Grab bargain while you still can

Jun 24 2009 by Peter McCusker, The Journal

The fall in construction prices means the time to build is now, says Martin Smith of King Sturge.

SALES are in abundance on the high street, but few people are aware that there are bargains to be had in the builder’s yard as well.

The current downturn in the global economy is certainly hitting the region hard. As a result, anyone previously contemplating the undertaking of construction, refurbishment or maintenance work is becoming more frugal, but is this wise in the long run?

The construction industry, as with most industries, has seen a fall in overall output due to the recession; however construction has been hit harder than most.

The Building Cost Information Service has estimated that the overall value of new orders within the UK, in the first quarter of 2009, will be approximately half of that experienced at the start of 2006. Orders for construction of new commercial and industrial properties are also estimated to fall to approximately 40% and 25% respectively of 2006 levels.

Building contractors have therefore been necessitated in making staff redundant and in total approximately 250,000 construction jobs have been lost across the UK in the last 18 months.

Of those who were unable to reduce costs, the ultimate price has been paid and it has been estimated that nine UK construction firms go bust every day.

Contractors are therefore very eager to obtain new commissions and are generally reducing their profit margins in order to obtain the work that will keep them afloat during this difficult period.

A recent survey shows that more than 86% of building contractors reported a reduction in profit margins resulting in construction work becoming cheaper. The Building Cost Information Service has reported that the average cost of building works are now at levels not seen since early 2006.

These statistics may be good reading for those with secure, strategic financial planning and are in need of vital maintenance works.

For everyone else it would be wise to consider the numerous benefits to both freeholders and leaseholders in undertaking works at this time.

Tenants usually occupy premises under leases containing some form of repairing covenant and are therefore obliged to keep their premises in good order at all times during the lease, not only, as some tenants think, at the end of the lease.

Therefore, if there are repairs to be made to the premises, they need to be undertaken now. From the landlord’s view; in requesting the tenants undertake these works they may ensure that their property is fully maintained and therefore retains its full market value, which is of particular concern to those with high loan to value mortgages.

A recent example of such works managed by King Sturge concerns repairs to an industrial estate, which was instructed by the landlord and funded by the tenant’s service charge payments.

The work, which was originally tendered two years ago, has been re-tendered and it emerged that the cost was 22% less than that previously received. This resulting savings to the tenant’s funding was equivalent to approximately two months rent.

It is estimated that the construction industry will show signs of recovery in the coming 12 months, however, the contraction in the industry is ongoing and unlikely to cease until the early part of 2010.

Once stabilised, it is anticipated to begin growth once again and return to a much less competitive nature and hence higher prices.

In order to take advantage of the cheap building costs, now is the time to review your portfolio or premises and grab a bargain while you still can.

Martin Smith is associate in the building consultancy department at King Sturge’s Newcastle office.