India’s construction sector gearing up for changes in business models

V Nagarajan

The construction industry in India is the second largest employer after agriculture representing 13 per cent of the global GDP.  A McKinsey report estimates that by 2030, India’s 40 per cent population (590 million) are expected to live in cities. There is a need to build 700-900 million sqm of urban space every year until 2030, a new Chicago sized space every year.

While a meaningful transformation through the use of alternative construction technologies and practices may take time, the change is likely to be accelerated due to the pandemic. This is because several stakeholders were affected by disruption in the construction industry. This fuelled the need to realign changes in strategies, business models and operating models.

According to a survey by CBRE on India’s construction cost trends, the industry is likely to witness increased investment in technology oriented construction such as use of prefabricated and modularised components, digitisation of products and processes through BIM (Building Information Modeling) modules, automation in off-site production and on-site assembly among others. Although these technologies are likely to lead to an increase in construction capex but may offset the labour costs and reduce construction completion timelines. Reinforcement steel prices in India witnessed an increase of around 8-10 per cent in in the last 3-4 months on account of a rise in global steel prices, shortfall in domestic supply of iron ore and growth in domestic demand for steel. Prices of cement across all major Indian cities witnessed a y-o-y increase of 4-5 per cent in Q4 2020 owing to a rise in fuel costs.

The Covid-19-induced lockdown led to a mass reverse labour migration from the Indian cities to small towns and rural areas.

The ‘Unlock India’ initiative witnessed gradual resumption of construction activity across states; however, the first few months of the unlock phase continued to witness shortage of labour despite the adoption of government-mandated health and safety measures on sites. Some developers also made provisions for on-site housing and arranged transport for their workforce to return to the sites. Labour costs, that contribute to 30-35 per cent of overall construction costs, are likely to increase by 5-10 per cent.

The COVID-19 pandemic has brought challenges to the fit-out industry.

As labour and construction materials are the two most critical components in any real estate project, rise in material costs due to supply chain disruption after the pandemic has had a cascading impact on the overall project cost.

In addition, lockdown imposition during the initial months of the pandemic and subsequent reverse migration of the workforce led to delays across several projects, thus impacting the overall project costs.

The cascading impact of all this is that it has fuelled the need to realign changes in strategies, business models and operating models.

Therefore, in response to the industry transformation, various steps were undertaken to navigate in the new normal during 2020.

Among the changes specified include emphasis on general contractor (GC) responsibilities, insertion of preliminaries section, inclusion of pandemic-related clauses in the agreement, modifications in design guidelines in terms of occupancy levels for common area and meeting rooms and rapid technology adoption for design and construction.

My wife passed away recently intestate. We have invested in two properties in India. One is solely by me and the other is jointly with my deceased wife. Her mother is alive and we have two children. What is the legal position of the claimants now? Jignesh Dosh, Sharjah.

 In such a scenario, Class I heirs of your wife will have the right to claim equal shares in the properties in India. In the first property, it will be you, your mother-in-law and your children will get 25 per cent of the share.  As regards second house, the share will be 12.5 per cent each as your wife has a 50 per cent share in the property. If there are any outstanding liability to financial institutions/banks, it will be equally borne by all assuming that no home loan cover has been taken by the borrowers

I have entered into a joint development agreement with a developer but the project is now stuck midway. What is legal course of action available to me? Wilson D’Souza, Dubai.

One has to refer to the agreement entered with the developer. It is not clear whether it has a clause to change the developer (arbitration clause) if there is exit mid-way or stoppage of construction. You have legal remedy and there is a need to consult a lawyer well-versed in property laws to seek remedial action.