Landlord and tenant - demand rising

Have we seen the worst of the property recession? There is growing evidence to suggest that is the case.

The prime residential market in London is on the rise again, though it is still down on the 2008 peak. Knight Frank are reporting that:
- Prime house prices in central London rose 1.3% in September
- The annual rate of price change has improved to -8.9% (from -12.0% in August)
- Average prices are still 18% below their March 2008 peak
- Price growth in some areas has hit 9% since March this year

In the retail sector Land securities have been providing concessions to their tenants in the last year to help them through the worst property recession in living memory. The traditional quarter rent days have been a contentious tradition for years and retailers never looked forward to finding three months rent in advance. This pushed some retailers like Woolworths over the edge when the quarter day arrived.

Land Securities introduced their Clear Let lease that introduced monthly rent payments in an effort to keep hold of increasingly rare tenants. But they are warning that concessions might become increasingly difficult as they rebuild the value of the portfolio for their investors. A spokesman recently said
“British Land is seeing more demand from new and existing tenants. In a well-functioning market both landlords and tenants will push as hard as they can and try to get as much as possible out of the other before settling somewhere in the middle. It is a question of who has the upper hand, and where there is good demand from tenants and low vacancy rates, landlords do not need to give more.”

Things are changing for both landlord and tenant. Yields are beginning to harden with CBRE reporting that in September prime shopping centres yields saw a 25 point improvement to 6.85%.

Overall, the IPD report that property yields and capital values have been growing since December 2008 and in the last few months rentals have also begun to rise.

It's clear that with reducing stock (due to almost zero investment in the last 24 months)combined with a more stable retail environment, landlords will find fewer reasons to succumb to tenant demand for hard bargains and concessions.

Preaching to the (nearly) converted

Today saw Provesta speaking at the Building Business For Our Region event in a windswept and wet Bridlington on the usually glorious Yorkshire coast.

Ven Management's Target initiative have organised a series of seminars aimed at SME's in the construction industry and the roomful of delegates that turned out at 9:00am in such miserable weather seemed determined to get something from the event. Hopefully the speakers left them with something to take away and utilise in their business.

Wendy Ashton from Target introduced the day after the obligatory bacon sandwiches.

Nigel Leighton, the Director of Environment and Neighbourhood Services at East Riding of Yorkshire Council discussed what motivates his local authority when they are procuring buildings from schools to offices. He was keen to get across the message that they are open to any business as long as fulfil the requirements of quality and protecting public expenditure. The frameworks now coming into play give the council more surety that they are partnering with and employing the right people for the job.

Wendy Ashton took the podium again to outline what Target is all about and how they were set up to bring together firms in the construction sector and provide them with tools and knowledge to improve their business and find their way into projects that they might not be able to easily access or find.

Lee Parkinson of Parkinson Procurement Solutions leads the YORbuild programme that is now leading all the construction procurement for the four local authorities in East Riding, Leeds, Rotherham and Scarborough, harnessing much of the £1.2 billion of public construction expenditure in the region. Lee provided the latest position on YORbuild with a detailed explanation of how contractors, consultants and suppliers can get involved in the framework arrangements that will be used to procure in future. Interestingly it seems that YORbuild is gaining itself a reputation as other public bodies outside the original organisations are approaching YORbuild to make use of the framework.

Tony Carroll of Provesta (that's me) then gave a run down of some of the practical measures that firms can look at to improve the quality of their bids. By making their company more skilled, knowledgeable, visible and transparent they can become a more attractive prospect to potential employers by ensuring that they use the talents already within the firm, get new ability where required, and then engage with employers and clients and the community. 

Andrew McCormick of Hobson and Porter provided an insight into where future work was to be found and what was required of suppliers that wanted to work with his firm, especially regarding accreditations and skills.

Anne Chamberlain, leads the project management team at East Riding of Yorkshire Council where they have adopted the NEC form of contract on most of their construction projects. Her potted run-down of the contract and how it is implemented explained how they used it to keep on top of project progress, expenditure and amendments.

