review Davis Langdon Ireland Annual Review 2013
Giants Causeway Visitors Centre, Antrim, ÂŠHufton+Crow.
Contents INTRODUCTION INDUSTRY REVIEW
Medium-term outlook Tender prices and construction costs Industry issues BUSINESS INTELLIGENCE
Jim Power, Jim Power Economics Michelle Fagan, RIAI Tom Kavanagh, Kavanagh Fennell GEOGRAPHIES
Island of Ireland UK International REFERENCE
Indicative building costs Development budget checklists Case Study: Office cost model Case Study: Project workout Case Study: Public procurement DAVIS LANGDON 32 Davis Langdon Ireland news Key contacts Global services
Introduction ... positive signs for recovery?
Welcome to this year’s Annual Review. 2012 proved to be another challenging year in the construction industry, but with more positive signs for recovery than previous years.
that contractors are being a lot more selective about what they tender for, due to a lack of resources and high tendering costs.
Construction output fell by 9 percent in 2012 and is forecast to fall by circa 3 percent in 2013 which is relatively good news in terms of curbing the downward spiral, but provides little solace to contractor’s falling order books.
Another stumbling block for contractors is the availability of performance bonds above 10 percent of contract sum. Bonding companies have significantly curtailed the availability of such bonds which is forcing both employers and contractors to reconsider their approach to projects.
There was positive news during the year with the €2 billion National Asset Management Agency (Nama) stimulus package in May and the Government’s €2.24 billion infrastructure stimulus announcement in July. The full effect of these announcements have yet to be felt but has led to positive decisions that should have an impact during 2013/14, such as the Grangegorman and Nama workout schemes. We were delighted to see some of the measures mentioned in last year’s review come to fruition, including the Real Estate Investment Trust (REIT ) legislation and stimulus measures. We understand that other measures are currently being examined in relation to the Public Works Contracts, Public Procurement and Project Bonds. Whilst good news like this is welcome it is not having an immediate effect on the market. Contractors, in particular, are feeling the pressure more so than others as they rely upon live construction projects. We have noted
In the review (page 4) we consider the path to recovery and look at what 10 percent growth year on year from 2014 onwards might look like and how long it would take us to get to the optimal level of construction output. It provides a sharp focus for Government and other industry stakeholders as to the scale of the challenge but also the opportunity in terms of much needed job creation.
Other items in the review include our Davis Langdon, an AECOM company, and AECOM colleagues giving a snapshot of what’s happening around the globe and we provide some relevant case studies for some of the project types we see in the market here, including Office Refurbishment and Project Workouts. We hope that you enjoy the Review and look forward to working with you again during 2013. Paul Mitchell
Director, Head of Office – Ireland firstname.lastname@example.org
Similar to last year we also have included some interviews with recognised industry figures and ask them their view on prevalent issues. Jim Power talks about the “Euro as balancing on a knife-edge.” The president of the Royal Institute of the Architects of Ireland (RIAI), Michelle Fagan, talks business and offers an insight into the industry and insolvency practitioner, Tom Kavanagh gives his perspective on insolvency and selling debt books.
Introduction | 1
Galway Clinic, Galway.
Industry Review 2 | Industry Review
The construction industry and the market is finally starting to adapt to the new reality.
Predicting the bottom had become a national pastime for the first two or three years of the economic decline, or crash in the case of the construction industry. However, 2012 has seen a shift in the emphasis of conversation amongst people in business and the focus now has moved on to trying to find ways to solve the many challenges that people, and the economy more generally, are encountering. This is also the case in the construction industry and the market is finally starting to adapt to the new reality and adjust its approach to doing business accordingly. This, however, is not to underestimate the challenges that remain or to suggest that the market is functioning properly. We will highlight some of these key issues later.
The “new reality” referred to above is that the shape of the recovery is likely to be more shaped than a wishful thinking “U” or “V” or even a “W” which all would signal a return to the highs of the mid-noughties. Of course it is acknowledged that those levels of €30 billion+ were wholly unsustainable, however, there would also be broad agreement that the current lows are also unsustainable. There isn’t quite unanimity on what would represent a sustainable level, however, we would see circa 10 -12 percent of Gross National Product (GNP), 8 - 10 percent of Gross Domestic Product (GDP) as being in the range required in the medium term. This would equate to circa €15 billion in current values or double the present level of output. The road to recovery as noted above is going to be slow, as illustrated in figure 1 on pages 4 and 5. Even with hypothetical growth of 10 percent per annum (pa) it would be 2023 before we would reach the 12 percent of GNP mark (assuming GNP growth of 2 percent pa).
Titanic Building, Belfast, Northern Ireland, courtesy of Titanic Belfast.
Industry Review | 3
How long would it take to reach optimum output? €40,000m
Construction output *
€20,000m Optimum construction output based on 12% of GNP
€5,000m €7.5 billion
2007 4 | Industry Review
What we need to achieve 10% growth
In order to achieve a 10 percent increase in construction output in 2014, we would need these additional projects (representative sample).
+170k +145k +125k
Labour figures based on notional cumulative output.
+100k +85k +70k +55k +40k
* Pre 2012 output based on â€œThe Irish Construction Industry 2012â€? SCSI/DKM. Post 2012 based on hypothetical 10 percent pa growth.
2024 Industry Review | 5
Belfast Streets Ahead, Belfast (photo courtesy of David Lloyd, AECOM).
