The London Office Crane Survey (PDF 2MB) shows tenants in expansion mode as they take up more space. Annual CPI Inflation remained at -0.1% in October 2015, the main contributing factors being ongoing downward pressures on food and energy prices. There is the possibility of marginal interest rises in 2016, however, the base rate is to remain at 0.5% in the short term.
London Tender Price Indices
London has led the way in the recovery of the construction industry and consequently has seen the highest levels of construction inflation anywhere in England which is typical for a capital city. Currently we are forecasting a level of 5 to 6% over the next 12 months, with the potential for a further reduction the following year.
London has led the way in the recovery of the construction industry and consequently has seen the highest levels of construction inflation anywhere in England...
Regional forecasts are based on a number of factors including local knowledge of market conditions, which are subject to unpredictable changes, therefore any published forecasts should be used with caution.
Commercial Property Outlook
Recent statistics show that supply of office space in Central London currently stands at 5.8 metres per square foot (m/sqf), equating to a vacancy rate of 6.1%, comparing to demand of 8.4m/sqf. Putting this into context, the average historic average vacancy rate is 10%, showing that rents will continue to be attractive to developers. Optimistic business sentiment and six months of relative economic stability following the general election have also been considerable contributing factors to the surge in demand for quality office space in Central London.
As a result of extortionately high rents, which are up 14% from this time last year, and the lack of available space in the City of London, demand for office space in the less traditional locations such as Paddington, King’s Cross and Whitechapel, where offices are either conveniently located near major existing or proposed transport hubs, has increased dramatically.
While take-up in the City remains largely by the financial services, banking and insurance sectors, the media and tech sectors are increasingly willing to compromise on location in favour of increased space and lower rental values. Activity has therefore proliferated to numerous more unorthodox locations throughout Central London, especially in the vicinity of new Crossrail stations. Office construction in Central London is up by 18% in the six months to October 2015, while over the same time period, there have been 26 new starts (equivalent to 3m/sqf), which is above the 10 year average.
One m/sqf of space has been added to the development pipeline for 2016, creating renewed optimism in the London office market. The Deloitte Crane Survey predicts that the delivery of projects in 2017-2019 will exceed historic averages, based on the planned capacity of future schemes not yet under construction.
Amongst the most significant players in the commercial market over the last quarter have been the developer Brookfield, who have started projects with lettable areas well in excess of 1.5m/sqf over the summer. This includes schemes such as 100 Bishopsgate and Principle place on Shoreditch High Street. The Canary Wharf Group was also responsible for letting the £200m 1 Park Place mixed use development in August this year, which will include retail as well as office space. Further examples of prestigious developments commenced in 2015 include projects at the Old Bailey and Marble Arch. These projects have driven year-on-year growth in the sector, the result being a sharp rise in tender prices in the six months to October as resources have become stretched.
The residential sector in London generally continues to perform relatively well, if not as prodigiously as the office sector.
The residential sector in London generally continues to perform relatively well, if not as prodigiously as the office sector. Nonetheless, private housing is experiencing ongoing growth. Slight year-on-year increases in contract award values have been reported in October in London (0.2%), while London’s share of the UK’s overall residential contract value awards also grew to approximately 30% in the same month.
One feature of the London construction market over the last six months has been the rotation of trade contractors from the residential sector over to the commercial sector, as opportunities in the latter have become more readily available. This shift may have appeared attractive to trade contractors who wish to re-establish relationships with long-standing large commercial developers. It remains to be seen how this will affect the residential sector in the short-term.
Examples of contracts let in recent months include the £150m Eileen House project in Elephant and Castle, set to deliver 329 units, and another project to deliver 73 homes at One Palace Street in St. James’, worth £90m. This shows the diversity of private housing under construction. The commencement of major masterplanning projects such as at Ebbsfleet shows that the construction of homes in more affordable locations has become a priority for developers, especially given the changes to levels of stamp duty, which is likely to affect the viability of the construction of high value residential property going forward.
Local Economic Outlook
Construction activity, particularly in relation to the commercial office sector, has gained momentum over the last six months. Sub-contractors remain selective about the type of work that they are tendering for. In addition to this, labour shortages, the trend towards two-stage tendering and the higher cost of certain materials have also created upward pressure on local construction prices. The rate of increase in 2015 has been at its highest for a number of years.
On-costs are increasing as contractors aim to agree contracts on their own terms. Nonetheless, where developers are proposing attractive and risk averse projects, reasonable tender prices may still be obtained. Issues with skills shortages (both in relation to labour and professional services) remain, however it has been reported that the number of declined tender enquiries has decreased since Q4 last year. With demand for housing and office space remaining in excess of supply, it is unlikely that the rate of increase to tender prices will cool off until mid-to late 2016 at the earliest. The current rate of increase to tender prices means that the affordability of projects is becoming a considerable risk; clients’ budgets are becoming insufficient, and therefore in the mid to long term, demand may start to fall away as an increasing number of projects become unviable. The latest sentiment amongst contractors suggests that engagement in more efficient procurement routes, including the consideration of single stage tendering, has started to become preferable as project starts are delayed due to extortionate price rises.
Contract awards in London continued to increase over the last six months. Increasing demand, particularly in the civil engineering and office sectors, has led to the rise in award values in the three months preceding October, despite evidence suggesting that the supply chain may be struggling to cope. The Barbour ABI Market Review for October 2015 (PDF 14.7MB) shows that London’s share of contract awards nationally stood at 21% in April 2015, as opposed to 25% in September. This equates to an increase from £1.2 bn in April to over £ 1.7 bn in September, an increase of over 40%.
While the increase in the value of contract awards is a positive sign, the lack of available output data from the Office for National Statistics (ONS) means that it is currently difficult to conclude whether the reported shortfall in the supply of labour is affecting output. In the latest Construction Market Survey carried out by the Royal Institution of Chartered Surveyors (RICS), in which respondents are asked whether they have experienced a rise in workloads since the previous quarter, London and the South East received the highest net balance of responses which suggested that workloads were rising. Shortage of labour is also cited as the biggest factor currently limiting growth. Although this phenomenon is not confined to London, its prevalence is more dramatic in London than elsewhere, with reports of supply chain issues in both the residential and office sectors.
Recent forecasts show that the level of optimism amongst commercial developers remains high, a net balance of 22.1% respondents displaying optimistic sentiment in the short-term.
The latest RICS UK Construction market survey still indicates skills shortages and financial constraints are currently the most significant factors limiting building activity.
How might clients approach the supply chain differently in order to secure work at reasonable prices and within programme?
- Accept that a procurement route to suit the contractor must be considered
- The provision of good quality tender documentation and providing tenderers with ample time to return tender documentation
- Direct engagement with the supply chain
- Avoid going out to tender too early in the design process