Think outside the blocks

The sanctity of the City of London may justify prime minister David Cameron using his veto in European Union negotiations but can the UK’s financial centre withstand what some regard as another threat – the transformation of its empty office buildings into homes?

The question would have been unthinkable in 2007 when London office space was at a premium but now two forces are fuelling the offices-to-residential debate.

First, there is a lot of empty City business accommodation. A former UBS bank building at Sun Street on the City fringe was invaded by Occupy anti-globalisation protesters last year to highlight the issue. More tellingly, the Walbrook Building’s 380,000 sq ft of offices in Cannon Street have been vacant since completion by listed developer Minerva back in February 2010. According to Knight Frank, the City has more vacant office space than the West End – 9 million sq ft against 5.4 million sq ft. City office rents are consequently lower, reaching a maximum of £55 per sq ft against a maximum of £92.50 in the West End.

Second, there is a government initiative – aimed at the whole of the UK, not just London – to relax planning guidelines to encourage more and easier conversions of commercial premises into homes. George Osborne, chancellor of the exchequer, calculates that nine per cent of office accommodation across the country is empty as a result of four years of economic downturn, providing space to create 250,000 homes over the next 15 years

The prospect of office blocks being transformed internally, reclad externally and turned into homes has raised the hackles of the UK’s most influential local authority. Planners and civic leaders in the City of London say losing business buildings – the City is home to the London Stock Exchange and other key financial institutions – may jeopardise the UK’s future as a financial centre when recovery finally comes and demand for office space rises.

Peter Rees, the City of London’s planning officer, warns: “The cyclical nature of the property industry means that if developers were to turn offices into residential blocks when times were tough, the City’s ability to attract and house new firms when market conditions improved would be seriously diminished.”

He says the government’s objective is laudable but could dilute “the agglomeration of firms that make the Square Mile a world-class business environment that continues to attract firms of all sizes from around the world”. Furthermore, the move may have “a detrimental impact not only on London but on business districts throughout the UK,” he says.

Rees and his supporters may be buoyed by a rise in commercial property deals in late 2011. Jones Lang LaSalle, a consultancy, says despite the Christmas slowdown there are now 42 deals for City and Docklands office space under consideration, valued at over £2.5bn.

The City says it is not anti-residential and emphasises its commitment to The Heron, a 36-storey apartment tower adjacent to the Barbican Centre. It is now over 70 per cent sold after a chequered history securing funding with the latest units to go on sale – 13 two- and three-bedroom homes above the 30th floor – priced from £3.5m and attracting interest.

The City of London also gave planning consent in late 2011 for two purpose-built residential schemes at Wood Street and Fetter Lane, providing 150 high-end apartments between them. Berkeley Group, the Wood Street developer, bought the site after a commercial scheme failed to get off the ground.

Ironically, such residential consents may only serve to strengthen the City’s anti-conversion stance – it can argue, after all, that original residential schemes win consent on their own merit. This view, it seems, is shared by nearby planning authorities too.

Despite their diverse political allegiances, many of London’s other 32 planning authorities have used their umbrella lobbying body, called London Councils, to warn against conversion and cite the importance of the so-called Central Activity Zone. This is a central core of the UK capital where planning decisions by individual authorities are expected to prioritise jobs and businesses over homes.

But as ever with politicking, not everything is as clear-cut as it seems. Many property professionals who deal routinely with individual London boroughs say the real position involves more finely nuanced attitudes.

“Westminster borough actually has a very positive policy to encourage conversion. It’s proved very successful as there has been 4m sq ft of conversion in the last nine years and this has brought huge benefit to the mix in areas like Soho and Covent Garden,” explains Nick de Lotbiniere, a conversion specialist at Savills.

“Kensington & Chelsea decided to protect offices from change to use to residential. This was introduced in December 2010, effectively severing the pipeline of new homes in the borough. Camden and Hammersmith & Fulham have a new policy that only if the building is surplus to commercial requirements may there be the possibility of conversion,” he says.

There is another often unspoken subtext to all this. Many London borough councils receive large sums through so-called Section 106 payments. This is funding from residential developers as a condition of winning planning consent, and is used to create infrastructure improvements from road safety measures to new community buildings or social housing.

David Cameron, announcing a new UK housing strategy in November 2011, told local councils to reconsider such “106 deals” in a bid to reduce red tape for housebuilders and to help kick-start an estimated 82,000 homes stuck in “stalled” private sector schemes.

London’s politicians, under severe financial pressure after cuts in central government funding, fear that if office-to-residential planning laws are relaxed all 106 payments will be scrapped. That worry may underpin localised opposition to office conversions.

This debate is being played out across much of the UK, too, where business and retail centres are suffering increasing volumes of redundant premises while numbers of new homes remain stubbornly low and resistance to building on greenfield sites is high.

However, many builders and engineers – while acknowledging that some conversions can be successful – warn that many offices are frequently far from ideal for transformation anyway. Therefore even if government’s proposals come to fruition, they will not necessarily provide an instant boost to the national housing stock.

Offices built in the 1960s and 1970s often have ceilings considered too low for today’s apartment buyers, who demand a sense of space; ironically, offices from the 1980s and 1990s have ceilings that are too high and packed with air-conditioning. “The cost of extending floors is usually prohibitive compared with demolition and starting again,” warns Mark Farmer of EC Harris, a consultancy specialising in engineering-related issues around construction and redevelopment.

He says many commercial buildings have steel frames, which permit more vibrations than those acceptable in homes, and façades that look “industrial” and have poor energy efficiency.

Most expensive of all, some offices are too deep to turn into homes without creating complicated, costly light wells or atriums in the centre of the block. “An office floor could be well over 120 metres long or wide. Even with an apartment on either side, you would end up with poor central access to fenestration and natural light. Then, once you have put a light well in, you lose saleable space,” says Linda Beaney, a London estate agent who handles the sales of commercial premises to residential developers.

When conversions do work, they appear to work well. However, such conversions – even in those boroughs inclined to allow them – only take place where the residential market is strongest, typically at London riverside and prime central locations.

For example, Amazon Properties has converted offices into three two-floor apartments close to London’s West End at 50 Hallam Street, priced at £7.95m each. Around the corner it has carved apartments from former offices at Portland Place, priced £4m-£7.95m (all through Knight Frank and Druce).

By contrast, outer London suburbs such as Croydon will not necessarily be helped by relaxed planning rules. As Will Grant of Jones Lang LaSalle points out: “Residential values there are so low, and there are so many new-build housing schemes, even if the borough wanted to promote conversion, the market would probably not respond.”

All of which puts the spotlight back on the City and central London boroughs, developers and politicians to reach a deal on the future of empty commercial premises. Government consultations on planning reform end in the spring with a decision soon afterwards. Watch this (empty) space.

Knight Frank, www.knightfrank.com

Druce, www.druce.com