BUILDING COST UPDATE: Q COMMERCIAL FIT-OUT AND REFURBISHMENT

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1 BUILDING COST UPDATE: Q COMMERCIAL FIT-OUT AND REFURBISHMENT UK BUILDING CONSULTANCY COST CONSULTANCY 2014 EDITION A

2 A 2 BUILDING COST UPDATE INTRODUCTION The construction industry is reporting activity at levels not seen since 2008 and economists are encouraged by the growth. London in particular is leading the way and contractors have been reporting positive upward trends in order books for BCIS published data shows that tender prices bottomed out in Q and have been followed by growth of 8.6% to Q (averaged across the UK). BCIS are currently forecasting modest growth over the coming years at 5% from Q to Q and 4% from Q to Q Economists have generally adjusted their predictions upwards for the London commercial market, with forecasts of between 5-6% per annum of year on year growth for the next three years. Recovery in the commercial market is also evident and developers are already generating positive investment returns in refurbishment. Furthermore, with 65-90% of fit-out expenditure typically qualifying for tax relief there is yet more incentive for investment in commercial buildings. A CLOSER LOOK AT THE FIT-OUT SECTOR WITHIN THE LONDON MARKET The potential viability for refurbishing a building is dependent upon a number of factors; its nature and condition, its location and potential position in the office market, economic conditions and the investment timescale of the developer. Building 1 suggests commercial assets with inherent long term value related to location, character, future planning constraints or listed building status might justify significant investment in refurbishment. Commercial buildings with limited potential to generate increased rental streams from refurbishment might, in contrast, only justify a limited investment to attract short-term tenants ahead of disposal or comprehensive redevelopment. Once a client has commissioned an office refurbishment (Category A fit-out), fitting-out the space to occupiers specific requirements (Category B fit-out) can be a significant cost add-on. In principle there are five main factors which drive fit-out costs; suitability of the base building, types of space and facilities required, extent of the services installations, speed of construction and level of occupancy. With this in mind it is therefore important for developers and occupiers alike to consider the above before embarking on a fit-out investment, as each element will have a direct impact on the overall construction cost and ultimately a schemes viability. TENDER PRICE INDEX FORECAST: BCIS All-In Tender Price Index (TPI) Source Data: BCIS 1 Building [Online] 15. Available at [Accessed: 30 April 2014].

3 ALL-IN ESTIMATING RATES UPDATE DEVELOPERS REFURBISHMENT (CATEGORY A) FIT-OUTS Office refurbishments give developers the opportunity to optimise the value of a building without the investment risk and cost that is associated with full-scale redevelopment. Refurbishment fit-outs vary between different developers/ occupiers but usually comprise the following works: Raised floors Suspended ceilings Extension of the mechanical and electrical services above the ceiling from the riser across the lettable space Sprinklers, fire alarms and basic safety signage Distributed power to each floor Finishes to main core areas, including fully fitted out WCs Office carpets Finishes to the internal face of the external and core walls Due to the wide range of options available to developers and the effects that building condition and constraints will have on the works, the range of costs for each grade of refurbishment are broader than would be expected for new build construction. There is no standard definition for refurbishment fit-outs but they are typically categorised as the following: minor, medium and major refurbishment works. Minor refurbishment works The main purpose of a minor refurbishment is to extend the economic life of the asset by up to five years. Opportunities for payback are limited with the scope of work being confined to the strip out of existing loose fixtures and fittings and redecoration to a basic standard with specific allowances for overhauling existing services and plant as necessary. Medium refurbishment works with no structural alterations These projects aim to renew the existing fabric and services of a building to present day standards of performance. The investment timeframe is typically 15 years and works would typically include the stripping out of existing fixtures and fittings and a fit-out to Developer s Category A specification including the provision of new services. Major refurbishment works with minor remodelling of layouts Major refurbishment schemes aim to exploit opportunities to increase useable floor areas and are aimed at an investment horizon of at least 15 years. Works will include the replacement of all fittings, finishes and services and it is highly likely that the facade will be replaced or upgraded, together with structural alterations (reconfiguration of circulation space or the infilling of redundant light wells). B3 REFURBISHMENT FIT OUT (CATEGORY A) SPECIFICATIONS REFURBISHMENT FIT OUT (CATEGORY A) SPECIFICATIONS ECONOMIC LIFE INCREASE LOW SQ FT HIGH SQ FT Minor refurbishment works Up to 5 years Medium refurbishment works with no structural alterations Up to 15 years Major refurbishment works with remodelling of layouts 15 years plus NOTE: The building costs illustrated in this section include preliminaries and overhead and profit for a lump-sum contract, but exclude VAT and professional fees (incl. legal fees).