In the short term, looking at the broad prospects for the industry, the three headline sectors in terms of demand led markets are: – Public sector – Residential – Private non-residential Public sector The Public Capital Programme (see figure 2) announced that Budget 2013 did not contain any significant surprises with an 11 percent reduction on 2012 output. The Budget also published the Multi Annual Capital Programme to 2016 which shows a further 6 percent drop in 2014 before leveling out in 2015/16. Within the Public Capital Programme all sectors have been affected, however, the core areas of health and education have been less so with health, maintaining the 2012 budget and education reducing by 4 percent. Amongst the hardest hit are road improvement/ maintenance budgets, which are being reduced by 38 percent, and housing budgets which are being reduced by 29 percent. The roll out of the motorway programme during the Celtic Tiger is often referenced as one of the few physical examples of essential infrastructure delivered during the boom. Of course the work was not entirely complete and the July 2012 stimulus plan announced by the Government was welcome insofar as it identified an aspiration to continue infrastructure development. It also includes schools, primary care
6 | Industry Review
centres and other public buildings. This and other projects, however, will be dependent on the Government sourcing funding for public-private partnerships (PPP) projects from the European Investment Bank and through the disposal of state assets. Residential The residential market has been at the centre of the financial storm which has hit the economy, with the result that, after the unsustainable level of house completions up to 2007, it was destined for collapse. The recent statistics indicate circa 4,000 house starts and 8,000 house completions in 2012, less than a tenth of the annual total at the peak. The majority of residential activity is in the one-off house category and the public-sector housing capital spend has been largely restricted to Limerick and Dublin city regeneration projects and repairs, maintenance and improvement of existing stock across the local authorities. Looking to the more medium to long term the most recent Census 2011 results published in July 2012 included statistics on the age profile and type of residential dwellings. Figure 3 summarises this data. This is useful when considering the likely demand for residential properties in the future. It is clear that, whilst the pace of change will be dictated by economic factors, Value of construction output
it does indicate that 44 percent of dwellings pre-date 1980. Private non-residential In terms of the broader property market, activity has been generally muted with some limited activity in the office market, particularly in the Dublin region, but the retail sector continues to decline. Notwithstanding this, a number of national brands will continue to roll out national programmes where they are restructuring their offering to meet the changing market. In addition, there is some movement in the hotel sector where, after a number of yearsof little or no investment, a minimum level is required to continue to operate effectively. In terms of potential impact for the construction sector, the limited private sector activity is likely to be primarily in the office fit-out, I.T. data storage and high end manufacturing for Foreign Direct Investment (FDI) clients and indigenous exporters. In summary, we see the value of construction output slipping marginally in 2013 in the region of 3 percent. Outlined in the table, below we summarise the available forecasts for the industry output in 2013.
Budget 2012 Exchequer PCP Figure 2: Public Capital Programme (PCP) (€ millions)
Budget 2013 Exchequer PCP Percentage Change
r he Ot
m m & un N ica at ur tio al ns Re , E so ne ur rgy Of ce fic s e of Pu bl ic W or ks
re ,F oo in d e ar
Ed uc & ati Sk on ill s
t, or Tr an
To ur Sp ism or t
ro nm Lo en ca t, C l G om ov m er u nm ni t en y t Jo bs , & En In te no rp va ris tio e n
Figure 3: Age profile and type of dwellings in the state (census 2011) 16% 14% 12% 10%
20 01 -2 00 5 20 06 or la te r
-2 00 0 19 91
-1 99 0
-1 98 0 19 71
-1 97 0 19 61
-1 96 0 19 46
-1 94 5 19 19
Be fo re
ta te d
Industry Review | 7
Belfast Streets Ahead, (photo courtesy of David Lloyd, AECOM).
So the real question is how close in percentage terms are we to sustainable tender levels and when will we reach such a point?
Tender prices Tender prices in 2012 continued the 2011 trend of modest increases. Of course the modest rises of 2011 and 2012 are well below the cumulative reductions since 2008. We do not envisage, nor would we advocate, a return to tender prices of 2007 because they would no longer be in tune with the new reality of the economy that we are, and will continue to operate in for the foreseeable future. It would be fair to say that the construction industry does not always follow a straight forward industry model, nonetheless supply and demand are the primary drivers. Construction industry output has continued to drop in real terms â€” the reality is that the capacity of the industry has probably reduced even further in real terms. These basic facts set the background and potential justification to expect tender price increases. So the real question is how close in percentage terms are we to sustainable tender levels and when will we reach such a point? To answer these questions we also have to set out what is meant by sustainable tender levels. To this end, it is seen as contractors setting prices at a level that covers costs and makes provision for profit and overhead in line with normal business expectations. We would be of the view that tender levels have not reached that sustainable level and thus the industry will graduate towards such a level by means of continued modest annual increases. We anticipate that this would be achievable by 2015,
however, as everyone realises in the current environment, even six month projections are challenging let alone three year projections. The last couple of years saw an increasing number of contractors in the general building sector following a dangerous path of â€œhaving toâ€? go in low and pursuing claim strategies to seek to re-coup the shortfall in costs, profits and overhead allowed for in tender prices. There are indications that this trend is reducing although it is still prevalent and represents a challenge for the industry. Construction costs In the middle of the Celtic Tiger we saw a major shift in the price of steel. This was primarily a result from China generating huge demand to feed its fast growing economy. Whilst China is still growing it is doing so at a reduced pace and other major economies have been hit, to a greater or lesser extent, by the international financial crisis. The result is that international demand has moderated, and whilst raw input costs such as energy, finance, etc. have increased, the overall material price increases have been generally modest. On labour costs, throw backs to the boom era such as payments in excess of the Registered Employment Agreement, bonuses, other fringe benefits, etc. have long since been stopped. In fact, February 2011 saw the introduction of an agreed -7.5 percent reduction in labour rates and a recent Labour Court recommendation has sanctioned a further 2.5 percent reduction.
On balance, we anticipate that we will see a further 3 percent rise in 2013 and similarly in 2014. We expect construction costs will broadly track that of the general economic consumer price index of circa 2 percent pa. Industry issues In an industry experiencing such turmoil as construction has undergone in the last four or five years, it is inevitable that there would be an array of issues being discussed. Some of the key issues which are currently generating much discussion are summarised below. Abnormally low tenders in contracting and consulting services Abnormally low tenders have been the subject of much discussion and with good reason. As output in the industry collapsed, the gap between lowest and highest tenders widened and the receipt of, what on the face of it appeared to be abnormally low tenders, has not been uncommon. In some instances, these may have been justified but it was widely acknowledged that the levels of tendering were unsustainable. The last 18 months has seen the impact of a reduced number of contractors and general restructuring. This has seen some stabilisation in tender prices with modest yearly increases. The gap between lowest and highest is also narrowing somewhat.Nonetheless, there remains instances where tenders are been submitted at cost and below.
Industry Review | 9
Ancestry.com, Dublin, (courtesy of Lafferty).
