Background – How long have you been at Capco and what was your previous track record?
I qualified (RICS) whilst working for Montagu Evans, prior to spending 12 years at King Sturge, which was a larger multi-disciplinary consultancy, best known for their investment and agency work. I was with them from 1999 – 2011 prior to the business merging with Jones Lang LaSalle, another big multi-disciplinary consultancy. That wasn’t for me so ended up working for a smaller practice before setting up on my own, offering Development and Project Management services. At the time there was a project I was working on close to my heart down in Woking, which was the new HQ building for WWF. I had helped them find the site and saw it through to completion and handover. In the meantime, one of my other clients was Capco where I was helping out in the early stages of the Lillie Square project. After 12 months I ended up joining full time in 2012, taking on the responsibility for the design and delivery aspects of the project. And I’m still here!
Could you give us a brief overview on Capco and the business they are?
Capital & Counties Properties PLC (Capco) is one of the largest listed property companies in central London. Capco’s key assets are the Covent Garden and Earls Court estates. We create and grow value through a combination of asset management, strategic investment and selective development. The company is listed on the London Stock Exchange and the Johannesburg Stock Exchange.
The business is going through an interesting period, considering plans for a possible demerger of the two main assets at Covent Garden and Earls Court. The two estates have very different profiles, Covent Garden being the established asset with a retail led focus on creative asset management and investment. Earls Court has planning permission for a masterplan of c.70 acres of redevelopment with joint ventures established with London Borough of Hammersmith & Fulham and Transport for London. As we all know the residential market is really tough currently and all options are being considered, including the opportunities for the introduction of third party capital.
My main focus is on Earls Court and specifically the Lillie Square project , which is a 50/50 JV between Capco and members of the Kwok family in Hong Kong. The first phase of the project is now complete and handed over and the second phase is on site with completion due in the spring of 2020.
A few views on the construction industry currently and some of the key events ahead, Brexit etc?
Obviously Brexit is right on top of us and the impact since the referendum in 2016 is unquestionable. On Phase 2 at Lillie Square, where our cost plan was drawn up in early 2016 the currency change alone led to an increase in our cost base was material. The exposure to this exchange risk from Europe, particularly on a residential job that has a significant amount of bathroom pods (that at the time were being sourced in Italy) there was c.£5m added to our appraisal over this period. For us, we ended up being able to mitigate that through other cost saving measures but not all jobs are able to do that, and other jobs were made unviable as a direct result of that. Irrespective of the finer points of Brexit, the FOREX change was massive alone, let alone all the other issues such as impact on labour, tariffs, compliance etc.
Then in terms of other things, in no particular order;
- US foreign policy and the ongoing ‘theatre’ around the US relationship with North Korea and Russia. There is no doubt that dynamic for the UK in terms of what that trade deal looks like with the US is massive, and I think that has probably been missed by some people. There is a lot of focus on Brexit, but that trade with the US is more significant in my opinion.
- The US Interest Rates are rising, which usually means the UK will follow suit and I know we are hanging in there but I suspect interest rates will start to creep and it will be interesting to see how that impacts on the market here in the UK, a dynamic going into the next 12 months.
- Closer to home, not as a direct result of Brexit but certainly linked to the conversation around Brexit, is the attitude of EU businesses to the UK in terms of rising materials costs. From a supply chain perspective where you at Colorminium operate, you have got to decide how much of that cost you can deal with yourselves and where it can be passed on up the chain. We have certainly been exposed to this.
- Migrant workforce is a big one. Use a bricklayer as an example, who is working in the UK to earn money to support his family back in Poland. That £1 that he is earning is now 13% less than when he decided to make that move pre 2016 so it’s not as attractive, and therefore why wouldn’t I work in Germany and get more bang for my buck and closer to home? The challenge is how do we retain the skills the industry desperately needs and help raise the skill base. Push as much as possible to modular offsite, brickwork, precast and remove a huge threat of labour? But how to do that in a ‘just in time’ world where our manufacturing base is reduced, which it has been significantly over the last 15 years. I saw recently on your LinkedIn the work you are doing on this. I am a massive supporter of pre-fab and offsite modular construction. I think we’ve made the right call going unitised on the next phase at Lillie Square not just for the façade in isolation (and certainly not about whether site build is better than unitising), it’s everything that goes with it (including mindset) and the ability ultimately for the main contractor to manage that well.
