John Lewis, the well-known UK retailer, is facing significant challenges with its plan to build more than 400 flats above a Waitrose in West Ealing. Experts have warned that the project could cost more to build than it would be worth on paper, potentially resulting in a negative return of £57 million. The development is one of three housing schemes that John Lewis is working on as part of its diversification strategy under the leadership of chairman Dame Sharon White. The company aims to make a substantial portion of its profits from non-retail sources by 2030. However, rising costs, including those related to fire safety requirements, construction prices, and interest rates, are impacting the financial viability of the scheme.
Spiraling Costs
The analysis conducted by consultants Quod, commissioned by John Lewis Partnership, raises concerns about the retailer’s expansion into property development. The firm highlighted the many challenges faced by the West Ealing development, making it one of the first major projects to encounter rising costs due to new fire safety requirements following the Grenfell Tower tragedy. Additionally, spiraling construction prices and higher interest rates are further contributing to the financial problems.
According to current estimates, the project would cost £240 million to complete but have a value of only £183 million based on present-day values. This unfavorable cost-to-value ratio raises doubts about whether the development would pass a listed company’s appraisal process solely based on asset value.
While the project may not be financially viable if sold, John Lewis plans to continue owning the building upon completion and rent out the flats to local residents. Katherine Russell, head of the build-to-rent project at John Lewis, emphasized this long-term investment approach and stated that they are not looking to solely generate profit for developers.
However, Quod’s assessment highlights the high risks associated with John Lewis’ ambitious expansion into a market it lacks experience in. Despite the challenges, John Lewis may view the project more positively, considering the anticipated increase in profitability from the newly refurbished Waitrose attracting more shoppers.
The forecast expenses for the West Ealing development include the cost of constructing 428 flats, landscaping the area, and refurbishing the Waitrose store at the base of the development. The financial viability analysis carried out by Quod focuses on assessing the feasibility of affordable housing in the development and assumes that 20% of the properties will fall under this category. However, John Lewis has set a higher goal of making 35% of the flats (around 150) affordable, pending grant funding.
Summary
John Lewis’ flagship housing scheme in West Ealing is facing extreme challenges and potential financial losses. Rising costs, including those associated with new fire safety requirements, construction prices, and interest rates, threaten the project’s financial viability. Despite these challenges, John Lewis remains committed to its diversification strategy and long-term investment in the development. While the current estimates indicate that the project may not be profitable if sold, the company plans to retain ownership and rent out the flats to local residents. The West Ealing development serves as a significant test for John Lewis’ expansion into property, highlighting the risks and complexities of venturing into a market the company has limited experience in.