Mechanical and electrical tender price rises As noted earlier, the last 18 months has seen a return to modest tender price increases (3 percent per annum) which is helping stabilise the market. One notable factor, however, in the market is the level of uncertainty with regard to mechanical and electrical services tender prices which in some instances appear to have increased significantly. This is generating a level of instability and is particularly prevalent on publicsector projects where the government contracts have received significant negative reaction. Bonds Performance bonds are always the subject of discussion in recessionary times as, inevitably with contractor liquidations, they are called in. This in turn, combined with the backdrop of the general economic financial instability, has seen increasing pressure being applied to see bond levels reduced, in particular 25 percent on larger projects. In a turning market, caution should be observed before reducing bond levels. Even in a depressed market, the industry has seen the costs involved in re-procuring a replacement contractor exceed that of current bond levels.
10 | Industry Review
Public procurement As highlighted previously, the industry stakeholders, including clients, contractors and consultants, have all undergone a restructuring process to downsize organisations and reengineer them to get more from less. Unfortunately, the systems that the industry operates in are slower to change and public procurement is one such area that consumes huge resources. Whilst it is acknowledged that a level of standardisation and process was introduced with the Capital Works Management Framework five years ago, in this new reality the industry needs the processes to be reviewed and a level of online automation to be introduced to fast -track time and economise on input required. Future skills shortage Notwithstanding the day-to-day pressures in the industry, it is important that we keep one eye around the corner. One issue that people are beginning to focus on is the potential for a skills shortage in a few years. Fortunately for the economy, we have a young mobile educated workforce and this mobility has meant that large numbers have been able to emigrate and find work in all corners of the globe. Hopefully the industry will generate opportunities for them to return in the future should they wish. However, this overlooks the need to continue to educate the workers and professionals of the future and, at
present, the numbers seeking entry into construction related courses have dropped dramatically with the result that in two or three years time, the numbers graduating will be reduced to a trickle. It will be important that the industry addresses this issue to avoid such a trend continuing over an extended period which would pose a serious problem in the medium term. Finance, NAMA and distressed developments Much has been written and spoken about the financial crisis and the availability of finance to enterprise. All of this is equally important, if not more so, to the recovery of the construction industry. In this regard the NAMA announcement in 2012 of â‚Ź2 billion in project funding and the availability of a further â‚Ź2 billion in project finance over the next four years is a very important development.
Ancestry.com, Dublin, (courtesy of Lafferty).
UCC Mardyke Arena, Cork.
UCC Mardyke Arena, Cork.
Taibhdhearc na Gaillimhe, Galway, (courtesy of Joe Travers).
The Shard, London, ÂŠ Hayes Davidson & Nick Wood.
Industry Review | 11
Grangegorman Urban Quarter, Dublin, (photo courtesy of Moore Ruble Yudell Architects and Planners).
Business Intelligence To assist in understanding the wider economic context in which the construction industry sits and to picture some of the different perspectives, we have spoken to a number of industry leaders for their thoughts on some key questions. Over the next few pages we have summarised in question and answer format, interviews we conducted with a number of thought leaders on what they see as the challenges, solutions and likely trends in their sector in the short to medium term. 12 | Business Intelligence
“ I would say in 2013 the future of the Euro in its current guise is on a knife edge.” Jim Power
The Economy Q
What do think is likely to be the reality of when we can expect to see a marked improvement in the economy?
A I would characterise the economy as one that fell off the cliff in 2007/2008, hit the ground towards the end of 2010, and has been struggling along the bottom since then. So I think from a bank point of view, from a public finance point of view and from an economy point of view, a debt deal in 2013 would be a bit of a game changer.
Q As an open economy, we are very susceptible to external factors. What do you see as the prognosis for international financial stability and global market growth? A I think that at the moment the external environment is very difficult — the Eurozone is in recession, I think the United Kingdom will go back into recession and the United States of America is growing at about 2 percent. The International Monetary Fund (IMF) is now starting to admit that the fiscal austerity has been too severe and that we may see a more pro-growth approach coming to international policy making. I would say in 2013 the future of the Euro in its current guise is on a knife edge. The Construction Industry Q What do you see as a sustainable size for a construction industry ( percent of GNP) in an economy such as ours? How long will it take us to get there? Could the construction industry grow by 10 percent per annum and what is needed for this to happen? A I would say 8 - 10 percent of GDP (or 10-12 percent of GNP) is fair enough. Clearly in the current environment it is fanciful to talk about that sort of target given that the sector is still contracting. Going back to the question about what would give rise to a 10 percent growth in the construction output, an external debt deal would in my view.
To me, one of the big concerns about Ireland would be that we invest nothing in public capital programmes — we cannot allow that to happen because if we do, it will end up costing a great deal more to remedy it. Property Q What would be your opinion on the job done to date by NAMA in terms of obtaining the maximum return for the state? A My view on that would be NAMA is not a perfect model but it was never going to be possible to create a perfect model. There was no straight forward, pain free, silver bullet way out of this for Ireland. I think it would be in the national interest for NAMA to work with the good developers and work through projects and say we are giving this back to you, you develop it, we will take a stake. I have never believed that the key indicator of success or not for NAMA was how much profit it makes — I don’t think NAMA’s reason for being is about profit — it is about recovery and working through a massive property book and, if it has to do deals and take losses, so be it.
Business Intelligence | 13
“ The industry must be educated to see the danger of below cost tenders as evidenced by the collapse of so many businesses.” Michelle Fagan Q What is your assessment as to where along the economic cycle the construction industry is at this present time in terms of overall output. Is it still falling, levelling out or showing the beginnings of some recovery? A Construction output appears to be falling, so we are not bottoming out yet. However, architects are seeing a tentative increase in activity — which may indicate the start of an increase in demand. Q What would you see as the three biggest ills/problems facing the industry? A Besides uncertainty in the economy, the biggest specific problems that we still face in the industry are:
Procurement - There is a lot of work being done with the Government Depts, but in general it is just becoming more and more difficult, costly and unnecessarily complex. Planning - Procedures need to be steamlined, and contradictions and inconsistencies minimised, for example the divergence of Local Planning and An Bord Pleanala and the cost incurred. Payment - The bureaucracy around payments and the frequent and protracted delays are causing serious hardship for small firms which are the back bone of the economy. Q The construction industry’s reputation seems to have been tarnished following the boom/bust cycle. Do you think this is the case and, if so, is it just deserved? A The construction industry’s reputation has been damaged and not entirely fairly. The industry didn’t cause the boom/bust cycle, we certainly didn’t help it, but we weren’t the fundamental cause. The industry was part of the overspending and over borrowing like many other sectors. The biggest damage was the legacy of bad developments which we are faced with and the people who have to live in them, that is unforgiveable. That situation is a result primarily of a weak regulatory system and a planning system funded substantially through development contributions.
