In 2018, the total value of commercial property in the UK sat at over £880 billion, when the office market was at its height. Since the pandemic and a shift in working habits, over 200,000 (and counting) commercial units are currently sitting empty, with many falling into a state of disrepair and in desperate need of restoration.
So, is there an opportunity for developers to take advantage of a seriously depressed commercial market to secure substantial units, often in prominent locations, with the aim of repurposing them into multi-unit developments that will deliver much-needed new homes and breathe new life into these vacant spaces.
Firstly, office to resi conversions are nothing new, in fact they have been steadily increasing since the change to Permitted Development Rights (PDRs) in 2013. However, the pandemic has seen a shift in how many people can now live and work like never before.
Recent technological advancements mean businesses can still thrive with a completely remote workforce, so the requirement for dedicated office space is no longer as critical as it once was. This shift immediately changes the saleability of commercial buildings and provides an opportunity for a discerning investor to strike while the iron’s hot.
From the outset, developers and investors need to work hard to source suitable properties that are large enough to comfortably work as a residential scheme, well-located to attract discerning buyers and be priced competitively enough to allow the deal to make sense upon completion.
A recent example from a Property Experts perspective is a fantastic 11,000 sq ft former Lloyds Bank on Horley High Street, which we managed to find via social media platform Instagram. After conducting our due diligence we found that the numbers stacked up in a big way, in fact it was a lot more attractive from a developer’s perspective to buy a commercial building and convert into apartments over a vacant site or refurbing a former dwelling into flats, which has typically been our bread and butter.
From an initial cost perspective, the PDRs allow for a smoother planning process, if it’s even needed at all in some cases, whilst the first stamp duty payment threshold is higher than on residential purchases, as well as lower CIL contribution payments due to the mass of the existing footprint , which helps keep overheads down from the off.
The main benefit of purchasing a commercial property is the fact the building is already there, so from day one you’re dry and can get to work on constructing the apartments. Typically, an office to resi project takes half the time of a new-build or even the conversion of an existing residential dwelling – something we’ve seen recently where we have been able to build the same number of units at our Horley project, as at our new-build Purley scheme, which is a major benefit for developers.
Additional benefits include the fact that these buildings are already fully equipped with large floorplates, good insulation and communal aspects such as lifts, staircases, ground floor storage and parking. All of this is very attractive when sourcing a project’s viability as it saves a lot of the initial work and allows developers to put more money and energy into creating well-designed apartments.
A further reason for residential developers to be encouraged to source and convert commercial buildings is the fact that currently one in 10 London offices is at risk of being unusable in the next two years due to new environmental standards that older properties will fail to meet.
From 2023, any office building with an energy performance certificate rated lower than E could be closed down by government authorities, rendering the space completely redundant and almost valueless. The first thing a residential developer will do is improve and upgrade the performance to ensure it meets national living standards, as well as help bring the long-term bills down for future residents.
With all of this taken into account it is clear to see why major organisations and areas such as the City of London are investing heavily in the office to resi sector. Following, recent events forcing most to work remotely has drastically reduced the need for people to live closer to the office and we are seeing buyers now look further afield – in 2020, those living in London spent over £20 billion on homes outside of the capital, which is over double compared to 2019, be it a permanent relocation or second home.
Therefore, there is a real demand for homes in good locations outside of London and this is typically where the High Street is suffering the most. For example, 40.9% of all homes completed in Croydon in 2020 were office conversion]. This is a perfect example of substantial properties in good locations becoming available due to a downturn in the commercial market, with developers capitalising on Croydon’s increasing popularity as a London commuter destination for homebuyers.
If a developer can acquire the right property and deliver the quality buyers have come to expect then there is an incredible appetite out there from potential purchasers, priced out of new build town centre developments, that want a high-quality home in a central location, close to good amenities and transport links.
This is a huge step-change in the market and a real opportunity for developers to find a great deal that will regenerate a disused building and deliver homes that will bring life back to the area, whilst improving their returns at the same time. It’s a win win!
*Bruce Burkitt is the founder & managing director of Property Experts