Market update. London fit-out - winter 2016/17 survey. Turner & Townsend. making the difference

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Janis Richardson
5 years ago
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1 Market update London fit-out - winter 2016/17 survey making the difference

A sense of calm in the fit-out market has formed after months of volatility and the market looks to have stabilised after the Brexit referendum result.

Our winter survey showed activity over the three months to December remained largely the same, but confidence was returning with a number of large fit-out projects in the pipeline for 2017.

2 A sense of calm in the fit-out market has formed after months of volatility and the market looks to have stabilised after the Brexit referendum result. In our autumn survey there was concern over prevailing market conditions, highlighted by increased competitive bidding practices. Our winter survey showed activity over the three months to December remained largely the same, but confidence was returning with a number of large fit-out projects in the pipeline for The market continues to adopt a safety first approach to the referendum vote and contractors appear more willing to compete on projects to secure future workloads. There has been a modest decrease in prices through competition, yet supply chain frailties persist and import cost increases add further burden to tender cost expectations. Inflation levels in the London fit out market closed out at 5 percent for Our survey reveals that inflation levels are still expected to be between 4 percent and 5 percent for the next 24 months. This is driven by continued labour and material cost increases as a result of a shortages of skilled labour in key trades and increasing input costs. In this issue we explore the trends over the past three quarters and what this means for clients procuring in Tender price inflation 5.0% London fit-out % London fit-out % London fit-out

3 London fit-out market analysis Our winter survey of tier one and tier two suppliers tested market sentiment, expected tendering conditions and expected price rises. Market outlook Summer 2016 Autumn 2016 Winter 2016/17 Cooler 8% Warmer 50% Warmer 33% Cooler 4% Staying the same 42% Staying the same 67% Staying the same 46% Warmer 50% Tier one and two supplier survey: market conditions The initial apprehension felt in the fit-out market post-brexit and throughout autumn 2016 seems to have abated slightly. The above sentiment indicators suggests that there has been a move back towards levels stated in summer Both summer and winter surveys suggest that contractors believe the market outlook to be warm, with 50 percent of respondents projecting this trend. Uncertainty is still very much in the air, and it is expected that fluctuations will persist as further knowledge as the Brexit process comes to light, allowing for investment decisions and workloads to be outlined with greater clarity. The last quarter of 2016 was a little subdued in respect of tendering opportunities, however, there is an increase in tenders coming to the market in 2017 and the London office market remains on track to perform well, with research suggesting that it could peak in As a result, however, the supply chain may become increasingly stretched as 2017 progresses. Careful vetting of suppliers will be required to ensure that the supply chain doesn t over commit. A key driver at present is the continuing effect of skills shortages and how these affect pricing within the sector. Specialist trades are frequently undersupplied and trades such as joinery and mechanical, electrical and plumbing (MEP) may incur higher costs as high quality labour is scarce and the trades are in demand. Much like the wider construction industry, the fit out market has been exposed to the large shifts in the value of Sterling. MEP components, in particular, have noticed an increase in base costs as a result of the currency valuation, which is typically quick to fall and slow to appreciate as a rule of thumb. 3

4 Tendering conditions Hot 8% Cold 4% Cold: Intense competition, not much work, prices low. Lukewarm: Strong competition, moderate tender prices. Warm: Moderate competition, moderate tender prices. Hot: Reduced competition, work easy to get, tender prices high. Warm 42% Tier one and two supplier survey: tendering conditions Lukewarm 46% Overheating: Shortage of builders, minimal competition, prices very high. Tendering conditions in Q showed that the appetite for competition has increased, with keener prices being submitted. The proportion of respondents suggesting warm tendering conditions in Q was 72 percent. In this survey it has reduced by 30 percentage points to 42 percent. This demonstrates that although market confidence has stabilised, competition is still fierce. Clients going to market in the early part of 2017 are therefore likely to see more competitive bidding. Current procurement route profiles remain in a similar distribution compared to Q Single-stage tendering is now just a little under half of all accountable contractor workloads. On larger fit-out projects, more clients are seeking to secure prices through a single-stage route. Early engagement of trade contractors is key to making this successful. Providing early visibility of the pipeline is more likely to see higher quality bids, particularly from MEP and joinery contractors. Increases to contractor order books have been evidenced in Q4 2016, with no clear lull post referendum. Opportunities to secure supply chain capacity remain viable in 2018/19 whilst a steady appreciation in work levels recorded in the 2017/18 period has occurred. 100% 90% 96.2% Negotiated, 13.3% Framework, 7.0% Other, 0.4% 80% 70% 60% 50% 40% 30% 48.8% Single Stage, 47.9% 20% 10% 0% 11.9% 2016/ / /19 Two Stage, 31.3% Tier one and two supplier survey: order books Tier one and two supplier survey: contractor workload 4

Inflation rates Material costs are the price paid for commercial quantities of a particular building material, including

Both Cat A and Cat B material costs are anticipated to increase by 6 percent over the coming 12 months.

