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When buying property, many wonder how builders set their prices. It’s not uncommon to see projects with shared boundaries having different prices or to notice prices fluctuating throughout the construction process. Unlike other products, real estate pricing is complex and influenced by a variety of factors. Here’s a breakdown of how builders determine their pricing and why it varies so much.

Key Factors Influencing Builder Pricing

1. Location

• Prime Locations:
  In prime areas, builders are likely to charge a premium due to high demand and limited supply. The scarcity of available land in desirable locations allows builders to set higher prices.

2. Builder’s Holding Capacity

• Financial Strength:
  Builders with strong financial backing or better cash flow can afford to hold onto their inventory longer. This ability to wait allows them to demand higher prices compared to neighboring projects where the builder might be under pressure to sell quickly due to financial constraints.

3. Stage of Construction

• Pricing Over Time:
  Prices typically start lower during the initial stages of construction and increase as the project nears completion. Early buyers might get a better deal, while those purchasing later may pay a premium.

The Cost and Profitability Equation

Builders often use a simple cost-plus-profitability model to set their prices. Like other businesses, they aim for a certain profit margin, usually around 20-30%. For instance, if the total cost of a project is ₹100, the builder might price it at ₹130 to achieve a 30% profit margin.

Breakdown of Costs (Example)

• Land Cost:
  Assume this is ₹1,667 per SQFT (refer to the Land Costing guide for more details).
• Construction Cost:
  In Tier 3 cities, this might be around ₹2,000 per SQFT, and up to ₹2,500 per SQFT in metro cities.
• Other Costs:
  These include office expenses, administration, legal fees, marketing, interest charges, etc., and might add another ₹400 per SQFT.

The total cost per SQFT would be around ₹4,067. Adding a 30% margin (₹1,220 per SQFT), the average price would be approximately ₹5,287 per SQFT, rounded off to ₹5,300 per SQFT.

How Prices Vary by Construction Stages

Builders typically divide the project into three key phases, and pricing varies across these stages. Generally, builders vary this price by +/- 5% depending on the stage of construction and to maintain some uniformity across larger buyer groups.

1. Pre-Launch/Launch Stage (0-6 months)

• Early Stage:
  This is when the builder starts work, such as excavating the plot and reaching the plinth area. During this phase, the builder is most in need of funds and might offer lower prices to attract early buyers.
• Price Range:
  Expect a price around ₹5,000 per SQFT for the first 10% of customers, and ₹5,100 for the next 10%.

2. RCC and Brick Work Phase (12-15 months)

• Construction Phase:
  This is the most intensive phase, involving the construction of the building’s structure. Since the builder is still reliant on external funding, prices gradually increase as the project progresses, but they can be capped at the average price determined at the beginning of the project.
• Price Range:
  The average price during this phase might be around ₹5,300 per SQFT for 60% of the customers.

3. Final Completion Phase (6 months)

• Final Stage:
  In this last stage, the builder typically requires less external funding and can complete the project with existing resources. As a result, the prices are often at their highest.
• Price Range:
  Prices may rise to ₹5,550 or more per SQFT for the final 20% of customers.

Conclusion

Understanding how builders set their prices can help you make more informed decisions when buying property. Pricing is influenced by various factors, including location, the builder’s financial strength, and the stage of construction. By recognizing these elements and the typical pricing patterns across different stages of construction, you can better gauge the right time to invest and potentially secure a more favorable deal.

Nishka Group