WHY DO PROJECTS COST MORE?
There’s a quote from an American radio host who specialises in personal finance: “A budget is telling your money where to go instead of wondering where it went.” The experience of “wondering where it went” is probably familiar to anyone who has tackled a significant property project. It’s expensive and even more so now, as construction costs have sky-rocketed since COVID-19 by nearly 40%. The retrospective bewilderment after a project has been completed stems from the all-too-frequent gap between what a project is forecast to cost and what it actually costs. Why is that? We believe it’s because few people will admit—or be told—how expensive it will all cost from the start of the project. As a result, many property owners embark on these sometimes multi-million-pound ventures without a full picture at their fingertips.
Now, there’s another pressure on the market: the prevailing wind of our government, which could encourage the residential property industry to further distance themselves from giving accurate costs for fear of putting clients off. The most damaging force on the top end of the market—and it’s coming on top of an existing near-penal level of Stamp Duty–has been the decision to charge Inheritance Tax to non-doms on their worldwide assets. It’s hard to read a newspaper these days and not find a story tracking the exodus of the very wealthy to countries that have more attractive tax arrangements, whether it’s Italy, the UAE or Singapore.
The vagaries of politics and nuances of tax arrangements rarely harm what RedBook’s founder, Sandy Mitchell, described recently as the “hyper prime market”. Members of the global wealth elite have a base in London, alongside many others elsewhere. To them, the UK will always be regarded as something of a safe-haven asset, a global financial centre, an education hub and a lifestyle destination. According to our research, foreign investment consistently drives 70% of transactions above £5m.
But that’s not the case for the prime market. Some domestic owners are now tightening their belts or reconsidering their options. We recently pivoted a project for clients who own a penthouse in west London. The original plan was to renovate the space to make it ready for their permanent base in the capital. However, having assessed the situation in Westminster and not liking what they saw, they’ve decided to relocate to Europe, and the team at RedBook has recast the design, toning down the level of luxury to make the apartment attractive to the rental market—and bring down the overall cost in the process.
Smoke and mirrors
Regardless of how much money is available, we think everyone would appreciate a clearer idea of what a project is going to cost from the outset. The reality is that—outside of our clients—this rarely happens. Instead, the recommendation is that every owner should approach a project with a contingency fund of at least 10% (if not more) set aside for unexpected expenses—sure of the knowledge that this will be needed.
There are several reasons for this lack of early clarity. First among them is a collective resistance to being entirely upfront about costs, which is baked into the system—at least it is for prime residential projects. There’s always been a fear at the back of a lot of minds that if owners were given the true cost of a project before embarking, they might back out. And they do. Being open and upfront about costs is high risk; at RedBook, we often have clients who baulk at the cost plan that we put together and present a lower figure proposed by another professional; sometimes we lose out. Our figures include the full 360 vision for the project, drawing from real-time data; most professionals can only present what their portion will cost.
Contractors, for example, will only give a cost for the construction—it won’t include aspects such as interior design or landscaping, VAT or other exclusions. Not only that, but it’s not unusual for contractor quotes to come back with very different numbers. One RedBook partner cited a case where there was a £1m gap between quotes for a project based on the same set of drawings. Quantity surveyors will, of course, cost up a project as accurately as possible, but they are typically only introduced once the design has been agreed, leaving little or no room for the brief to be changed to better meet the budget. The system is inflexible.
Real-time costs
RedBook aims to de-risk the minefield of construction and refurbishment projects right from the start. Since COVID and with the current economic climate, this seems ever more important. It’s why we launched the RedBook Index in November last year—and will be updating and expanding it with 2024-25 figures later this year. By introducing this real-time data platform, which benchmarks project costs against a specialised industry standard, for the first time, clients can feel more confident about launching property projects without the risk of unwelcome surprises along the way. In short, they go into projects with their eyes wide open.
In the RedBook Index, we unpacked what £1,000/sq ft typically buys in the capital and revealed that only £640 goes towards the actual build (the remainder covers overheads and fees). It’s often used as a guide for a top-end finish but only delivers a silver level of specification. For those looking at gold, the raw build refurbishment costs rise to £885 per sq ft—with all the extra costs and fees on top, taking the total close to £1,400/sq ft.
Drilling down further, it’s tricky to apply a blanket cost-per-square-foot price across a property when the level of decorating and specification is so often more nuanced. The RedBook House illustrates how to build up a more accurate cost, piecing together specifications such as ‘Bronze’ for children’s bedrooms, ‘Gold’ for the kitchen, reception rooms and principal bedroom and separate costs for new-build to cover the extension and basement for the new lower ground media room and gym which factors in real-time costs of digging. This perspective allows for any design changes to be made long before contracts go out to tender. When used in the pre-purchase stage, time and again, we’ve seen how it brings much-needed clarity to buyers about what they are taking on.
