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The three Rs point to growing markets

Spending cuts, sustainability and a race to provide prime office space to meet the predicted shortage in 2014 are set to drive a mini-boom in refurbishment and refitting in the public and private sectors.

Although construction output is expected to fall for the next two years before growth returns in 2013 (according to winter forecasts from the Construction Products Association), an increasing proportion of work over the next 24 months is likely to be smaller projects to upgrade existing stock.

The three sectors where this is expected to be most marked are education, health and commercial offices, particularly in London.

Analysis by Glenigan for Construction News shows a greater proportion of refurbishment work is already feeding through in these areas.

ISG is one company that is benefiting from this trend. Managing director of UK construction Craig Tatton said: “We had substantial new build wins before Christmas but we see increased refurbishment work coming through in the pipeline with smaller project values.”

He cites college projects that would previously have been for a £20m new build but are now being undertaken as a £10m refurbishment. Where it can, ISG combines this work with retrofitting to reduce carbon dioxide emissions.

Specialised skills

Fit-out and refurbishment use quite different skills, according to Peter Owen, managing director of Willmott Dixon’s Midlands business, and contractors are likely to stick to what they know best.

“Refurb often involves structural changes and the work is quite technical. Fit-out is more cosmetic and contractors often work 24-hour days, seven days a week,” he said. That said, the rise in refurbishment work could see bigger contractors without specialist refurbishment divisions buying them in.

The most notable increase in refurbishment work is in the commercial offices sector. Glenigan’s analysis shows that in the second half of 2010, 49 per cent of the £732m of new commercial starts involved some refurbishment.

This tallies with research by Savills, based on its activity survey of 200 developers. Director of European commercial research Mat Oakley said: “We’ve been seeing consistent month-on-month increase in refurbishment activity since 2009. It’s always the segment of the market that recovers first because it’s smaller and cheaper.”

The commercial office market is being seen as the engine that will drive construction back to growth in 2013. CPA analysis found orders in the office market rose by 21 per cent in the first half of last year. Forecasts such as these do not break down into refurbish and new construction - both are classified as new work.

Research organisation CityOffices is tracking 110 office schemes in central London totalling more than 22m sq ft that have planning permission and that the developer is thought to be considering a start in 2011. The shortlist includes British Land, Land Securities, Great Portland Estates, Helical Bar, and Exemplar.

The reason behind the increasing activity in central London is that high quality office space availability is expected to hit a low in late 2014 and rents are already rising to reflect this shortage. By that time, a glut of leases signed in the 1980s will reach an end.

“We’re now seeing a lot more new build activity but it’s being held back because of a lack of finance,” Mr Oakley said.

Key attractions

Refurbishment is a popular choice for three reasons, he said: it is easier to fund; it is quick - a grade B office space can be turned into grade A within a year and does not necessarily need planning approval; and it is increasingly what tenants are after.

“Tenants don’t want to be seen to be paying top rents or they can’t afford to. And there is an increased acceptance that it’s more sustainable to go down the refurbishment route,” he said.

Completion of new offices combined with a high level of property deals in late 2010 is set to provide a host of new contracts for fit-out contractors from spring onwards, according to CityOffices.net director Andy King.

Ibex director Matthew Battle said: “The fit-out market picked up in 2010 on the back of pent-up demand in 2008 and 2009, when it virtually came to a standstill.” All are expecting the race to provide more prime space will significantly bolster order books. Mr Battle said this new wave of office work may incorporate change of usage: “We may be fitting Costa Coffee into office space, for example.”

He expects out-of-town offices built in the 1980s to be given revamps as well because they offer amenities that more modern offices don’t, such as large car parks. “We’re working with developers that are snapping up these types of offices in the Thames Valley and west London,” he said.

Sustainable trend

Meanwhile the green agenda and the introduction of the Carbon Reduction Commitment, which will now add about £8,000 to the energy bills of the 5,000 major property owners affected, is expected to drive more retrofit work.

Contractors such as Willmott Dixon and ISG are certainly trying to encourage that trend. Land Securities, for example, has embarked on retrofit programme across its entire property portfolio to cut CO2 emissions by 30 per cent by 2020. An element of this work involves changing the behaviour of occupants, but it is also expecting to upgrade services such as lifts and lighting.

Head of strategic research and insight at EC Harris Simon Rawlinson said refurbishment has traditionally been the norm in retail but expects to see more upgrades to secondary shopping centres - malls in towns and cities that are looking tired and need to be made more attractive.

With capital spending expected to fall dramatically in health and education - by 10 per cent and 55 per cent respectively by 2014 - it is inevitable that in these sectors we can expect to see a dramatic move away from new build. The need to save money could also prove a catalyst for local authorities and central government to rationalise their office estates.

“In the public sector it’s a question of whether you get enough out of refurbishment to justify the expenditure,” Mr Rawlinson said. “We could be seeing a number of councils refurbishing their offices to get more people in and make efficiency savings.”

One example is the refurbishment of the 1930 extension to Manchester town hall, which is being upgraded to provide more space and free up other offices around the city.

Council buildings might also be used for other things. “Town halls could become hotels, or libraries might be turned into residential,” Mr Oakley said.

Rationalising its estate to unlock value is also a problem facing the NHS. According to EC Harris head of public Graham Kean, there is more unused space in the NHS than the entire footprint of Tesco. “Some sites are residential estates waiting to happen,” he said.

Meanwhile the huge reduction in school building, where the Building Schools for the Future budget will shrink from £1.4bn a year to only £400m annually by 2015, means “making do” will inevitably be the name of the game, although the James review of capital spending in schools is yet to report.

That said, councils are facing a massive shortage of school places, which means schools will need to be expanded in some way, either by local authorities or through the free schools programme.

From shop to school

One model EC Harris has put forward is the conversion to schools of underused retail space in the form of edge-of-town units where you might find a Curry’s or a large pet store.

“They have a fairly robust structure, they’re multi-serviced and provide a large footprint if you have three or four units together. There’s often plenty of space around them as the car parking is generous. You could put an all-weather pitch down and form a playground. They could make brilliant primary schools,” Mr Kean said.

Whether it is the refurbishment arm of a contractor revamping an inner city office block or a specialist fitting out new shops in a shopping centre, both need skills that are different from those of the new build contractor. Buildings are often occupied, so work requires higher levels of diplomacy and an almost sixth sense for trouble.

Once work starts on an existing - and often listed, building - it can throw up all kinds of problems that do not show up on surveys. Mr Rawlinson warned that it is essential contractors put aside enough contingency.

ISG’s Mr Tatton added: “Clients are looking for strong balance sheets and strong financials - and how can we help with the development finance.”

Land Securities’ Andrew Dudley, project manager in charge of the £350m Trinity Leeds project to refurbish and develop Leeds city shopping centre, agreed. “For refurbishment work, we’re looking for contractors with excellent people skills, and for a quieter, less impactful way of working. When we’re choosing a contractor, we like to see their tenant liaison manager; someone good is worth their weight in gold to us.”

Mr Owen said risk in refurbishment can be massive, particularly while prices are tight. “With refurb you often don’t know what you’re getting into until you start. It should be a no-go area to go and buy work.”

The increase in fit-out work will undoubtedly lead to new companies springing up. But as managing director of ISG’s fit-out business Darren Hill pointed out, to make it work it is essential “to be able to understand your customers’ business and be able to adapt to what makes them tick”.

He said the more specialist knowledge you have, the more efficient you can be on projects. But this sort of knowledge makes barriers to entry quite high.

 

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