Bloomberg News

London Landlords Facing Rents of Zero Turn Offices Into Condos

February 03, 2012

Heron International  will seek what it says are the highest residential property prices ever charged
in the City of London financial district in a 36-story building that’s due to be completed in 2013. Source: Heron International

Heron International will seek what it says are the highest residential property prices ever charged in the City of London financial district in a 36-story building that’s due to be completed in 2013. Source: Heron International

More people will be making their homes among the banks and insurance companies of central London as a shrinking financial industry and the prospect of leasing out buildings for free prompts landlords to convert offices into luxury apartments.

Developers including Axa Real Estate Investment Managers Ltd., Berkeley Group Holdings Plc (BKG) and Heron International Inc. also plan to build homes in the heart of Britain’s financial services industry, known as the Square Mile, after purchasing obsolete commercial buildings in the area.

“The fringes of the City are struggling in terms of letting secondhand buildings,” said Anthony Duggan, head of real estate research at Deloitte LLP. “There will be a number of developments looking at alternative uses.”

London has seen demand for offices slump after banks cut more jobs in the U.K. than in any other country last year. Rents in the City of London will fall 4 percent this year, compared with earlier predictions of a 6.1 percent increase, JPMorgan Chase & Co. said in a Jan. 11 note. Values will drop 7.3 percent in 2012, the bank said.

Axa is seeking older offices or partly developed “brownfield” sites on the fringes of the financial district to turn into housing. Berkeley plans to renovate a derelict office property near Moorgate into 90 residences. Heron is building a 36-story residential tower near the Barbican, and Hammerson plans to develop 253 apartments near Liverpool Street station.

Finance Jobs Lost

Employment in the Square Mile dropped 8.5 percent last year and it will remain below 1998 levels until 2014, according to the Centre for Economics & Business Research Ltd. The cutbacks and the amount of aging space give City tenants greater bargaining power on rents with owners of older, empty office blocks.

About 54 percent of office space in the City of London and on its fringes is more than 15 years old, meaning it can no longer be marketed as “prime,” according to research from DTZ Holdings Plc (DDTZ).

Some landlords may choose to lease space for nothing to avoid a charge on empty buildings, Michael Marx, Chief Executive Officer of Development Securities Plc, said in an interview.

“I’m feeling more and more robust about that forecast as time goes past,” he said.

Since April 2008, the U.K. government has required office property owners to pay business taxes, equal to those usually owed by tenants, on buildings that remain vacant for more than three months.

Axa Shops Around

Axa Real Estate plans to build homes and offices that will be worth at as much as 100 million pounds ($158 million) when completed Harry Badham, U.K. director of development, said in an interview. The company, which has 40 billion euros ($52.4 billion) of property under management, is looking at buildings and sites in Clerkenwell, Farringdon and Shoreditch.

“Residential conversion of older buildings can be an obvious route to value,” Badham said. Purchases would be by its Development Venture III fund, which has raised 588.5 million euros to date to buy property across Europe, he said.

A separate Axa Real Estate fund is developing an office building at 1 St Paul’s, close to the cathedral, that will include 10,000 square feet (929 square meters) of homes as well as 60,000 square feet of offices and 20,000 square feet of retail, the insurer said in a statement.

“There’s more value in going residential,” said Badham, who said home values were 10 percent to 15 percent higher at St. Paul’s than that for offices. Axa Real Estate may retain flats and lease them to a serviced apartment owner.

Cheaper Than Knightsbridge

Home prices in the City of London typically range from 650 pounds to 1,350 pounds a square foot, Neil Chegwidden, residential research director at Jones Lang LaSalle Inc., said in October. Knightsbridge has the highest average price per square foot in London at 2,007 pounds, followed by Belgravia at 1,982 pounds and Mayfair at 1,960 pounds, broker Savills Plc said in an October report.

The average two-bedroom apartment in the U.K. is about 800 square feet (74.3 square meters), according to 2008 data from Nationwide Building Society. That means a property that size in the City of London is worth 520,000 pounds to 1.08 million pounds based on Jones Lang’s valuations.

Luxury home prices in central London have increased for 14 consecutive months through December, Knight Frank LLP said Jan. 9, making conversion to homes more attractive to owners of empty buildings.

Roman House

Berkeley, the U.K.’s largest homebuilder by market value, won approval to renovate Roman House, a derelict office near Moorgate, into a 90-apartment building in December. It’s seeking more empty structures or brownfield land in the City to convert into homes, Berkeley (Capital) Plc managing director Piers Clanford, said in an interview.

