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Fight for fit-out: Smaller jobs open new battlefront

ISG subsidiary Agility is barely two years old and turning over £80m a year. So why are smaller fit-out firms having success and who’s competing in this space? Binyamin Ali investigates.

For many across Britain, and indeed Europe, June 2016 is likely to remind them of one thing and one thing alone: the EU referendum.

The vote to leave the EU has forced businesses to consider their operating models and, for some, to look at new areas of opportunities. At ISG the vote coincided with a decision to launch a new subsidiary business: Agility.

Established to target fit-out work in London’s sub-50,000 sq ft commercial office market, Agility has set lofty ambitions as it looks to steal some market share for its parent group.

In its first year of business, the new fit-out contractor had a turnover of £49m, which increased to £80m in year two. Now in its third year of trading, Agility has a turnover target of £100m and wants to reach £150m by 2022.

This scale of growth for a business in its fledgling years, operating in an uncertain market, is impressive. But is it sustainable, especially with Brexit in mind?

In August, Knight Frank reported that take-up of offices in central London “remained robust in Q2 2018, reaching 3.39 m sq ft, which is 7 per cent ahead of the long-term average”.

It continued: “In fact, only one H1 in the last 10 years has seen a higher volume of leasing activity, which provides a useful reference point to demonstrate just how remarkable this year’s results have been to date.”

Leasing activity is certainly a good indicator of demand for office space, but it cannot be relied upon to tell the whole story. Looking towards the development pipeline, Knight Frank said it believed that “supply has peaked and will fall over the course of the next 12 months, due to the lack of speculative new and refurbished space”.

What then does this mean for ISG’s new fit-out division and how will the incumbents in this space be affected by fluctuating demands and an aggressive new competitor?

Brexit-proof fluke?

In 2016, the difference in turnover between ISG’s fit-out and construction divisions was £59m – fit-out had a revenue of £319m while construction contributed £378m.

In 2017, the difference increased to £85m, but that included the £49m turnover contributed by Agility.

Although ISG’s fit-out arm does not only handle commercial office work, the figures suggest the contractor might have started to feel the pinch of a shrinking office market a little early.

Case study: Equinox St James’s Street

agility fit out equinox 2

agility fit out equinox 2

Contractor: Agility
Client: Equinox
Value:£5.7m
Architect: Wood Bagot 

Agility completed the £5.7m fit-out of Equinox’s new fitness club in Westminster in December 2017. 

The job involved a refurbishment and fit-out of the three-storey building, which sits on St James’s Street. The gym includes a series of fitness studios as well as spa, sauna and steam rooms.

The building’s original marble archways were restored for what was the client’s second gym in London. The interior includes two new spiral staircases in the fitness centre, designs for which were 3D-modelled by the team. Agility adds that the project also featured a significant amount of structural, M&E and joinery work.

Data from the Construction Products Association shows that new orders in the offices sector were only £0.8bn in Q2 2018, compared with £1.6bn two years earlier in the quarter before the EU referendum.

The CPA report added: “Given that the falls in new orders are likely to be driven by the current uncertainty, it is expected to have affected the largest projects, where the expected rate of return is over a longer period and, consequently, riskier.”

These larger projects are the bread and butter of ISG’s commercial office fit-out work, and the slowdown in this area is likely to impact the contractor.

But while ISG may have created Agility to expand its offering and target work in the ‘core’ sub-50,000 sq ft office space, the contractor may have also Brexit-proofed its fit-out division at the same time.

“In some cases, we get two weeks or less to turn around a smaller-scale project. We need the supply chain to be back-to-back with us in terms of responsiveness”

Lee Phillips, Agility

Further data from the CPA shows construction of new offices will fall by 10 per cent this year and 20 per cent in 2019, but that work for fit-out firms is likely to continue as businesses move around within the existing stock.

Knight Frank’s observation that the first half of 2018 saw the second-highest volume of leasing activity in the last 10 years offers some indication of the demand for existing office space.

This is good news for office fit-out contractors because, as Morgan Lovell managing director Colin Allan says, “business change […] drives most of our projects”.

And although Agility managing director Lee Phillips would not be drawn on the names of the new firm’s clients – citing NDAs – he did confirm that Agility is on “numerous public sector frameworks”.

This is likely to include the £1bn government Hubs programme to reorganise public sector offices through fit-out work, under which ISG was selected to deliver projects in lots two and three (northern projects worth under £25m and southern projects worth under £25m).

Shaking things up

But public sector work is only one of the avenues Agility is exploring for work.

Following up on any further work ISG’s private sector clients have coming up, which is often on a smaller scale, has been another source of revenue for the subsidiary.

These “day-two works” have allowed Agility to pick up an established relationship with a client, provide the level of service expected from a tier one, and keep that cycle going, Mr Phillips explains.

This has also worked the other way, with Agility bringing a client on board that has a larger project in the pipeline, with ISG’s major projects team then taking on that work.