14 | Business Intelligence
In your view, how big a problem is Below Cost Tendering (in contracting and consultancy)? And, as an industry are there any steps that can be taken to address both the issue itself and the fall-out from it?
A Below Cost Tendering is a Health & Safety and a Consumer Protection issue. It has to be at a level that will cover the costs of providing the service adequately. A below cost tender is a high-risk strategy for both the client and for the architect/ consultant/builder. The industry must be educated to see the danger of below cost tenders as evidenced by the collapse of so many businesses and the subsequent cost to the client body and ultimately the end users. It is up to the representative bodies to provide guidance to both their members and to the contracting authorities on how to properly calculate costs and fees, etc. in order to protect consumers. As we are in a dysfunctional market, in an unprecedented economic crisis in this country, it would seem that proscribed fees and rates could be considered, in particular by public clients in order to minimise risk and stabilise the situation in the interest of the public purse.
“ In the next 12 months you are going to see a lot more sites sold as is.” Tom Kavanagh
From a receiver’s point of view, is there a difference in insolvency today and insolvency in the last recession?
A It is very different. The big difference is that property is 90 percent of it now. In the last recession, there would have been a certain amount of property companies in difficulty, but you would have had a mix of trading companies, old fashioned manufacturing companies, retail, hotels etc. — a much more broad mix. Now, the problem is that it is 90 percent property — so there is a whole industry of property professionals in the mix between the receiver and the bank and the ultimate realisation of the product. For the first time we are seeing auctioneering firms taking on some fixed charge receiverships, this is following a United Kingdom trend. Q What do you see as the biggest risks and exposures for those acting in a receiver capacity? A Risks have multiplied for receivers as property is so slow to sell, and in a lot of cases receivers are being instructed to hold the property in the medium term. −
− Also there are an amount of cases where there are legal complexities with title, planning, rights of way, etc. −
Borrower resistance is becoming more endemic — eg. denying vacant possession, obstructing the work of the receiver, refusing to co-operate with financial /tax information, etc.
Management companies are now a major headache, particularly in part built developments where the residents are unhappy and also in cases where the management company is controlled by the borrower.
From a construction industry perspective, is there more or less of an appetite out there to build out incomplete residential stock?
Q What is the effect of Banks selling debt books? A The guys buying the debt book, at say 30 percent of value, are aiming to get 30-40 percent uplift on that. They just want to cut deals and move on. So it really depends on wherever it is pitched at in terms of their target — our view is that they will be very focused on getting the maximum return but once this is achieved they will have no hang ups about debt forgiveness.
A Less and less — there is a marked reluctance from banks to fund build outs unless the units are 80 percent complete where we see a low spend and a cash turnaround in the relative short term. In the next 12 months you are going to see a lot more sites sold “as is.” So, smart developers are going to buy half built sites at very low prices and I think they will be the people who will build out.
The biggest worry we would have is health and safety issues on open sites where it is very difficult to manage insurance risk.
Industry Business Developments Intelligence | 15
122 Leadenhall, London.
Geographies 16 | Geographies
“Global knowledge and local presence” have never been more important.
In an era of increasing globalisation and ever mobile investors and employees, it is essential for all those operating in professional services to understand and to be able to operate in the different markets around the world. At the same time, it is equally important that we do not become remote from the key market in which our day-to-day service is provided. In this context “global knowledge and local presence” have never been more important. In the following section we take a look at the market in Ireland and Northern Ireland and then identify the key trends in the United Kingdom and internationally. Further information on all the international markets can be obtained from our website: www.aecom.com or by contacting email@example.com.
Island of Ireland Census 2011 results In recessionary times there is a tendency for people to retrench to urban centres. As a result, investment and the re-circulation of money, which almost inevitably is linked to the movement of people, tends to follow — albeit even in cities it is very limited as a result of the economic circumstances. Residential The recent launch of the national Residential Property Price Register was awaited with considerable expectation. Unfortunately, the format and level of detail provided on properties makes analysis difficult. Prior to May 2012, the Central Statistics Office (CSO) did not record any price
increase in the previous 55 months. There are signs of a leveling off with the CSO release at the end of November recording a net effect of no change, since May. Private non-residential In terms of the broader property market, activity has been generally muted with some limited activity in the office market, particularly in the Dublin region. The retail and industrial sectors continue to decline. In terms of potential impact for the construction sector, the limited private sector activity is likely to be primarily in the office fit-out, I.T. data storage and high-end manufacturing for FDI clients and indigenous exporters. Public Capital Programme As noted earlier in the review, there were no surprises in the Public Capital Programme announced in Budget 2013. With an overall 11 percent reduction, all sectors have been affected. However, the core areas of health and education have been less so, with health maintaining the 2012 budget and education reducing by 4 percent. Cork and Southern Region Whilst activity in this region has continued to be muted, a number of bodies are advancing with masterplanning which will put the region in a good position to develop projects on a phased basis. The Cork area currently has masterplanning exercises underway or advanced for the docks, Spike Island, Marina Park, the Science and Innovation Park, the IMERC Campus at Ringaskiddy and the north west of the City.
Geographies | 17
Galway Clinic, Galway.
The region is also maintaining a share of foreign direct investment with Eli Lilly, Apple and Stryker examples of companies that have made significant announcements in the region in 2012. The food sector is also performing well with Kerry Group, Dairygold, Greencore and Glanbia all planning growth.
Limerick and Mid-West Region Education and healthcare continue to provide the backbone of construction activity in the region. Limerick Institute of Technology has recently announced its â‚Ź200 million Campus 2030 Masterplan which will be a major boost to the city. Across the regions, schools are providing a constant, if limited, flow of work. North Tipperary Vocational Education Committee (VEC) has two significant secondary school projects well advanced in Borrisokane and Nenagh and Limerick VEC has recently appointed the design team for a 1,000 pupil school in Croom. The Health Service Executive (HSE) has recently completed the â‚Ź20 million critical care unit and has recently commenced a clinical science unit. The development of a unitary authority, including the city and county councils as well as the regeneration agencies will hopefully facilitate and accelerate the much needed regeneration of the city centre and regeneration areas. The changes in governance to Shannon Airport and Shannon Developments will also be keenly observed by the region.
