John Lewis pulls out of BTR - CFO insight

The decision follows a, "fundamental shift" in economic conditions according to the retailer. But what does that mean?

For the sake of time I will just address the cost side of the equation today. There are of course other aspects but I do have a day job to get on with! :)

To really understand cost from an investment perspective you need to look beyond the headlines. It is not just materials and labour (they already had the land in this case).

So let’s take you beyond the headline.

Time is money

There is one eternal truth in business. Time = money. That is especially true in capital projects. And this cost is often overlooked.

Now let me explain two key drivers of time cost in development that I pay close attention to as an experienced property CFO.

1. Prelims - When you are undertaking any significant build you have fixed costs. In the industry they would be referred to as P&Gs or Prelims. This is the amount that you are spending on a site regardless of if ANY work is happening. So if your Prelims are £100k a month then a 6 month delay costs you £600k.

2. Finance costs - All investments of this nature involve some level of financing even if it is an internal one. Development Finance is typically in or around the 1% a month mark if you are doing well. So on a £20m project a month delay is costing you £200k a month. So a 6 month delay is £1.2m.

So now when people talk about a 6 month delay you can see how that translates into money. As CFO part of my role is to price in the costs of delay into investment decision making.

Regulation has a price

Regulation is required. I don’t think that anyone serious in the property industry would disagree with that as a start point. However, when new regulation is put in far too often the full cost of it is not understood.

If you have been listening to developers and builders in the last year one of the key points that is repeatedly being made is that red tape has slowed down a development to a crawl. With my CFO hat on I won’t get into the rights and wrongs of regulation such as the Building Safety Act and the efficiency or otherwise of it’s implementation. What I can do is tell you the financial impact that slowing down has on the bottom line and on an investment decision. And once you understand the cost of delays better you really start to understand how red tape really translates in to higher costs.

That is why for developers the regulatory framework they operate in IS the economic conditions.

A good CFO will help you price risk into your investment decisions. I suspect this is what has happened here.