London fit-out market update April 2018

A reduction in pipeline visibility into 2018/2019 highlights uncertainty throughout the London fit-out market. Our autumn survey showed a gradual cooling of the market throughout the first half of 2017 with a decreased annualised construction output across the London market.

Our winter survey shows that this trend has continued. Insolvency was reported as an emerging risk in the market, although this has materialised much earlier than expected.

Four key trends have been identified in this report:

Expected decrease in tender price inflation

Inflation forecasts remained at 3.3 percent in 2017. Rising material costs, following Sterling’s devaluation, contributed significantly to the overall inflation forecast. Moving into 2018, tender price inflation is expected to fall to 2.2 percent as the volume of office space under construction reduces. Nonetheless, inflation remains positive as construction activity of new and refurbished office space appears to be above historical levels.

Skills shortages ever present

There is continued reporting of skills shortages across the fit-out market, as well as the construction sector as a whole. This will prove to be the biggest challenge facing the industry. While Brexit negotiations continue, reliance on migrant labour in the capital, and an ageing construction workforce approaching retirement, is likely to mean an increase in labour costs.

Fall in contractor market pipeline

With little clarity provided by UK Government over the intended Brexit outcome, the market continues to adopt a hesitant, wait and see approach. As a result, contractors’ optimism in the market has been largely subdued, with 59 percent of respondents indicating that the market is expected to stay the same. The impact of Brexit continues to feed through as the number of smaller lease transactions dropped in the immediate aftermath of the referendum result. This has had a knock on effect over the past two quarters with fewer projects coming to market.

Client ‘hesitancy’ due to uncertain market outlook

A lack of confidence from clients means investment decisions are put on hold. Uncertainty over what Brexit will look like, means clients are not committing to projects and the supply chain is not investing in capacity.

Insolvency Risk

Whilst competitive prices can be achieved on single stage tenders, the insolvency of major household names in early 2018 has created nervousness. Clients need to tread carefully to make sure they are not caught out.