18 | Geographies
Galway and Western Region In addition to the schools programme which is active in the region, National University of Ireland Galway continues to roll out its capital development programme with a number of key developments such as its Science Research Building and Arts, Humanities & Social Sciences Buildings, both due for completion in 2013. Other projects in the pipeline for 2013 are the proposed new Roscommon County Council Offices and, in the private sector, the foreign direct investment remains a driver of activity with HP, Mylan & Merit Medical in Galway and GSK in Sligo, examples of Industrial Development Authority (IDA) announcements in the last year in the region.
Northern Ireland The value of construction output for the first two quarters of 2012 was circa 2.7 percent higher than that of the same period in 2011. The trend has been away from new build work with a decline in output in this segment. However, the refurbishment and repair and maintenance segments, whilst still declining marginally, are holding up better as the economic circumstances mean property owners are more likely to refit and maintain their existing property than invest in new build.
Grangegorman Urban Quarter, Dublin (photo courtesy of Moore Ruble Yudell Architects and Planners)
The public sector does provide a pipeline of projects including the Desertcreat Training Centre, stadium programme, a series of health sector and third level education projects, and the expansion of the Belfast Waterfront Hall. Private-sector development is, as everywhere, restricted by funding.
United Kingdom Construction Output Construction output has fallen during 2012 and is forecast to fall further in 2013, as the 2012 set of new orders figures reveal the lowest level of new activity since 1980. Separately, recent official figures showed that the number of people employed in construction fell below two million for the first time since 2001. The outlook for 2013 is worse than for 2012 as the public sector cuts bite harder and the private sector struggles to gain traction. Both Experian and the Construction Products Association (CPA) expect new work output in 2013 to drop further: the CPA by 2.4 percent after a 9.5 percent fall in 2012; and Experian by 3.8 percent after a 10.9 percent fall in 2012. The private commercial sector, on which the industry must now depend, is not expected to show any sort of growth nationally until 2014 at the earliest. Private housing may show an upward turn in 2012 but growth is expected to be slow. The outlook for London is better than for the rest of the country and the north-south divide is likely to widen over the next couple of years.
There is also a large pipeline of London office projects, though many keep slipping in programme as funding remains difficult. Despite the drop in workload, some contractors have actually become more selective in the projects they are willing to bid for. This is often simply the necessary result of downsizing of estimating teams since the start of the recession. Tender Prices Tender prices dropped by 17 percent over an 18 month period from the first half of 2008 but then failed to recover any ground, slipped a little further and still bump along what is hoped to be the bottom. As the number of contractors and sub-contractors dwindles, there will eventually be less fierce competition and those that remain will price more sensibly, hardening prices. But the industry is still some way from that position.
Building costs Construction materials prices rose in the early months of the year but have since fallen back. Over the 12 months to August, the index shows an overall rise of just 0.1 percent. Building operatives secured a 1.5 percent wage increase in September 2011 that provided their first increase in pay since June 2008. Negotiations for a further pay deal in 2012 will see basic wage rates rise by 2 percent from 7 January 2013.
Whilst the outlook for prices is muted, tender prices in London may harden if more of the office and residential pipeline comes through, but prices are expected to move only in the range of -1 - +0.5 percent over the next 12 months. During the year after that, more schemes may get under way if finance becomes easier and prices may rise in the range of 1-2.5 percent. Outside London, however, conditions look set to remain tougher for longer. Prices over the next 12 months may move in the range of -1.5-0 percent.
Geographies | 19
North America The key characteristics of the current market are sluggishness, uncertainty and anxiety. The depth of the recession in the construction industry has created a very large negative output gap. Overall, private construction is growing modestly, while the public sector continues to decline. Some limited growth expected in Canada and Mexico.
Eu rema for th perce Civil e de al Europ to i Octob an
Global markets â€” overview In the short-term, there is expected to be a degree of stagnation in global construction spending with more sustained growth not expected until 2015 onwards. Going forward, the outlook for global construction is likely to be dictated by development status. Generally, the share of global construction spending continues to shift from developed country markets to developing country markets. In particular, the Asian market has increased from a share of 31 percent in 2005 to a forecast share of 46 percent by 2020. This shift is largely at the expense of decline in the Western Europe market which has shrunk from a share of 35 percent in 2005 to a forecast share of 24 percent in 2020 (Source: IHS Global Insight 2011). These are significant changes in the structure of the global construction market over a relatively short timeframe (i.e. 15 years) and when combined with relative growth levels (i.e. rapid spending growth in developing countries and stagnation in developed countries) suggests a new focus for global construction spending in the future.
South America Brazil, Argentina and Chile are expected to have recorded construction growth of over 5 percent in 2012. In Brazil, preparations for the 2014 FIFA World Cup and the 2016 Rio Olympics are well advanced and increases in construction spending are largely being led by infrastructure upgrades.
20 | Geographies
Africa Following the recent turmoil in much of North Africa, construction spending remains constrained. Reconstruction in Libya and infrastructure upgrades in Egypt are likely to act as a stimulus for the region through to 2015. In the rest of the region there is a mixed picture, Nigeria (+8 percent), with continuing declines in others particularly South Africa.
uropean construction output ained weak in 2012 with output he first eight months down 4.9 ent on the same period in 2011. engineering showed the biggest ecline. The outlook for 2013 is lso weak as sentiment in the pean construction industry fell its lowest level in two years in ber, as building activity dropped nd new order books declined.
Asian markets are expected to continue to exhibit robust construction spending. China is the largest market in the world. India is seeking increases in private funding solutions. Japan is expected to see sizable increases in construction spending through to 2015. In Southeast Asia, relatively strong construction spending growth is also expected in Indonesia and Vietnam .
Australasia Construction spending in Australia is expected to have grown by close to 5 percent in 2012, boosted by the global demand for natural resources. In New Zealand, our mid-year survey indicated that although current conditions are still fairly poor, there is evidence of a positive upswing in the industryâ€™s outlook for the coming year.
