With tough lending conditions in the commercial property sector since the onset of the credit crunch, and, despite the news this week that the UK is officially out of recession, with no clear end yet in sight, it is not surprising that owners, occupiers and funders have shifted their focus from new build projects to the refurbishment of existing space to deliver enhanced asset values and better working environments or to rationalise or downsize their estate.
Aside from funding considerations, there are many perceived advantages to a refurbishment. Not least are those identified by the British Council for Offices in its November 2009 report "Can do Refurbishment", which include:
- increased investment value;
- possible programme savings;
- taking advantage of capital allowances;
- possible advantages of existing sites compared with new builds in terms of planning matters; and
- better environments for end users such as workers, customers or clients
What are the key issues and considerations for developers undertaking a refurbishment project?
It is always worth making sure that the proposed project has a clear and demonstrable purpose. This will in turn dictate the critical success factors and how they are delivered.
- Are the works part of a rolling programme of refurbishment to add value to a property portfolio? In this case a developer may wish to consider some of the benefits of a framework arrangement to achieve efficiencies and cost savings.
- Is a key driver to reduce your carbon footprint? In any case, environmental and sustainability considerations and regulations are likely to impact on refurbishment projects, and indeed for some of the reasons noted below, are already driving refurbishment strategies.
- If the main focus is marketability of the end "product", what needs to be done to attract tenants, purchasers and funders? Quality space, environmental performance and flexibility will be some of the key factors.
- In an owner-occupier situation, the main considerations will be enhancing the existing space to increase productivity and support future growth of the enterprise. However, the way in which your business works (or perhaps aspires to work) will have to be factored in (for example the feasibility of individual room control in cellular offices versus mixed cellular and open plan spaces – some approaches will design around current business practices while others will use a refurbishment as a means to drive innovation by changing working habits).
In any of the above arrangements quality, budget, time constraints and the desired level of risk transfer will also dictate the developer's strategy, with approaches ranging from a “light touch” (e.g. improving the general appearance of the building, servicing plant and addressing backlog maintenance) through to comprehensive refurbishment taking a building back to its frame and “starting again”.
Selecting a team
Selecting contractors and consultants who have the experience and capacity to understand and deliver on your critical success factors will be key. A mini competition may deliver not just competitive fees (especially in the current market) but also innovative solutions where a more distinctive service is desired. For example, this might involve inventive solutions for incorporating existing services – integrating new elements with old, and identifying what needs upgraded and what needs replaced.
Many developers are considering framework arrangements with key consultants, contractors and suppliers where work is being done on a regular basis. A framework allows developers to quickly "call off" services often with pre-agreed fees or fee mechanisms, cost savings for repeat business and an agreed contractual risk profile.
It should be borne in mind that public bodies will be bound by the public procurement regulations in advertising, placing and operating framework agreements, although where programme is the principal consideration, public sector bodies can utilise the Office of Government Commerce (OGC) pre-existing framework for project management and design team services.
Standard form frameworks have been published by both the JCT and SBCC in recent years which provide a good starting point for consideration. However, the agreements are fairly high level and aspirational with some clients preferring greater certainty on, for example, pricing elements, key performance indicators and continuous improvement.
Regular readers will have been kept abreast of recent developments in the law relating to environmental impact and sustainability and these will drive both the need for refurbishment and delivery. For example:
- In relation to energy performance certificates (EPCs) clients are likely to want to secure as good a rating as possible whether that be to establish their “green credentials” or to provide an attractive product to the market.
- Similarly if a BREEAM rating is desirable or considered necessary for marketing the property then the available points and allocations might dictate much of the client’s strategy. The key differences between EPCs and BREEAM are that EPCs relate to carbon dioxide emissions whereas BREEAM points are awarded against a wider set of criteria; and BREEAM is voluntary whereas EPCs are largely mandatory. In many cases clients will want both.
- One of our recent articles highlighted the provisions of the Climate Change (Scotland) Act 2009 which requires the Scottish Ministers to produce regulations providing for the assessment of (i) the energy performance of non-domestic buildings and (ii) the emission of greenhouse gases produced by or otherwise associated with such buildings or with activities carried out in such buildings. Owners will then be required to take steps, identified by the assessment, to (i) improve the energy performance of the buildings and (ii) reduce the emissions. There is a lot of detail to follow in relation to these regulations but the impact on refurbishment strategy is plain to see.
- Inspections of certain air conditioning systems are currently being phased-in in Scotland. Whilst improvements recommended in the reports are not mandatory, they will indicate how systems can be improved and cost savings achieved.
Some standard form contracts have started to address sustainability issues, such as the JCT design and build contract which encourages contractors to suggest economically viable amendments to the works to improve environmental performance, either in relation to the construction process or of the completed development. Developers may wish to consider such clauses in choosing their contracts or indeed “beefing up” these provisions should they be of critical importance.
- Interaction of other legal duties: For instance if the building is known to contain asbestos then the duty holder under the Control of Asbestos Regulations may, for a variety of reasons such as programme or cost, choose not to disturb the material but rather manage the risk. This will impact on the extent to which work is possible around or connected to these locations.
- Staff impact and logistics: The scope of the project may be dictated where programme is critical (e.g. relocation of staff from other locations or phased refurbishment while staff are in the building and “move around” the works).
- Health and safety issues: The HSE have consistently targeted refurbishment projects – in 2007 over half of the workers who died on construction sites worked in refurbishment - due to increased risks such as falling from height and electrocution. It is critical to ensure the appointment of a competent and adequately resourced team. The party procuring the works has to provide pre-construction information to the team under the CDM Regulations. Whilst it can take advice from the team the duty does belong to the party procuring the works and the quality and content of information about the existing building does need to be carefully considered including surveys and investigations that may need to be carried out. This may also help to “de-risk” the main project particularly where reliance on the output can be passed over to the contractor.
Refurbishment may be an attractive option in the current market and can produce real benefits but remember to identify your critical success factors at the outset, take care to appoint a professional team who are right for the job, and be aware of your environmental and health and safety obligations and commitments.
You can view The British Council for Offices report "Can do Refurbishment" at The British Council for Offices