The Hidden Heartbeat of Real Estate Development
Real Estate

The Hidden Heartbeat of Real Estate Development

The Indian real estate industry has been a driver of economic expansion for a long time now. It has played a crucial role in boosting the country's GDP and offering job opportunities to millions of people. However, the construction of real estate has always come with challenges in our country - not ...

The Indian real estate industry has been a driver of economic expansion for a long time now. It has played a crucial role in boosting the country's GDP and offering job opportunities to millions of people. However, the construction of real estate has always come with challenges in our country - not least of all with regards to managing expenses and overseeing projects effectively. As our cities grow at a rapid pace, the need for housing continues to surge along with the government's emphasis on making housing more affordable. The importance of keeping development costs in check while simultaneously ensuring good construction quality is paramount - as is coordinating project development, which is critical for the success and durability of real estate projects. Managing costs in real estate development Managing costs in real estate development involves overseeing and controlling capital outlays to keep projects within the budget limits without sacrificing on efficiency and quality. As real estate projects are typically large-scale undertakings, even small deviations from the budget can have serious financial consequences. This is especially evident in India, where real estate projects often see delays due to complications in land procurement, regulatory clearances, and also demand and supply fluctuations. Some studies in the past have revealed that close to 80 per cent of real estate developments in India are prone to delays and cost overruns of anywhere between 20-50 per cent from the initial estimates. This often happens because of inadequate planning processes, ineffective procurement strategies, and poor coordination among project stakeholders. The study also emphasises that these additional costs not only impact the financial viability of developers but also result in higher prices for prospective buyers, consequently reducing the affordability of housing options. Factors that contribute to budget estimates overshootingRegulatory hurdles: The real estate industry in our country is bound by regulations that demand numerous approvals at various project milestones. Delays in securing these approvals can result in cost increases. For example, holdups in obtaining clearances or building permits may bring construction work to a standstill - leading to higher expenses on labour and materials. Dealing with land acquisition challenges: In India, this can be quite a task due to the intricate nature of the process involved in acquiring land rights. Issues often arise from disagreements on land ownership claims and insufficient compensation offered to landowners. This can result in legal disputes and increased project costs. The implementation of the Land Acquisition Act of 2013 was intended to promote better compensation practices. However, it has inadvertently added complexity to the process, resulting in even more delays than before. Inflation: In India, rising inflation and market uncertainties affect the cost of building materials such as steel and cement, alongside labour costs. Price volatility in the market further exacerbates these challenges by causing fluctuations in raw material costs, resulting in higher project expenditures. An illustrative case would be the spike in steel prices witnessed back in 2021 - this resulted in a notable 5-10 per cent surge in total expenses in numerous ongoing projects. Inadequate project coordination Inefficiencies and increased costs arise from a lack of collaboration among parties involved in a project - such as architects, contractors, and suppliers. Moreover, ineffective project management aspects like planning, communication and overall decisions can add to the challenge. Relatively precise cost estimates during the initial planning phase are crucial to prevent exceeding the budgeted costs. A thorough project blueprint that encompasses on-site assessments for materials and labour costs, and the use of resources such as Building Information Modelling (BIM), can help developers to arrive at accurate cost projections and recognise early on the potential challenges in the project. Improving procurement efficiencyProcurement process: Enhancing the procurement process can result in savings on expenses by choosing trustworthy suppliers and securing favourable agreements for timely material deliveries. Bulk acquisitions and establishing long-term supplier contracts are also strategies for cutting costs significantly. Risk management: It is essential for controlling costs in construction projects, as it involves identifying and addressing risks such as regulatory hurdles and market uncertainties early on to avoid potential setbacks or delays. Utilising technology: It can significantly improve cost management in real estate development. For instance, purpose-built software helps monitor spending and project advancements to keep them on budget. Drones and AI-powered tools can help in site surveys and quality checks, reducing the need for expensive revisions and reworking. Effective management of finances: It involves creating a comprehensive project budget and consistently tracking expenses to make necessary modifications when needed. Developers must also secure sufficient funding to address any unexpected costs that may emerge during the project. Real estate development coordination Effective collaboration between parties is crucial for the smooth execution of a real estate project, given the involvement of various stakeholders such as developers, contractors, architects, engineers and regulatory bodies. In this context, ensuring coordination becomes imperative to avoid potential setbacks like project delays, budget escalation, and conflicts that could jeopardise overall success of the project. Challenges in coordinating effortsDiversity: Real estate is a diverse landscape characterised by the coexistence of numerous small to medium sized developers alongside major industry players. This diversity poses challenges in implementing procedures and fostering seamless collaboration among all involved parties. Rules and regulations: Navigating the regulatory landscape in India can be challenging due to the various layers of regulations applicable at the centre and state levels. The process involves engaging with regulatory authorities at national and regional levels – each having distinct criteria and deadlines. This complexity can result in setbacks and communication gaps among parties. Effective communication: Project coordination relies heavily upon communication among all parties involved. Unfortunately, there are often notable gaps in communication between stakeholders due to the absence of a centralised platform and the reliance on outdated methods like emails and phone calls. Multiple interests: In real estate projects, it is common to see varying interests among stakeholders which can sometimes clash and make coordination tricky to navigate. For instance, developers may place importance on keeping costs in check and finishing on time, whereas contractors might be more concerned with maximising their earnings. This can and does result in disagreements and project delays. Strategies for coordinationEstablishment of a project management office (PMO): It can potentially enhance coordination among different stakeholders. The PMO serves as a primary point of contact for all stakeholders, ensuring alignment and seamless progress of the project on all fronts. Technology utilisation: It can significantly improve coordination among parties. Take, for instance, the integration of cloud-based project management software that facilitates monitoring of project advancements, seamless document sharing, and real-time communication. Moreover, Building Information Modelling (BIM) serves as a basis for all stakeholders to engage collaboratively and enhance overall effectiveness. Effective collaboration: It is important to have meetings and updates to ensure smooth coordination among team members involved in a project's progress evaluation and problem-solving process. Establishing roles and responsibilities is essential to prevent misunderstandings and promote effective collaboration among all parties involved in a project throughout its development cycle. Mediation: An effective system for resolving conflicts is crucial for addressing any disagreements that may arise throughout the project's duration. This could entail establishing a mediation process or enlisting a third party to settle disputes. Managing expenses and collaboration are crucial factors in real estate development, because projects are usually huge and involve various parties working together closely for success. With efficient cost management strategies and effective stakeholder coordination in place, developers can enhance project profitability while also fostering the wholesome growth of the real estate industry. Developers can benefit greatly from utilising technology for accurate cost estimation and streamlining procurement processes, along with centralising project management efforts for improved coordination and cost control, to stay competitive in the industry. About the author Anuj Puri, Co-founder and Chairman, Anarock Group, has over 30 years of experience, specialising in multi-disciplinary advisory deals and transactions.

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