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Construction costs have witnessed a steady increase, exemplified by a 27.0% surge in 2023. The average cost per square meter rose from KES 56,075 in 2022 to KES 71,200.
This escalation is primarily attributed to the heightened prices of essential construction materials, including cement, steel, paint, and aluminum. The ongoing upward trend poses a significant challenge for real estate investors, necessitating proactive measures to shield themselves from escalating costs.
Various strategies can be employed for this purpose, with the effectiveness of each approach contingent on the specific circumstances of individual investors.
One strategy involves direct collaboration with suppliers or engaging purchasing agents. By pre-purchasing materials, investors can capitalize on lower prices and circumvent the premiums associated with last-minute acquisitions.
This approach proves particularly effective when anticipating rapid increases in construction costs or facing the risk of material shortages.
A second method to mitigate the impact of rising construction costs is to secure fixed-price contracts. Negotiating such contracts with contractors or opting for agreements allowing cost-plus billing provides investors with protection against additional expenses in the event of heightened construction costs.
Alternatively, cost-plus contracts enable investors to share in cost savings if the construction comes in under budget. While effective in minimizing construction cost risks, this strategy may result in higher overall costs if the project concludes under budget.
Diversifying one’s investment portfolio represents a third avenue to guard against escalating construction costs. This diversification can manifest through investments in various property types or geographic locations. The rationale behind this approach is to spread risk across multiple investments, providing a buffer against market fluctuations.
While no singular strategy guarantees complete immunity against construction cost increases, a combination of these approaches can significantly mitigate the associated risks.
Additionally, real estate investors should adopt a proactive stance, recognizing that construction costs are just one facet of the broader equation in developing real estate products that appeal to clients.