Middle East Saudi Arabia, the largest market in the region, is also expected to lead much of the growth in the region (+5 percent pa), through to 2015, followed by a return to growth in the U.A.E. (+4 percent pa). Preparation for the FIFA World Cup 2022 is expected to make construction spending growth in Qatar amongst the fastest in the world throughout the next decade. Geographies | 21
World Trade Centre, New York (Michael Mahesh, courtesy of Port Authority New York and New Jersey)
Reference 22 | Reference
Indicative building costs
â‚Ź per square metre
Healthcare Hospitals 1,650 Primary care centres 1,450 Nursing homes 1,450
2,600 1,850 2,050
Education Primary schools 950 1,150 Secondary schools 950 1,150 Third level 1,400 2,600 Commercial Offices - Shell & core (landlord fit-out) 1,350 1,950 - Owner occupied 1,550 2,500 Offices fit-out - Basic 310 460 - Medium 460 720 - High 720 1,100 - Top 1,100 1,850 Shopping centres - Shell & core 625 1,050 - Mall 1,350 2,500 - Fit-out 880 1,450 Residential Apartments 1,250 1,650 Apartments (12-16 storey) 1,550 2,000 Social housing 880 1,300 Sheltered housing 980 1,500 Housing (suburban housing) 820 1,050 Industrial Warehouse/factory shell 575 675 Factory (basic) 675 925 High spec factory - Shell & core 875 1,250 - Fit-out 675 1,125 Leisure Cinema 1,550 2,150 Hotels - 3/4 star 1,350 2,000 - 5 star 2,000 3,100 Swimming pool - (60% wet & 40% dry) 1,650 2,150 Car parks Surface (includes drainage & lighting) 100 Multi-storey 360 Single basement 520 Double basement 720
220 620 820 1,130
Public buildings Fire station Prison Courthouse
1,700 2,600 2,100
1,400 1,900 1,700
The figures quoted are for mid-range buildings in the Dublin area at January 2013 prices. Due to the volatile nature of the current market and the low tenders being received, it is possible that tenders will be received outside these ranges. Professional advice should be sought for specific projects. The Davis Langdon indicative building costs should NOT be used for fire insurance valuations or for residual valuations for funding purposes. If you require a valuation for fire insurance or more specific information, please contact Davis Langdon. When considering building costs, you should check if costs include: - Value added tax - Professional fees - Inflation - Fit-out - Landlord fit-out/landlord credits - Furniture - Planning levies, fees & charges - Demolition - Abnormal ground conditions
Reference | 23
Renault, Dublin (photo courtesy of Lafferty).
24 | Reference
Development budget checklist
It is critical in establishing a development budget to adopt a methodical approach and to ensure those conducting the exercise have the experience and database of relevant information to establish a realistic budget. A sample of the principal budget headings are listed in the table below.
Summary of development budget checklist Ref Description
1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.2 3.3 3.4 3.5 3.6
Land purchase Site cost Stamp duty Legal costs Agentâ€™s fees Finance costs Arrangement fees Other Stat. fees & contributions Planning fees Fire certification Planning contributions Infrastructure Infrastructure apportionment Works to adjacent properties Land remediation Costs to date Other Construction costs Construction cost estimate Inflation/deflation Costs to date Phasing costs Owner insurances Other
4.0 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18 4.19 4.20 4.21 4.22 4.23 4.24
Professional fees Project manager Concept architect Masterplanning Architect Quantity surveyor Structural engineer Civil engineer Services engineer Health & safety consultant Planning consultant Fire consultant Traffic consultant Facade Consultant Landscape architect Employers representative Acoustic consultant Environmental engineer Archaeologist Resident engineer Site survey Structural survey Photographic survey Contamination survey Other
5.0 Selling & letting costs 5.1 Agents 5.2 Legalâ€™s 5.3 Marketing costs 5.4 Mock-Up units 5.5 Model 5.6 Photographic 5.7 Site boards 5.8 Pre-Opening costs 5.9 Tenant incentives 5.10 Tenant enhancements 5.11 Other 6.0 Financing 6.1 Equity 6.2 Senior debt 6.3 Mezzanine debt 6.4 Arrangement fees 6.5 Due diligence 6.6 Other 7.0 Miscellaneous 7.1 Developers management fee 7.2 Tax Advice/accounting 7.3 Adjoining neighbours 7.4 Contingency 7.5 Other
Reference | 25
CASE STUDY: Office market options The commercial market is one of the few sectors where the construction industry is experiencing some real activity. There are a number of factors contributing to this and these inevitably have to do with supply and demand. As we have all seen and heard, IDA Ireland is doing well in attracting Foreign Direct Investment (FDI) in the face of stiff competition from other countries. These business wins, whilst across a range of sectors, have generated good demand for office accommodation for business services enterprises establishing here. Primarily in Dublin, this demand is typically for small unit sizes between 5,000 -10,000 square feet. Added to these multiple small let requirements there are also a number of high-profile organisations in the market for large lets. On the supply side, vacancy rates are dropping in Dublin generally and are in mid-teen percentages in Dublin 2. This combined with a shortage of large prime office accommodation in the city centre, means that there is the potential for continued activity in the sector. Whether that activity is likely to be new build or refurbishment will be largely dependent on the demand. In the short term, it is likely that demand will continue to be for short-term flexible leases, thus refurbishment of existing space will probably represent the best balance of risk and return for developers plus a quicker delivery of space to the market and income generation. However, in the mediumterm, and possibly sooner for potential owner occupiers, there is likely to be more favourable condition’s to support new build as a real option. Below we have summarised the principle refurbishment options for owners or developers, with indicative benchmark costs per square feet based on a medium size office refurbishment.
Office refurbishment options Repair Minor Refurb
Re-Model Medium Refurb
Renew Major Refurb
Focused on common areas and involves essential repairs only. Often done during occupation.
Full upgrade of Mechanical & Electircal and finishes; no major structural changes. If occupied some decanting and phasing.
Significant structural alterations/facades/roof finishes. Renewal of fittings, finishes and Mechanical & Electircal .
Extension of Economic Life
Approx. 5 years
Approx. 15 years
Approx 15-20 years
Benchmark cost\sq. ft. of Gross Internal Area (GIA)
€30 - €75/sq. ft of GIA
€75 - €125/sq. ft of GIA
€125 - €175/sq. ft of GIA
New Build Office Cost Model In terms of new build, we have set out below indicative building costs and a summary of the key cost drivers. In addition, we have included a cost model elemental breakdown for a sample
office development in Dublin based on Category A fit-out and a further breakdown of the extra-over cost for a mid-range tenant fit-out.
