New office to resi plans welcomed

Property experts at CBRE say government plans to allow the conversion of office buildings into homes without the need for planning permission is welcome news for Birmingham.

Department for Communities and Local Government chief Eric Pickles announced the new permitted development right yesterday (24 January).

According to CBRE, this will help to tackle the housing shortage, which is particularly chronic in Birmingham, as well as bringing redundant – by virtue of location or specification – office stock back into use.

Adrian Willet, a director in the development team at the Birmingham office of CBRE, welcomed the relaxation of the planning rules.

He said: “We are already advising a number of funds looking to build portfolios in the private rented sector in Birmingham. Where they are unable to find existing stock they are targeting obsolete office accommodation. There is also on-going interest from providers of student accommodation.

“Demand for residential space is growing as the sector is currently outperforming tertiary commercial property and while residential rents are on a steep upward curve, office rents have over recent years been largely static or, where tertiary stock is concerned, in decline.”

Nor is there any sign of growth in the residential sector slowing. Affordability issues and, more recently, the mortgage drought, have put pressure on would-be owner-occupiers, particularly traditional first-time buyers, who are now struggling to get a foothold on the property ladder. In addition, affordable housing supply has failed to meet the growing demand for homes.
Average lease lengths in private rented accommodation have increased as a result, from six to 12 months. Tenant turnover has reduced, letting fees are consequently down and management costs have shrunk. All of this is increasing investor appetite in the sector.
In the absence of any meaningful stock levels in the Midlands, the lure of office buildings is that construction risks have been removed, and development timescales truncated. Costs are also an inducement, at £120 per sq ft for a conversion, compared to £200 plus for new build.

Ashley Hancox, CBRE’s Birmingham-based head of regional offices, said the move could prove a lifeline for landlords sitting on redundant office stock and saddled with paying business rates on empty space.

He said: “Although Birmingham has a looming Grade A stock shortage, there is a surfeit of tertiary and poorly located space which no longer makes the cut for offices. It has quite simply outlived its economic life and is in danger of slipping into redundancy and disrepair, with no prospects of acceptable returns in commercial re-use.”

Henderson Global Investors’ recent consent for change of use at No 1 Hagley Road for 182 apartments for rent already provides a precedent for the opportunity, albeit that no decisions have yet been made as to the building’s future use.

Mr Hancox added: “This is the second time Birmingham’s tertiary stock has had the opportunity to gain a new lease of life. Those of a certain vintage will recall the mid 90s when a previous wave of tertiary office stock was more valuable for residential use. The old British Telecom offices at 95, Newhall Street, now Millennium Apartments and the first large scale conversion of a modern office building, provided the first wave of Birmingham city centre living. This has to be healthy for the market in the long-term and will assist in increasing the quality of the remaining stock and ultimately promoting new commercial construction.

However, Mr Willet warns that not every redundant office building is suitable for conversion.
He said: “To be frank, investors have a long tick-list. For a start off, they look for density – circa 200 apartments, so many buildings are simply too small. Parking, while not always a given in an office building, is also more important for residential tenants.

“Location is also key – the building needs to be close to prime residential areas,
otherwise values drop off very quickly. That’s why Edgbaston was so attractive to Henderson.

“There can also be insurmountable mechanical and engineering issues, which simply rule out conversion.

“Finally, the prices investors are prepared to pay are not always palatable to landlords. Henderson bought No 1 Hagley Road for circa £17 per sq ft. In a buoyant office market the same building could fetch £100 per sq ft. In the current climate, anything above £35 per sq ft and any purchaser will struggle to make a conversion work.”
Other classes of property, including general industrial buildings and storage will also benefit from the planning by-pass. Shops, hotels or industrial parks are excluded.

The new rules will be in force for three years only.