Finally, Jonathan Cheng of Resource Efficiency Yorkshire / Groundwork UK outlined the myriad legislation and practice requirements that construction businesses need to be aware of in order to meet the current and forthcoming environmental standards. Groundwork are currently running a series of environmental management programmes targeted at helping SME's devise and implement their own environmental standards.

The slides from the "Connect With Clients - Give Them What They Want" presentation can be found on Slideshare.

Frozen peas (Does a client really need a building?)

Tony Carroll
20.10.09

Many years ago when I designed buildings for a living I had a client, Tim Hopwell, who owned a frozen food distribution business operated from a string of cold stores around the UK. Hopwell's needed a new branch in Sheffield so after completing their Nottingham HQ our practice, Crampin and Pring, was employed to extend and refurbish an existing site that they had acquired on the outskirts of the city.

The scheme that I came up with for the building was quite innovative.  The common problem of damaging ice build up in the inaccessible void between the inner insulated core and the outer weatherproof cladding was resolved by giving the building an external structural frame and creating high speed ventilation chambers between the wall and ceiling/roof layers.

So far so good. But this was a more expensive solution than Tim had been used to paying for so he rightly asked me why it was costing more than he expected. However, the solution made sense to him but he then went on to explain his thoughts on buildings and his business. It was an salutary lesson that has remained with me.

Tim explained that his business was selling frozen peas... and chips, fish fingers, etc. It paid the wages, and put roofs over staff heads and petrol in his Lexus. The only thing that made the profit was "selling frozen peas" and he didn't want a building. He didn't even want staff, computers or his distinctive orange lorries.

All he wanted to do was to sell frozen peas.

In fact, if he could sell frozen peas from the middle of a field he would. He needed a building, but he didn't want a building. My bubble was well and truly pricked.

There is a valuable lesson here for those of us in property when we consider what our clients and customers motives are for what we do. It is very easy to become tied up in the day to day issues of what is a complex business without ever seeing the core purpose  that we are fulfilling.

Tim died a couple of years after that discussion but that it was a valuable lesson in what motivates the people who use and pay for our buildings.

Don't ignore the warnings from the OFT cover pricing investigation


 The unprecedented fines levied by the Office of Fair Trading on the 103 building companies declared guilty of involvement in cover pricing has sent a shockwave through a construction industry already reeling from the worst recession in memory. With individual fines up to £18m the firms involved have been hit hard.

Predictably the general media and their readers have latched on to the investigation and decided that the size of the fine represents the measure of guilt but closer examination shows that it isn't quite so straight forward. An unusual formula that includes the last three jobs involved in cover pricing and the proportion of that market sector in the turnover in the business means that one firm might have a million pound firm and another might have a hundred thousand even though the offences appear the same. On top of that some firms received leniency providing that they actually knew that they could apply before deadline expired, unlike Kier who at the time of writing is still 'considering its position'. We might not have heard the last of this affair.

But what about the other firms? Cover pricing is, or at least was, standard practice throughout the construction industry simply because contractors want to remain on clients and project managers tender lists. So in a way the OFT investigation has highlighted fundamental problems within the clients procurement process. The OFT has not been able to quantify any loss yet they are encouraging clients to sue the 'guilty' contractors. Controversially, the investigation was geographically and time limited meaning that those outside the area or a day past the deadline weren't included in investigations or sanctions. Contractors on the west of the Pennines escaped investigation while those on the east did not. This raises an obvious and deeply ironic point about the OFT actually creating an unfair market.

In their note to procurers the OFT themselves state that;
the endemic nature of the practice within the industry suggests that many other companies are likely to have been involved in bid rigging, even though such activity remained undetected. For this reason, it cannot be assumed that the Parties are the only companies that may have engaged in cover pricing.

Don't assume that those that received a fine were any more guilty than those who did not. They are now more likely to have strong internal procedures to avoid future problems. It might go against their natural inclination but clients and contract managers must take care when considering tender lists to ensure that firms aren't excluded without a valid reason. The OFT and Office of Government Commerce have been very clear.

Check the guidance issued by the OFT, OGC and and OECD and ensure that tendering contractors know that they can say no without fear of being excluded from the next tender list. A transparent and equitable contract procurement process should ensure that all parties get the best price, performance and ongoing relationship well into the future.