Indicative Building Cost Ranges New Build Offices
€/ sq ft excl VAT
Tenant Office Fit-Out
€ /sq ft excl VAT
Landlord with Category A* Fit-out Owner Occupier
Basic Medium High Top
30-45 45-70 70-100 100-175
See exclusions at end of cost model. * Category A fit-out normally includes raised floor, carpet tile and suspended tile ceiling to open plan office with basic M&E services, finishes to external walls and core areas, including toilets. Where the fit-out is carried out by tenant the landlord may offer developer allowances in lieu of completing Cat. A Fit-Out.
Key Cost Drivers Net to gross ratio - level of circulation
Wall to floor ratio; floor to floor height
Provision for future flexibility - structural grid
Building location - green field or city centre
Working restrictions - access, hours, noise, dust
Specification of envelope & finishes
Services requirements - Air conditioning/ Mechanical ventilation, etc.
Amount of cellularisation/open plan
Cost Model: New Build Office with Category A* Fit-out The project consists of circa .75,000 square feet of mid-range quality office accommodation in Dublin suburbs close to M50, including open plan offices, cellular office accommodation for managers, meeting rooms, break-out spaces, canteen/kitchen, comms room. The costs are split into: Build cost for “grey box” shell & core with landlord Category A* fit-out (or developer allowances) Extra-over for mid-range tenant fit-out Office construction and fit-out costs can vary substantially depending on location and grade, in particular specification of envelope, services and finishes will strongly influence outturn costs. Professional advice should be sought in relation to construction costs for specific project proposals.
26 | Reference
New Build Office with Category A* Fit-Out (Cost Model GFA: 75,000 Square feet) Element
Substructures Pad and strip foundations
Internal wall finishes 225,000 3.00 2.0% Plaster to blockwork, and tiling to toilets in core areas
Floor finishes Allowance for floor finishes
External walls Recon Stone external façade
Roof In-situ concrete roof
Ceiling finishes 393,750 Perforated tile suspended ceiling allowance
Roof finishes Asphalt roof covering
Painting and decorating 56,250 0.75 Eggshell paint to walls and plasterboard ceilings
Drainage and refuse disposal 56,250 uPVC rainwater installation, soils and wastes
Mechanical installation 1,293,750 Air conditioning, hot and cold water supply
Floors 787,500 Reinforced In-situ concrete flat slab
Stairs Precast concrete stairs
Internal walls 450,000 Blockwork and concrete walls to core areas
Frame Reinforced concrete frame
Windows, glazing and doors 1,125,000 15.00 10.0% Powder Coated Aluminium Curtain Walling and Windows
Transport installation Eight-person passenger lifts
Internal doors and screens 168,750 2.25 Beech veneered solid core doors to core areas
Electrical installation Power, light, data, CCTV
Balustrades and handrails 7 8,750 1.05 Stainless steel balustrades with glass infill panels
Sanitary fittings 225,000 3.00 WC, WHB, Urinals, vanity units, cubicle system
Roof completions 112,500 1.50 1.0% Roof lights, fall arrest system & screen enclosure to plant
Fittings and furniture Reception and core areas
External wall finishes 168,750 Timber/stone feature finish in selected areas
Preliminaries and insurance 1,350,000 18.00 12.0% Site supervision, staff, plant, equipment, overheads
Total Building Cost
Extra-Over for Mid-Range Tenant Fit-Out Element
Partitions and doors 431,250 5.75 11.5% System partitions and hardwood veneered doors
Mechanical Installation 637,5000 Fit-out to kitchen/canteen/boardrooms etc
Floors Raised Access Floors
Electrical installation 618,750 8.26 16.5% I.T., A.V. to boardrooms, cellularisation, modifications, etc.
Wall finishes 176,250 2.35 4.7% Painting and timber panelling to boardrooms and reception
Fittings and furniture 386,250 5.15 10.3% Reception desks, built-in furniture, shelving, coffee docks
Floor finishes 315,000 4.20 8.4% Carpets to offices,Tiling to canteen, stone floor to entrance
Alterations Alterations to shell and core
Ceiling finishes 236,250 3.15 6.3% Suspended tile and plasterboard ceilings, bulkheads, features
Preliminaries and insurance
Total Fit-out Cost Total Shell and Core plus Tenant Fit-out Cost (excl VAT) Exclusions External Works Enabling/Demolition Works Client Direct Costs
Assumptions Basement Carparks Professional Fees VAT
Constructed in one phase (Fit-Out overlapping with end of shell and core) Competitively tendered Contractor to have full access to the site
Reference | 27
CASE STUDY: Project workout This case study is based on a large-scale insolvency situation involving a mixture of completed income producing assets and incomplete housing units. Project background Davis Langdon was commissioned in late 2010 to carry out an independent business plan review on the property assets of a development company that was experiencing difficulties. The review covered an overview of the business, individual project analysis and review of Hold/Develop/Dispose options, taking account of cost to complete, cashflow and programme implications. Following a number of months of negotiation and forensic examination, the lender made the decision to appoint a receiver over the assets of the developerâ€™s company. At the time of the receivership, there was an excess of 1,000 acres of development land, over 200 incomplete housing units spread across a number of sites and a number of trading commercial units. Davis Langdon was appointed as asset manager reporting to the bank and receiver and were responsible for delivering the revised business plan. The financial model produced as part of the business plan, demonstrated that it made financial sense to complete
Business Plan Review Exit Strategy Insolvency Hold? Develop? Dispose? Individual plans for assets/sites Action 28 | Reference
the standing housing stock and bring to market. However, the full new build elements on the next phase of the developments were not viable. There were a number of issues that arose and had to be managed during the project workout period, including; -
Ongoing theft, despite 24-hour security Dereliction order by local authority Serious fire issues relating to completed apartment block Picketing of sales office by the local residents Cancellation of structural guarantee Discovery of the deleterious materials Reluctance to accept receiver-type sales contracts Significant additional works required by local authority upon receipt of extension to existing planning permission Complexities surrounding recovery of infrastructure bonds Environmental issues relating to waste treatment facilities Additional costs associated with site resolution plans
Over the 12 months after the appointment of the receiver, approximately 70 percent of the incomplete housing stock was finished and sold. The remaining stock was sold â€œas seenâ€? with the adjoining development sites. Whilst this project had a positive outcome, the importance of the initial due diligence, investigative surveys and management team assessment cannot be underestimated. The diagram shows some of the areas that were investigated as part of the business plan assessment on this project and should be seen as a minimum on any such workout project.
