Copyright: David Lawson/Financial Times May 1997Home page
The early problem was that no-one dared believe commercial property would fail to recover from recession. Now it is generally accepted that many buildings will never be used for offices again. They are just too inefficient for most occupiers, and upgrading would cost too much. Estimates vary that from 15 per cent to 25 per cent of buildings are obsolete - which is a lot of dead space considering the West End has more than 100m sq ft of offices. It also means there is a lot more to come, considering that only around 4m sq ft has been converted so far in central London. 'Simple economics show that the whole area north of Wigmore Street makes better sense as residential,' says Marsh.
Recovery in office rents has presented little threat to the trend because residential prices went up even more over the last couple of years - in some cases by 35 per cent. The only pressure is coming from developers considering hotels rather than homes, says Marsh. More than 1m sq ft had been approved for these conversions up to the middle of last year.
This has created a feeding frenzy as traders and developers scramble for secondary stock being shed by larger landlords. Safeland, for instance, has raised 7.5m pounds this year alone from buildings it bought, gained permission for conversion and then sold on. It has just pierced the heart of the prime office core, buying the Great Smith Street library and BTR's building in St James's for similar treatment.
This kind of deal is raising fears that the West End could suffer even greater shortages of prime office stock in future. Even leading names like Burford have jumped on the bandwagon, putting two buildings around St Martin's Lane and the Sanderson Building, Berners Street, into a joint venture for conversion into hotels. Any building with 'light, height and parking' is vulnerable to this trend, providing the floors are no deeper than 60ft and the ceilings less than 7ft 6in, says Marsh. He and consultants Allsop & Co calculate that a fringe building let at 15 pounds a sq ft has a likely capital value of 120 pounds. Residential conversions are worth 250-350 pounds a sq ft.
But there is a point when conversion loses its attraction. Ralph Pearson of property consultants Chesterton says that when rents hit 20 a sq ft, converters will move on to cheaper pastures. Even where a landlord has to pay 50 pounds a sq ft to renovate and can let as offices only on short leases, the return would be better than prices of less than 100 pounds a sq ft being achieved in sale for conversion, he says. Risk profiles have also changed. A year ago a landlord would have faced a long void before letting offices compared with a deluge of pre-sales for flats. Media companies are now scrambling for space, as indicated by a 15 per cent jump in rents. Meanwhile Far-east money, which accounts for a quarter of central London residential investment, could begin to fade as Hong Kong joins mainland China and the pound strengthens.
The prime West End is likely to be priced out of the conversions market by the end of this year - which comes as no surprise to Marsh, who always believed the best deals were in fringe areas such as Marylebone Road, where Berkeley Homes is currently converting Marathon House into flats. But conversion could still make sense on individual buildings unable to meet modern commercial needs. Prime targets could be big period mansions off the main office streets in Mayfair - an apt choice, as they were built to live in. The stately homes in areas like St James's will remain commercial, however, which is ironic when the purpose-built offices of recent decades are gradually switching to residential.