4 4 OCCUPIERS (CATEGORY B) FIT-OUTS Category B completes the occupier s specific requirements and can typically comprise the following: Installation of cellular offices Suspended ceiling upgrades and modifications Enhanced floor and wall finishes, decorations and branding Enhanced mechanical and electrical services / specialist lighting to suit layout Installation of below-floor power and data cabling to user accessible termination Adaptation of raised floor systems Adaptation of life safety systems Tea point / kitchen fit-out Installation of safety signage systems, furniture fixtures and office equipment There are no standardised specification levels for a Category B fit-out but they can be generally categorised into low, medium and high specification fit-outs. REFURBISHMENT FIT OUT (CATEGORY B) SPECIFICATIONS Low specification fit-outs These projects place emphasis on getting the most out of an existing space. Typical features would consist of the following; limited cellular spaces, minimal alterations to existing Category A services, limited bespoke joinery, minimal alterations to base build finishes and the occupiers head count is maintained with the Category A design parameters. Medium specification fit-outs Medium specification fit-outs generally have greater emphasis on client facing areas, with higher office cellularisation, higher services enhancements, bespoke joinery items, featured lighting and alterations to base build finishes. High specification fit-outs These projects comprise outstanding design and quality with high-end finishes and often incorporate bespoke joinery items, featured ceilings and floor finishes, kitchen and gym fit-outs. The floor spaces will be heavily cellularised with high services demand. CATEGORY B FIT-OUT SPECIFICATIONS LOW SQ FT HIGH SQ FT Low specification Medium specification High specification NOTE: Costs include preliminaries and overhead and profit for a lump-sum contract, but exclude furniture, IT equipment, professional fees (incl. legal fees), relocation costs and VAT. The above costs are all based on schemes where the Category B installation commences from an existing Category A installation.

5 TAX RELIEF ON REFURBISHMENT AND FIT-OUT EXPENDITURE Tax relief is available in the form of plant and machinery allowances via the capital allowances legislation, as an incentive for investment in commercial buildings. They are a significant component of the fit-out development equation, with 65 90% of expenditure typically qualifying for relief. The relatively low cost associated with fit-outs and the high recovery of these allowances also provides a fantastic opportunity to developers/occupiers. Plant and machinery allowances are available for office projects in three forms: Integral features: Integral features comprise fixtures integral to the building, such as electrical systems, hot & cold water installations, lifts, heating and ventilation systems and external solar shading. This asset pool allows for a writing down allowance (WDA) of 8% per year on a reducing balance basis. General plant: General plant includes items such as security & fire alarms, data & telecoms installations, carpet and sanitary accommodation fixtures. This provides for a WDA of 18% per year on a reducing balance basis. Enhanced Capital Allowances (ECAs): ECAs provide for a 100% first-year allowance on energy saving and environmentally beneficial plant and machinery. Items that may qualify in an office include; air conditioning, lighting, motors & drives and water saving technology. The broad conditions for entitlement to claim plant and machinery allowances are as follows: Be within the charge to UK tax Incur capital expenditure on the asset Have the relevant interest in the building Use the asset in the course of a qualifying activity The following table shows the capital allowance savings based on a 3,500,000 Category B office fit-out, assuming 75% of costs qualify for capital allowances. B5 FORM OF PLANT AND MACHINERY ALLOWANCES FORM OF PLANT AND MACHINERY ALLOWANCES QUALIFYING AMOUNT IN TOTAL SAVING IN YEAR 1 SAVING IN Integral features 1,350, ,500 22,680 Plant and Machinery 1,010, ,100 38,178 Enhanced Capital Allowances 265,000 51,250 55,650 Total 2,625, , ,508 NOTE: Assuming a UK corporation tax rate of 21%.

6 6 CONTACTS For further detailed advice on construction costs and capital allowances please contact the following: QUANTITY SURVEYING Jon Hannon Senior Director, Quantity Surveying t: e: PREPARED BY: Jonathan Allen Surveyor, Quantity Surveying t: e: CAPITAL ALLOWANCES Graham Burrell Director, Capital Allowances t: e: DISCLAIMER 2014 CBRE CBRE Ltd has taken every care in the preparation of this report. The sources of information used are believed to be accurate and reliable, but no guarantee of accuracy or completeness can be given. Neither CBRE, nor any CBRE company, nor any director, representative or employee of CBRE company, accepts liability for any direct or consequential loss arising from the use of this document or its content. The information and opinions contained in this report are subject to change without notice. No part or parts of this report may be stored in a retrieval system or reproduced or transmitted in any form or by any means electronic, mechanical, reprographics, recording or otherwise, now known or to be devised without prior consent from CBRE.

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