Physical development Addressing Health & Safety measures, defective works, security, legal boundaries, etc.
Planning / local authorities Managing statutory compliance issues; dereliction notices; contributions, etc.
Professional team Dealing with incumbent team, compliance documentation, debts warranties, etc.
Financial model Setting out roadmap to complete for workout with scenario modelling and Net Present Value (NPV) for portfolio assets.
nt reme u c o Pr
Procurement Maximise value for money and speed to market with managed risk transfer
Validation of budget Review of cost-tocomplete and all costs under development budget.
Sales & revenue Appoint agents; establish programme and strategy for disposals.
ent m tea
Pro fes s
pm elo Dev
Sales & revenue
Funding Establishing self funding elements and cashflow requirements/sources for workout.
Legals Arranging due diligence, disposals, etc. and managing litigation, title and warranty issues.
Development team Which staff to retain? Assessing knowledge base and requirements going forward. Reference | 29
CASE STUDY: Public procurement Public procurement timetables for open and restricted procedures —above EU thresholds Open***
(With PIN Notice)
(With No PIN Notice)
Restricted † ‡
(With PIN Notice)
Restricted † ‡ (No PIN Notice)
Restricted † † (Accelerated)
Days -52 to 185 7
Must be published a minimum of 52 days prior to Contract Notice to impact on time periods.
Minimum requirement under EU Directive/Irish Law (subject to allowable reductions noted).
Where notice is drawn up and transmitted by electronic means as per directive, the time limit for receipt of tender may be shortened by seven days.
Where notice is drawn up and transmitted by electronic means as per Directive, the time limit for receipt of expressions of interest may be shortened by seven days.
Where the contracting authority offers unrestricted and full access by electronic means to documents as per Directive the time limit for receipt of tenders may be reduced by five days.
Where Notice is drawn up and transmitted by electronic means as per Directive, the time limit for receipt of Expressions of Interest may be shortened by five days.
Must be published within 48 days of contract award. For further information on public procurement contact firstname.lastname@example.org
30 | Reference
Publish PIN Notice*
Requests to Participate (EU Directive Minimum**)
Publish Contract Notice
Assessment (Contracting Authority Discretion)
Letter of Intent/ Unsuccessful
Invitation To Tender (EU Directive Minimum**)
Letter of Acceptance
Standstill Period (EU Directive Minimum**)
Publish Contract Award Notice † † †
Duration (Number in bar indicates duration in days) Reference | 31
Ancestry.com, Dublin (courtesy of Lafferty).
News, people and services 32 32 || Davis Davis Langdon Langdon People
Davis Langdon News
Launch of: 150 Years of Quantity Surveying: The Annals of Davis Langdon PKS 1860–2010 We recently had the book launch of 150 Years of Quantity Surveying: The Annals of Davis Langdon PKS 1860 – 2010 at the Irish Architectural Archive in Dublin with a great turnout of past and present clients, colleagues and staff. Michael Webb, the former managing partner of Davis Langdon PKS, and author of the book, gave a speech and talked about how the ethos of the very early Patterson & Kempster was kept alive during their transition to Patterson Kempster & Shortall (PKS) days and is very much alive in the current Davis Langdon organisation.
Paul Mitchell, Jim Power, Michelle Fagan and John O’Regan enjoying a scintillating read at our book launch last year.
Charity at Work In a male dominated industry, we are conscious of doing what we can to promote men’s health and what better way than by having some fun along the way. Congratulations to all the guys who took part in this year’s Movember and for raising money for Action Prostate Cancer, a very worthy cause.
Promotion We are delighted to announce that Anthony McDermott was made a director during 2012. Anthony, who is based in the Dublin office, has worked on a wide range of projects since joining Davis Langdon in 2008. In particular, Anthony has lead our service delivery on landmark projects such as the Bord Gais Energy Theatre, Grand Canal, Grangegorman Development and Masterplanning for ESB.
Davis Langdon | 33
Davis Langdon: Key contacts Dublin
Paul Mitchell Director, Head of Office, Ireland email@example.com + 353 1 4320460
John O’Regan Director john.o’firstname.lastname@example.org
Anthony McDermott Director email@example.com + 353 1 4320481 Gregory Flynn Regional Director firstname.lastname@example.org + 353 1 4320498
Tomás Kelly Regional Director email@example.com + 353 91 530199
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John Lombard Associate email@example.com + 353 1 4320413 Declan Hegarty Associate firstname.lastname@example.org + 353 1 4320465
Eoin Dunphy Associate Eoin.email@example.com + 353 1 4320404
Belfast Andrew Cross Senior Surveyor firstname.lastname@example.org + 44 28 9060 7200
34 | Davis Langdon
Limerick Andrew Thompson Associate email@example.com + 353 61 318870
Cathal Barry Regional Director firstname.lastname@example.org + 353 61 318870
Cork Stuart Griffin Associate email@example.com + 353 21 436 5006
Glenn Hanna Senior Surveyor firstname.lastname@example.org + 353 21 436 5006
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Davis Langdon | 35
AECOMâ€™s global capabilities: Architecture Building Engineering Construction Services Design + Planning Economics Energy Environment Government Mining Oil + Gas Program, Cost, Consultancy Program Management Transportation Water With approximately 45,000 employees around the world, AECOM serves clients in more than 140 countries.
36 | Davis Langdon
Key offices in Ireland
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Davis Langdon, an AECOM Company Dublin Office 24 Lower Hatch Street Dublin 2 T: 353 1 676 3671 F: 353 1 676 3672 E: email@example.com
More information on AECOM and its services can be found at www.aecom.com.
Davis Langdon, an AECOM Company Limerick Office Mezzanine Suite Riverpoint Lower Mallow Street Limerick T: 353 61 318 870 F: 353 61 318 871 E: firstname.lastname@example.org
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