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Clients switch to refurb over new-build in 'overheated' London market

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Clients are turning to refurbishment projects over new builds in London as the offices market continues to overheat, according to Deloitte

More than 70 per cent of the capital’s office starts were refurbishments rather than new builds, its latest London Crane Survey has shown.

Deloitte director of construction advisory Mike Cracknell said refurbishment was becoming increasingly attractive to developers, according to the AJ’s sister title Construction News.

‘The Derwents of this world have been doing this for a long time, and I think more developers are recognising that it’s a hard market to work in if you don’t know what you’re getting into,’ he said.

’Quick turnaround of buildings is good from a development point of view, and the quality of the stock that is now available increasingly does make it an attractive area.’

Total office construction was at an eight-year high in the capital, with 14.8 million sq ft under development in Q3 2016.

This was 4 per cent higher than the previous Q1 survey, and was 41 per cent above the 10-year average of 9.7 million sq ft.

But new activity in the capital dropped, with just 40 office schemes starting on site during the past six months, down from the record high of 51 recorded in Q1.

The new schemes totalled 2.8 million sq ft – 42 per cent lower than the 4.8 million sq ft recorded in the previous period. Of these, 70 per cent were refurb projects.

Deloitte real estate head of insight Will Matthews said current office stock was now easier to refurbish.

‘When we started the Crane Survey 20 years ago, a lot of that stock was from the 1970s and would not have lent itself to the kind of refurbishments we’re seeing today,’ he said.

‘The buildings we’re looking at today have the kind of structures that allow you to work with raised floors and install the right kind of equipment, in a way that older buildings didn’t have.’

Contractor availability still hampers the sector, however. Cracknell said the market was still ‘overheating’ after reaching a peak in the previous survey.

‘We’re only now starting to come off that peak,’ he said.

The survey suggested that office delivery will peak in 2019.

Deloitte’s findings also showed that 41 per cent of space under construction is already let, with the financial sector accounting for the largest proportion.

The City has the highest level of construction on record, with 8.8 million sq ft of space currently being built, ahead of the previous high of 8.2 million sq ft recorded in Q1 this year.

Deloitte said a number of major office jobs have been pushed back, with completion dates slipping by an average of one quarter.

However, Deloitte insight manager Shaun Dawson said that, while the volume of jobs slipping back was noticeable, it was not unusual.

He added that, even though some schemes had been delayed, most of them will still be finished by early 2017.

The survey also found that the fall in the value of the pound since the EU referendum will push costs up 3 per cent, with the typical project seeing 30 per cent of its materials sourced from overseas.

It also revealed that services, external works and internal finishing firms expected to see the largest increase in work in 2017, while demolition firms, which reported a 12 per cent increase in activity over the past six months, would see the largest fall in work next year.

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