“There’s interest from the City for a pied a terre and somewhere to stay during the week,” Clanford said. “People work long hours and that’s a target market us.”

Renovating Roman House, which contains a protected Roman wall, rather than building from scratch, saved Berkeley as much as six months in construction time, he said. For other developers, sites will need to be demolished and rebuilt because their layout is unsuitable for homes. When refurbishment costs reach about 160 pounds a square foot, they equal the cost of developing a site, said Iain Parker, head of European offices at real-estate adviser Davis Langdon.

‘Moons Aligning’

“The environment is almost more suitable for refurbishment and reinvention,” Parker said. “It’s almost like all of the moons are aligning in terms of cost, money being tight, the sustainability agenda” and planning.

Heron demolished a fire station when it tore down the Barbican Centre’s service building to develop The Heron, a 36- story residential tower. The project is less than one kilometer (0.62 miles) from Berkeley’s development and Heron is seeking what it says will be the highest home prices ever charged in the City at about 1,600 pounds a square foot.

New residential developments will deliver better quality than renovating old offices into homes, though winning planning approval can be difficult, said Paul Cheshire, professor of economic geography at the London School of Economics.

“You really should be building houses in the first place because what you’re going to end up with is second-class houses or apartments,” by converting offices, Cheshire said in an interview at the university. “But the planning system may make it very difficult.”

Residents Rights

The fringe of the Square Mile is more suitable for residential conversion than the center because housing would “sterilize” the surrounding area, said Ken Shuttleworth of Make Architects. Residents would have the right to impede future development if it blocks out sunlight, and that would reduce the value of neighboring buildings, he said.

Brookfield Office Properties Inc., lower Manhattan’s biggest office landlord, is also looking to buy obsolete City office blocks for conversion to flats, said Martin Jepson, senior vice president for development and investment at the New York-based company.

“Redundant offices are the natural provider of future residential land,” said Ian Marris, partner of London residential development at Knight Frank LLP, by phone. “There’s an acute shortage of supply of new-build homes across all of central London.”

Office Conversions

From 2007 through 2011, landlords began turning 19 commercial buildings in the Square Mile into homes, according to research by Savills and London Residential Research. Of those, 14 refurbishments were completed and all the apartments in them have been sold, Savills said. Two of the five projects still under construction are new build.

“The land registry doesn’t report residential index figures for the City because it’s so small,” Lucian Cook, director of residential research said in an interview today. “Scarcity is one of the biggest drivers of price in prime central London.”

The City of London, which has restricted the majority of homes to the Barbican area, had about 11,677 residents in the middle of 2010, according to the Office for National Statistics. That’s likely to increase, according to David Wootton, the lord mayor of London.

“We would like to have more residences,” Wootton said in an interview. “It’s a matter of balance and making sure that small pockets of residential don’t disrupt the business cluster.”

Lower Manhattan

A similar phenomenon has taken place in lower Manhattan, where almost 16 million square feet of space, mostly in older buildings deemed obsolete for offices, have been or are slated to be converted to housing between 1995 and 2013, according to the Alliance for Downtown New York, an organization representing area businesses.

“The goal in lower Manhattan has always been to keep it a globally competitive business address,” said Elizabeth Berger, the alliance president. Beginning in the 1990s, “you saw both the conversion of obsolete office space and the creation of new residential, and the community has grown exponentially. I’m a lower Manhattan resident for 30 years, and when I moved here, about 10,000 people lived below Chambers Street,” she said.

The most recent population estimate is 56,000, according to the alliance.

On Hold

Hammerson Plc (HMSO), the U.K.’s third-largest publicly traded developer, delayed plans to develop an office block at Principal Place on the edge of the City after talks to lease part of the building to CMS Cameron McKenna LLP prior to construction failed, according to a Jan. 16 statement.

The project was canceled to avoid exposing shareholders “to excessive risk,” Hammerson Chief Executive Officer David Atkins said in the statement.

Hammerson still plans to develop a residential tower with 253 apartments at the site near Liverpool Street rail station and is in talks with companies to develop the tower in a joint venture. One of the companies is Manhattan Loft Corp., its chairman Harry Handelsman said in an interview.

“It’s a sexy opportunity,” said Handelsman, who masterminded the conversion of a disused building at Kings Cross railway into a luxury hotel and residences. “Towers are still a bit of a novelty in London. It’s a way of sustaining growth of a city. It needs to adapt to the high-rise model.”

To contact the reporters on this story: Neil Callanan in London at ncallanan@bloomberg.net; Christopher Spillane in London at cspillane3@bloomberg.net

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net


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