The impact of Brexit on contractors could be beneficial for landlords and occupiers.
New data from Cushman & Wakefield’s Occupier Fit Out Cost Guide shows category B office fit-out costs increased by just 1% between January 2018 and January 2019, compared with a 5.8% increase between Q1 2017 and Q1 2018.
The cost of low category B fit-outs in Q1 2019 stood at £56 per sq ft compared to £55 per sq ft in Q1 2018. However, costs rose by 5.7% between Q1 2017 (£52 per sq ft) and Q1 2018.
Similar trends were found in the cost of medium and high category B fit-outs, which provide finished workspaces that are ready for tenants to move into, unlike category A, which provides a basic level of finish.
Both saw an increase of 0.9% between Q1 2018 and Q1 2019 – a substantially slower price rise compared with the same period between 2017 and 2018.
Between Q1 2017 and Q1 2018, the cost of medium fit-outs rose by 6% from £82 to £87 per sq ft. Over the same period, high fit-out prices increased 5.4% from £130 to £137per sq ft.
Brexit rush
C&W’s head of London cost consultancy Paul Montgomery said price levels are flattening primarily due to the fact fit-out contractors are competitively tendering for jobs in their eagerness to secure work before the UK leaves the EU.
“If Brexit hadn’t been around the corner, maybe last year and the early parts of this year we may have seen higher pricing levels from contractors,” he says.
“They would have been more confident there would be a consistent workload pipeline. But their concern is they want to ensure their order book is as full as possible before any potential impact of Brexit happens.”
As a result, tenants can currently secure a good deal as contractors race to win work.
“If you’re going to do a relocation or refit, now is a very good time to secure a professional team or contractor to deliver it, as pricing is still competitive,” Montgomery says.
“People are buying well at the moment so there are deals to be done.”
But these market conditions are not set to continue, according to C&W’s 2019 forecast. Between Q1 2019 and Q1 2020, fit-out costs are set to increase by 3%.
Risk of financial stress
And the wider property sector could be negatively affected if contractors run into trouble by outpricing themselves on work, says Montgomery.
If contractors fail to price in the risks associated with Brexit, such as a possible increase in construction material costs and delays in materials, then they may find themselves in financial stress while delivering projects.
Therefore, developers could see a fall in the contracting market, with less companies to choose from to build out their schemes.
This risk could be higher on large-scale jobs, Montgomery says. “Contractors are pricing work in Q1 2019 but the costs of this might not become real to them until Q2 or Q3 2020, when the price might be significantly different,” he says.
“We might not necessarily see any impact on contractors struggling this year, but we may see it in 2020 or 2021.”
Montgomery therefore advises landlords or tenants to monitor the financial health of contractors closely before selecting a company to deliver their fit-out.
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