | International Focus on India | Summer 2011

The construction sector employs approximately 31 million people and, after

agriculture, is the largest employment sector in the country.

Commercial real estate trends

Infrastructure sector

Commercial real estate has seen 3 phases in recent years; a

period of growth between 2006 and 2008, when rents more
or less doubled due to growth of the IT sector, expansion of
local and international corporations and a limited supply of
higher specification office space. This period of growth was
followed, in 2008 - 2009, by a sharp drop in demand, due to
the economic slowdown which saw an oversupply of office
space and lease rentals falling by 25-50% compared to the
2006 rates.

Development of infrastructure generally supports growth

within the commercial sector and it has been estimated
that India needs to spend almost US$1 trillion in the next
few years to meet its infrastructure requirements. The
government plans to source these funds from combinations
of Public Private Partnerships (PPP), public investments
and exclusive private investments while FDI is expected to
provide liquidity to allow key rail, road, and power projects
to continue to be built.

From 2009 onwards, there has been a good supply of

commercial office space available across cities with demand
still slow. As a result, rents are likely to be kept in check
within the short-to-medium term until demand catches up
with supply.

Indias infrastructure industry is currently experiencing

unprecedented levels of growth, on the back of the
expansion of the economy as a whole and continued
infrastructure investment is expected to up the Tier II
and Tier III cities driving demand for new, high quality
commercial developments.

Commercial sector
The total market value of commercial and real estate
schemes currently under construction in India is approx
US$ 44 billion. The increasing presence of a large
number of international firms, especially those within the
financial services sector is helping to drive forward the real
estate market. A good working environment, enhanced
infrastructure and lower labour costs are attracting more
international firms and, in turn, keeping demand levels high.
Demand across India has also been stimulated by other
factors such as the projected rapid growth of the Indian
economy, the introduction of Special Economic Zones
and the rise in business process outsourcing. Nonetheless
there remains a substantial differential in quality and
location between back and front office which is creating a
disproportionate demand across the market.
In Mumbai, the office market is expected to see an
over-supply in the next 6-9 months with rents expected
to remain low; this situation is likely to be exacerbated by
the completion of a number of new projects which are
currently under construction.
It is interesting to note that across India as a whole, most
occupying companies have shown a clear preference
towards ready or near complete spaces, resulting in higher
absorption of 9.44 million sq ft, compared with pre-commitments
of 2.64 million sq ft.

Commodity / Input Prices

Construction-related commodities costs are expected to
continue to increase over the next few quarters, and these
increases will be directly passed on in the form of higher
construction costs. 2011 has seen some spectacular rises
in commodity prices including oil, steel and copper and
recent world events mean that the rate of rise is unlikely
to slow down.
Industries based in India producing materials such as
cement, glazing and steel have also shown strong growth
of between 7-13% per annum, indicating sustained demand
both from the local and regional construction markets.
Labour costs are also increasing and there is currently a
shortage of high end skilled labour/experienced workforce
in key city locations. This is likely to have a sizeable impact
on tender prices and lead-in times, potentially requiring
the use of 2nd tier teams to deliver fast-track projects.
The impact could be a reduction in the quality of service
received by key clients.
As a result of the current levels of material and labour cost
inflation and the buoyant market conditions, contractors
are increasing their average margins by between 5% and
7%. These increases are reflected in higher tender prices,
particularly on key landmark developments, although on
smaller projects contractors are more likely to absorb the
increased costs to remain competitive and secure turnover.

EC Harris Research | International Focus on India | Summer 2011

Economy and construction - India at a glance

Economy generally

2009

2010

2011

GDP growth (%)

7.4%

7.4%

8.6%

Consumer price
inflation (%) D&B

9.1%

12.1%

9.9%

Producer price inflation

(%) D&B

8.4%

3.8%

7.0%

GDP per Capita - US$

US$1,059

US$1,126

US$1,289

Retail sales growth % (Organised retail

penetration)

Rs 0.9
Trillion
5.5%

Rs 1.1
Trillion
5.6%

Rs 2.0
Trillion
7.3%

Private consumption
expenditure (Growth
rate %)

6.8%

4.3%

6.6%

Government
consumption expenditure
(Growth rate %)

16.7%

10.5%

3.0%

Investment rate (% of GDP)

34.9%

36.0%

37.0%

Exports - Merch. exports

US$ billion

189.0

182.2

216.1

Imports - Merch. imports

US$ billion

307.7

299.5

353.9

Industrial production
growth IIP (Growth rate
%)

2.8%

7.9%

10%

Current account balance

(% of GDP)

(-2.4%)

(-2.6%)

(-2.7%)

Interest rates PLR (%)

11.50 12.50%

11.00 12.00%

12.50 13.50%
2011

Construction Industry

2009

2010

Cement consumption
(million tonnes)

142,23

159.43

Residential construction
workload (million units)

78.7

75.5

Total Construction Output

(YOY growth rate %)

5.9%

6.5%

10%

Labour Rates % increases

- Skilled workers

2-5%

2-5%

2-5%

- Unskilled workers

2-5%

2-5%

2-5%

Summary
It is likely that the ongoing delivery of major construction
projects in India will be boosted by the continued growth
of the economy, by foreign direct investment and an influx
of international businesses and corporations. These factors
are expected to create an increased demand that will cause
tender prices and soft costs to increase for the foreseeable
future.
It would be prudent however to view the current growth
with an element of caution; there is still a high level of
national fiscal debt and there remains the risk of a

slowdown in government spending. Investor sentiment over

the coming year is likely to be adversely affected by concerns
about ongoing corruption and lack of transparency issues,
but despite this there are strong signs that large Blue-Chip
corporations are taking the plunge and investing in India.
To meet the anticipated ongoing sustained demand, there is
likely to be a period of catch-up which could see shortages
of skilled and experienced resources and a temporary spike
in labour costs, all of which could impact on the affordability
and deliverability of construction projects.
Materials costs will also continue to increase as demand
picks up; as a result project teams will have to carefully
factor in the associated lead-in times of M&E plant and
equipment, as well as cladding and other technologyintensive components. World commodity price rises are
also expected to lead to factory gate price increases.
As companies become more established within the region
and the real estate sector grows, supply within the construction
sector itself will eventually increase to meet demand, resulting
in more competitive tender prices. However, this could take a
good few years to play out, and the alignment of supply and
demand will probably not happen anytime soon.
There are also certainly some ingrained challenges such as
regulatory hurdles, land acquisition, inadequate design and
planning capability. This, with an historic culture of rampant
scope creep, material cost escalations, non-availability of
quality vendors for material supply, and a record of missed
delivery dates, could all have an impact on project programme
and cost.
In terms of Commercial Real Estate, immediate demand
is likely to catch up and overtake current supply until new
projects are released into the market. This is likely to lead
to rises in rents, proportional to demand, followed by falls
in the longer term, as new, better quality commercial space
becomes available.
Based upon these indicators and an overview of the market
the EC Harris view is that increased levels of tendering
activity within the construction sector will see tender prices
will increase by 5-7% over the next twelve months.

Contact
Richard Warburton
Location leader, India
e richard.warburton@echarris.com
Paul Moore
Cost and Technical Research Leader
e paul.moore@echarris.com
w echarris.com/research
7992EC