ISG’s established position has also been important in giving Agility what Mr Phillips believes to be the new fit-out contractor’s competitive edge: a tier one supply chain.

Mr Phillips says getting suppliers to operate in this area was “a challenge” due to misconceptions over the amount of work on offer, as well as the idea that “you’d be working for the small-end clients, therefore it’s not as glamorous or as prestigious”.

agility managing director lee phillips

Agility managing director Lee Phillips

Agility MD Lee Phillips: “The volume of work available in this sector is c£800m”

“The reality, which is totally different, is the volume of work available in this sector is approximately £800m [annually],” he says.

As well as getting them to work in a new segment of the market, there was also the small matter of convincing the supply chain to go through “behavioural changes,” Mr Phillips adds.

ISG routinely does fit-out work on projects with a gross internal area in excess of 100,000 sq ft. These jobs are often in large and unoccupied spaces, with a project delivery timetable that has some breathing space built into it.

The sub-50,000 sq ft market turns this on its head. Almost 80 per cent of the work is in occupied buildings, space is limited and “in some cases, we get two weeks or less to turn around a smaller-scale project,” the MD explains. “We need the supply chain to be back-to-back with us in terms of responsiveness.”

As well as making full use of ISG’s tier one supply chain, Agility has also looked to tiers two and three, taking on “around 10 companies that are now sharing our values and have done some fantastic work”.

Although Agility was established to target jobs in the sub-50,000 sq ft market, where contracts are typically worth around £5m, client demands mean project and value sizes can swell beyond this. “If a client said to us, ‘Your major projects team have completed a 500,000 sq ft project, there’s £20m to spend now in a phased occupied space’, we would write the strategy [for delivering that] and we would implement it,” Mr Phillips says.

As a result, Agility has been able to take on multiple projects that have a total value in excess of £20m, as well as a total project size greater than 50,000 sq ft.

What the competitors say

Of course, not everything Agility is doing is completely new, with plenty of other fit-out contractors operating in the 50,000 sq ft market.

Tier one contractor Morgan Sindall has its Morgan Lovell subsidiary, for example, which it established in 1977. The fit-out business works solely on commercial office jobs, handles work up to 80,000 sq ft, turns over around £90m and has taken on contracts worth in excess of £20m.

Asked about Agility’s use of tier one supply chain members, Morgan Lovell’s Mr Allan says it is something his business already does. Using a tier one supply chain in this space “can have a degree of merit”, but has to be weighed against the desired outcomes and value of the project, he says.

“[This is because] those tier one suppliers can be quite expensive, therefore may not create a great amount of success,” he adds. The contractor also appreciates the importance of the customer experience, Mr Allan says.

Paragon is another fit-out contractor that can work in the same market. However, as the fit-out arm of Interserve, Paragon’s remit goes beyond commercial offices and sees it operate beyond the 50,000 sq ft segment.

“Those tier one suppliers can be quite expensive, therefore may not create a great amount of success”

Colin Allan, Morgan Lovell

Despite casting a wider net than Agility and Morgan Lovell, Paragon divisional director Paul Vinten says the business still considers the sub-50,000 sq ft sector as “the core market”. The typical value of Paragon’s contracts in this space is around £5m, and it expects to have an annual turnover of approximately £180m this year.

Mr Vinten is reluctant to group Paragon’s supply chain firms in terms of the tiers they belong to, arguing that doing so “suggests that a tier one supply chain is better”. He adds, however, that Paragon’s own supply chain is likely to include firms that “we would share with a number of other contractors, some of that being ISG as well”.

The business was established 15 years ago and survived the recession that followed the 2008 financial crash – a downturn Paragon managing director Matt Bray says prompted increased competition. “What happens is contractors go bust and what springs out of bust contractors is lots of little contractors. The pie is probably the same size but it is being shared out in much thinner slices.”

Despite this, both Paragon and Morgan Lovell suggest that, even with Brexit looming, there will always be opportunities for fit-out contractors. Businesses that have to adapt to new economic climates often need to change their operational structures, they add, which frequently leads to interior office design and layout changes.

“[Business change] could be business growth, demand from those organisations and expansion, change in leadership,” says Morgan Lovell’s Mr Allan.

It can come in a declining market as well, where businesses need to re-evaluate themselves and change to suit another market or another route.”

As Paragon’s Mr Vinten puts it: “There’s a good market in a poor market.”

Where to next?

This, coupled with the Knight Frank data showing demand for existing office space remains robust, goes some way to explaining why Agility’s Mr Phillips expects to be able to drive further growth and reach his short-term £100m turnover target, despite economic uncertainty.

But in a market where the incumbents consider their ability to react quickly to changing client demands as critical, ISG’s subsidiary is unlikely to have it all its own way.

In a highly competitive market, its leading protagonists look poised for a combative couple of years.

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