Cahill: People have suddenly got a bit of confidence in the future

Roundtable: State of the market

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Place held a roundtable discussion sponsored by Morris & Spottiswood at the Spinningfields office of Pinsent Masons to examine the health of the commercial property market around the region.

In attendance:

  • Paul Unger, editor, Place North West
  • Tony Cahill, North West business unit director, Morris & Spottiswood
  • Mike Edge, head of real estate Manchester, Pinsent Masons
  • Jonathan Walsh, managing director, MEPC Birchwood
  • Caroline Baker, director of development consulting, DTZ
  • Tom Lonsdale, managing director, Placecraft
  • Andrew Hamilton, senior director, BNP Paribas Real Estate
  • Michael Woolley, head of construction, Hill Dickinson

Tony Cahill, North West business unit manager at Morris & Spottiswood, opened the discussion with a reflection on the fit-out market today.

Cahill said: "What we have identified, as a refurbishment contractor, is the amount of money clients will spend on refurbishment has come down significantly from two years ago.

"It is also much harder to get decisions out of people than it was in the past. We are bidding speculatively for a number of projects that either will not happen or they will take four to six months for them to come back and sign up. We are continually being asked to go back in to reduce costs further even though we have been successful and in their budget as they want to save costs."

That said, 2010 ended better than it started, Cahill added. "All of a sudden certain people have decided that they have got a bit of confidence in the future and have pushed the button on requirements so we've got a lot of confidence in the occupier market but haven't got confidence in investment and in the development property market."

In terms of margins, there are still people out there 'buying work in' at a zero margin or even loss just to keep turnover going, the panellists agreed.

Cahill said: "We saw quite significant falls in tender price application in 2009 of probably around 10% and we saw about another 5-6% fall in 2010, but since the end of the second quarter that bottomed out. We haven't seen any further fall."

The lower prices - and margins - have led to a wave of tendered frameworks coming to market as clients look to fix prices at a low level for years. Whereas panels would have lasted two years before, they are now often being set for three or four years.

The intense competition among firms tendering for contracts is having a knock-on legal impact, says Hill Dickinson's Michael Woolley. Contractors are accepting work at low fees but then aiming to make extra money - and profit - by challenging aspects of the contract as they undertake the work, making claims during the life of the build programme.

Woolley said: "The contractors that we've talked to have said that they have tendered for a fair amount of work but I think that's buyers increasing tender lists rather than there being more work about, and the work they are taking is on margins and I think that that means inevitably where they can make anything is out of disputes and disruptions. So I think there's plenty of scope for that."

The people around the table said the frameworks are becoming very expensive to compete for and are generating an extraordinary volume of waste nationally.

Tom Lonsdale, planner at Placecraft, said: "There is a lot of waste of human resource within the councils who are saying they are already under resourced and becoming slimmed down devoting ridiculous amounts of time to developing frameworks, but particularly things like PFIs which take forever to close a deal and under housing PFIs and school PFIs and every tender has an inverted pyramid of people competing for it. You've got multiple firms each subbing to multiple firms."

All participants agreed that it would be preferable to return to having conversations with a potential client about what they actually want rather than uploading applications online. They felt the "public sector is paranoid about being challenged on its decisions instead of just making some. They build this enormous edifice around themselves to protect themselves from that challenge, in most cases."

On the housing market side, DTZ's Caroline Baker and Andrew Hamilton of BNP Paribas said the house builders are returning to market to land-bank but are only building out the prime sites.

Hamilton said: "Our research actually suggests that there will be a house price growth in the North West in 2011 but I query that. There will probably be more people with money who want to sell a house, therefore, it will be supply and demand raising prices up but it's not a real growth in the housing market just people saving on cash."

Rental levels are strong in Manchester city centre's apartment market as supply stalls, partly driven by the fact that people would have chosen to move out of the city centre to buy their first house, but now they can't afford to do that because they can't access a mortgage.

With development funding for new schemes at a historic low, what impact is this having on the quality of design?

Lonsdale, who is also a CABE advisor working with developers to improve their designs, said: "The poorer quality builders have had planning assistance from the both national and regional quality houses such as Places Matter, CABE and Yorkshire Forward and we were slowly beginning to get commitment of their own accord, it's taken them 10 years of duress to get some of the slower developers to recognise the value of design quality. Now it maybe that we have lasted just long enough for that to have some momentum, but still not enough I don't think."

Lonsdale continued: "The Big Society concept I have to say is utter, utter deception, because to put the onus onto community groups who don't have the skills themselves, and not to give them the resource with which to require those skills and deploy them, I just don't see the direction that this is going to come from."

The skills gap exists within quangos and the public sector too, Jonathan Walsh of MEPC Birchwood added: "I'm on the board of regeneration for Warrington & Co, the regeneration partnership for the town, which has a board meeting once a month for 10 months of the year. It's very difficult to get professionals to give up their time to work on it, just as it's difficult to get the money and the staff to actually do things these days.

"The applications for the board have some pretty good names on it, it's a strong board but that board is going in there blind as to what its resources will be and those people will turn up and they will endeavour for a period time and at the first board meeting aim to make a difference but if they go to the board meeting from the private sector - give up their own personal time, be it in the evenings or whatever, and join the local authority or whatever else - and they can't perform because there is no resource, they'll give it a go for 12 - 18 months, whatever period of time, and the LEP will crumble to being something else."

Another pattern in the public sector is that planning decisions are not being called in for public inquiry by government.

The approval of Peel's Wirral Waters and Lend Lease's Preston Tithebarn are cases in point, both of such large scale that they will impact on the economies outside the local authority border and therefore justified for a call-in.

Is not holding inquiries a recessionary move to promote development? DTZ's Baker commented: "I don't think it is recessionary. I think it's political and it comes back to the localism agenda. Wirral Waters is, potentially, if it is delivered on the aspirational scale planned, way beyond the impact of Wirral to be able to say yes or no to it. The impact on Liverpool, Ellesmere Port and other areas is huge. I think it's more the fact that in politics at the moment, while pushing the local agenda, you can't be seen to going 'Oh, we will pull one in'."

With so much uncertainty in the market, 2011 looks like being another tough year, unless some clarity emerges.

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