5 percent. At the other end of the scale, carpet tiles are set to increase by 5.5 percent. Suspended ceilings are suggested to increase by 4.

5 Inflation rates Material costs are the price paid for commercial quantities of a particular building material, including sales tax but excluding delivery to site. Both Cat A and Cat B material costs are anticipated to increase by 6 percent over the coming 12 months. Cat A power price inflation expectations are the highest within the Cat A cost spectrum, expected to increase by 7.5 percent. At the other end of the scale, carpet tiles are set to increase by 5.5 percent. Suspended ceilings are suggested to increase by 4.9 percent over the coming 12 months from Q The largest increase is proposed to be acoustic fabric costs - increasing at a pace of 12 percent. Tier one and two supplier survey: Inflation expectations +12 months 5

6 Survey return commentary Contractor The current market conditions within the traditional fit out spectrum is competitive. Subdued tender price increases, with greater competition, is becoming more apparent. However, the amount of tenders is still very healthy and enough to ensure most contractors remain busy. We are seeing more strip-out/churn type work than the creation of new Cat A office space. The supply chain still appears very busy and are still slow to respond. Two-stage procurement route does not appear to be favoured even when there are time constraints. Flooring Buoyant market within central London with good levels of competition and 2018 are forecasted to be very busy in the central London fit out market. Ceilings & Partitions Plenty of larger projects from Blue Chip companies, smaller companies tending to suspend planned works to see what the outcome of Brexit is. Internal glazing MEP Strong competition and competitive bidding are holding pricing down where some increase should be evident through raw material costs being passed on. Order books are relatively secure through 2017 into 2018 with good opportunities moving forward through these periods, however there is more uncertainty over the level of opportunity and buoyancy of the market from the backend of 2018 and beyond. The supply chain remains relatively solid and dependable with shortage of capacity evident over the next months. Joinery Our market continues to stay busy despite uncertainty on Brexit and we anticipate a positive The period between tendering a project and receiving the order is increasing substantially. In addition, there is a request for a lot of value engineering (VE) on most projects. We find that as a finishing trade the budget is spent on the previous trades and as a consequence we suffer. 6

7 Key challenges Labour shortages are persistent and the supply chain is still holding back on investing in increasing the manufacturing capacity and are operating at peak. Lead times remain an issue in some areas but this has improved whilst programme slippage is making procurement and labour allocation a challenge. Material price increases remain an issue, more so on imported goods. Suppliers are being very cautious when issuing rates and we are expecting several increases over the next 12 months in some instances. Understanding the tendering capabilities of supply chain members and ensuring that they do not over commit is a key consideration. Advice for clients What is clear is that clients need to think differently about their procurement strategy. The market in 2017 is forecast to be very busy with a number of mid-sized and large projects coming to market. This will increase the pressure on the supply chain and mean that main contractors are stretched. Whilst this opens up opportunities for other firms, clients need to have a clear strategy for how they will engage the market to secure a competitive price. Single-stage and two-stage tendering is still prevalent, however hybrid routes and incentive based models are becoming more common. Such routes seek to provide some of the benefits of two-stage tendering while still maintaining commercial tension. Early consultation and engagement of trade contractors is also key to securing interest, particularly in the case of mechanical and joinery. Visibility of pipeline opportunities and consultation in developing the contracting arrangements is much more likely to see keener pricing and more thorough tender returns. Summary Early market engagement to secure interest Look beyond traditional tendering models to secure a better price Agree contract terms up front before tendering Market test before you buy Typical cost range GBP/ sq ft Capital cost only. Excludes fees, furniture, client direct costs and taxes Low High Cat A Cat B 7

About Our team We are an independent professional services company specialising in programme management, project

value and performance during the construction and operation of our clients assets.

com Kristoffer Hudson Economic Analyst t: 44 (0) 113 205 4832 kristoffer.hudson@turntown.co.uk Cost Management Limited.

We do not make any representation or give any warranty, express or implied, and shall not be liable for any losses or

8 About Our team We are an independent professional services company specialising in programme management, project management, cost and commercial management and consulting across the real estate, infrastructure and natural resources sectors. With 97 offices in 41 countries, we draw on our extensive global and industry experience to manage risk while maximising value and performance during the construction and operation of our clients assets. Colin Wood Director t: 44 (0) Kristoffer Hudson Economic Analyst t: 44 (0) Cost Management Limited. This content is for general information purposes only and does not purport to constitute professional advice. We do not make any representation or give any warranty, express or implied, and shall not be liable for any losses or damages whatsoever, arising from reliance on information contained in this document. It must not be made available or copied or otherwise quoted or referred to in whole or in part in any way, including orally, to any other party without our express written permission and we accept no liability of whatsoever nature for any use by any other party.

London fit-out summer 2017 survey

London fit-out summer 2017 survey Market update making the difference 1 Key themes Impact of clients delaying decisions to invest now being felt London fit-out update One year on from the Brexit referendum,