Investors have invested £2bn in converting London offices to new uses as the shift towards working from home has reshaped the market.
CBRE, a real estate advisor, reports that since the beginning of last year, buyers have purchased central London offices worth £1.3bn with the intention of converting them into new uses. There are also £700mn worth of other deals in the pipeline.
The property sector is trying to adapt to the new environment of hybrid work.
Ed Bradley, CBRE’s head of London Office Investment said: “This is a significant portion of London investment volume in today’s marketplace.”
He said that the investment scale in “conversions of secondary offices into other uses” is unprecedented.
The commercial real estate market has seen a sharp decline in investment since the autumn of last year, but some investors still have their eyes on new projects that will convert offices into student housing, hotels, and laboratories.
Bradley said that he has seen “several examples” where alternative office investors and developers outbid traditional office investors 10-20 per cent.
GIC, the sovereign wealth fund of Singapore, agreed in September to invest in the former Ted Baker HQ near St Pancras Station (also known as “Ugly brown Building”) The site will include lab space due to its proximity to major hospitals and universities. Other properties, such as Nobel House on Millbank near the Houses of Parliament, are set to be converted into hotels and serviced apartments.
The lack of research space and the increase in international students and visitors following the pandemic have fueled the demand for student housing, hotels, and laboratories.
Market changes also followed rising interest rates in order to reduce inflation, and a “mini” Budget last fall that increased borrowing costs even more. This unnerved investors.
While top-end properties still command high rents, the demand for older and lesser desirable properties has dropped as companies reduce their space.
Some surplus office buildings will be difficult to convert due to their physical design, the planning rules, and the amount of money needed. This raises fears that these assets could become stranded assets.
Offices that are outdated often require large sums of money to upgrade them to be attractive to tenants or fit for a new use, reducing their appeal as an investment.
According to CoStar, investment in central London offices fell by half compared with the average over the past 20 years in the first three months of this year. However, dealmaking had increased from the 20-year-lows reached in the fourth quarter of 2022.
Planning constraints have thwarted the hopes that offices could be converted into homes.
In 2021, the government will tighten up standards on light requirements and unit sizes for conversions from offices to residences.
Gary Sector, a partner with Addleshaw Goddard, a law firm, says that many London local authorities limit the number of office conversions in order to protect their high street and retain jobs within their area.
“Government policy encourages greater conversion of residential use.” “I think that many authorities are keen to hold on to employment-generating uses in the Borough,” he said.
The changes in 2021 were significant. It’s not possible to convert an old office into a residential building. “It’s not as simple as that.”