Gordon Hewling, a Director in the Building and Project Management Consultancy department at GVA Grimley, offers advice on how landlords with too much office space, too few tenants and the prospect of void rates could take advantage of significantly lower tendering prices for refurbishments to attract and retain tenants.
The ability to offer low priced refurbishments, aided by low tender prices and a reduction in VAT, is a potential lifeline to landlords who are concerned about existing office space which may be in competition with new office buildings.
Research by GVA Grimley indicates that current Grade A office supply in Newcastle is equivalent to only one year’s average take up, and speculative completions over the next two years will add only one further year’s average take-up. This clearly demonstrates an under supply of office space. The situation is unlikely to change over the next few years because of the lack of development sites, particularly in the heart of the city, and the current uncertainty in terms of funding speculative developments.
There is therefore an opportunity for landlords to retain and attract new tenants to existing property by using refurbishment as a way of upgrading office space to make it more attractive. This is becoming increasingly cost effective and could offer a safety net. In this economic environment, any contractor who has a short fall of work going forward will probably be willing to significantly reduce prices to ensure they can keep going.
Whilst the cost of construction materials has risen sharply in recent years, largely driven by increasing world commodity prices and demand from places such as China and India, the forecast is for a materials inflation of around 2% per annum going forward, which is similar to general inflation.
This, together with a significant reduction in the number of construction projects in the market place will help landlords to secure value for money. We are now seeing construction companies lowering their tender prices and squeezing their profit margins as they compete for fewer contracts in a declining market. In the early 1990s recession, tender prices fell by about 23% over a four year period and an even greater fall seems possible in the current economic climate.
Many landlords may have been put off refurbishment projects in recent years due to the historically high materials and labour costs which have pushed prices up. There is now a very strong argument to suggest that this is a good time to tender projects.
However, it is vitally important that landlords select their contractors carefully. Robust financial checks of contractors should be undertaken and we would recommend requesting contractors to enter into a performance bond or parent company guarantee where appropriate to protect a landlord’s position.
Gordon Hewling is director of the Building and Project Management Consultancy at GVA Grimley’s Newcastle office.
