London fit out report 2016
Our survey of tier one and tier two suppliers as of summer of 2016, testing market sentiment, expected tendering conditions and expected price rises.
The London fit-out market remains busy despite uncertainty in the global economy. An expected peak in lease expiries in London in 2018 is driving demand, with occupiers seeking to rationalise their property portfolio and make their space work harder, particularly with rental prices steadily increasing. A number of major fit-out projects are coming on line during 2017 which will absorb capacity and result in tier one fit-out contractors and their supply chain being more selective in their bidding.
We also see a trend in nearshoring among the major professional and legal services practices, with support functions being relocated to the regions where rents are lower, with London used as a central hub for attracting talent.
In 2015 we saw tender price inflation levels on London fit-out projects at around five percent due to the surge in demand in the fit-out market. In 2016 this has dipped to around four percent as market supply has caught up with demand. We expect this to return to around five percent in 2017 as some of the planned major fit-out projects come on line. Some clients are choosing to procure their main contractor team early on a two-stage arrangement, often many months ahead of starting on site, in order to secure resource from the best teams.
- 5% Tender price inflation 2015
- 4% Tender price inflation 2016
- 5% Predicted tender price inflation 2017
Fit-out market analysis
During summer 2016 the general feeling in the fit-out market has been one of waiting for the fallout of the Brexit vote, effectively placing a pause on expectations. Notwithstanding this, there was an expectation that input costs (labour, plant, materials) would continue to increase after the ‘Brexit’ vote, regardless of outcome, with few suppliers expecting the market to cool (eight percent).
The market is buoyant and the short-term impact of Brexit has led to price increases due to the weak pound, but it is unknown what the effect of ‘Brexit’ will be in the medium term, and whether or not market activity will increase or decrease. We have seen little evidence of schemes being cancelled or put on hold however, uncertainty in the economy may put off investors.
Still, London is most active with big projects underway such as Crossrail and Elephant and Castle redevelopments. However, regions outside the capital are benefiting from the heat of the London market, with developers starting to invest in areas surrounding major cities such as Cardiff, Bristol, Watford, Oxford etc.
The market has plenty of opportunities, but increased foreign competition in London is making work harder to win, which places increased pressure on tendering conditions. An increasingly active market place would tend to cause a reduction in pricing levels as firms bid competitively to secure work.
The level of contractors and sub-contractor insolvencies has also been fairly subdued of late, lending some assurance to the surety of fulfilment of works. Evidence suggests that cost increases have occurred while there is more pressure from contractors to reduce prices. Programmes are getting tighter and profit margins seem to be reducing, potentially impacting the level of future insolvencies if this situation persists.
Download the full report to find out about inflation rates, industry commentary and key challenges and indicative costs across category A and B.