What’s the points of stability in the market for a developer with so much uncertainty?
At the moment there isn’t a huge amount of stability. From Capco’s perspective we are building phase 2 at Lillie Square because we have made historic sales commitments, we have sold 80% so we have to build it. Due to the current uncertainty there are a lot of investors not keen to deploy capital until the current volatility in the finance markets stabilises. In terms of lending there are more and more hurdles being put up on the availability of finance so development will follow that, and if there isn’t any certainty less developers will take a view.
As a developer, how important is it to you to have a relationship with the key subcontract trades on your projects?
One word answer…very! It’s our business, it’s our relationships, it’s our product. If you want to get to the right answer you have got to engage B2B with the key trades and we have made a point of doing that and strongly believe that is key to the overall success of the project, for everyone – an alignment of interests.
It is always a breath of fresh air to see and feel first hand the supply chain responding with ideas and that is often where we see real added value. I think the tier 2’s and 3’s are crying out to have more contact and visibility directly with the client bodies where you do have a clear alignment of business interests and we want to see everyone in the supply chain succeed. What we are also trying to get to is the position of understanding the prime cost for our product. From there you are in the right position to discuss all other aspects including programme and sequencing.
When you talk about the main contractor, yes, I do think the model particularly for residential is under pressure and I think that sometimes it’s hard to align business interests with main contractor’s in such a dynamic and fast moving, fast changing industry. Our approach is to sit down and making sure that it is clear what we are trying to achieve and make sure that fits the supply chain offer. In order to do this there should be an open conversation on pipeline, availability of teams, risk profile etc.
Quite often the project will only be as successful as its weakest link, so if the main contractor is failing everything else then locks up behind it. And it’s the same for all key trades, some more extreme than others but all key trades have the ability to significantly impact on programme. In a perfect world we would pre agree the supply chain, we would have an alignment of business interests and we had all looked each other in the eye across the table and signed up.
Is the façade a critical piece of a construction project for a developer?
There are three packages that if we don’t get absolutely right then you are screwed in simple terms! Façades, bathroom pods, and MEP – there are obviously other critical packages such as dry lining and joinery but, for me, if you have those three right that’s the spine of your job. Whilst at risk of making myself unpopular with the design community, I would add that facades is an area where our expertise as an industry on the design side is a work-in-progress, particularly in the residential sector, and hence increases the focus on it.
From an external perspective, if you looked at the façade industry, if you looked at Colorminium, what would you say your perception would be of the biggest challenges we face? If you were invited to invest in a façade business, what would make you nervous?
Track record is the first thing that would make me nervous, and I don’t know whether it’s to do with aluminium but it seems that anyone that touches it is at risk! After I give my answer, I will spin it around to you to say ‘why is your market place so volatile’? Clearly cash flow is a massive issue in terms of outlay on materials, and there are clearly issues that we have touched on around currency fluctuations, differing compliance/design criteria, availability of labour/materials as well as quality management. One particular point in my mind is the way the far eastern companies have tried to establish themselves both in the US and EU and the issues that has created in relation to quality risk. For me there’s two things there – first is quality management – but there’s also big business driving the façade industry as it is quite a commoditised industry. To me I see that volatility as one of the highest in our supply chain risk. But clearly the façade industry is more volatile than some of the other packages.
Most people, most developers who will be very commercially driven, understand that generally in life you pay for what you get but want to do it openly and they want to make sure the money that they pay that is attributable to performance goes to the right people and the people that are fundamentally putting the skin in the game and taking the risk. That’s what most client teams will want. It’s not they don’t want to pay it, they want to pay it in the right way, to the right people.”
What are your views on early involvement and single sourcing?
Early involvement is clearly a no brainer, but single sourcing causes an issue for me because we have investors to demonstrate value to. It’s not to say value means lowest cost but it’s naive to think it is not one of the primary considerations.
That said it is ‘horses for courses’ and there will be times when we can satisfy ourselves that there are circumstances to do this, with a market tested commercial position and a solid rationale behind the other key issues such as track record, team, technical approach, programme etc.