According to the Financial Times (FT), investors are spending £2 billion on repurposing unwanted London offices as landlords attempt to accommodate hybrid working.
How much has been spent on purchasing London office space?
Real estate giant CBRE told the FT that since the beginning of last year, investors have purchased central London offices worth £1.3 billion with the intention of converting them to new uses. Deals worth another £700 million are in the works.
The transactions, which represent 2.2 million square feet and over 10% of new investments, come as the real estate industry seeks to adjust to the evolving world of hybrid working. Ed Bradley, head of London office investment at CBRE, said that the amount of money invested in "converting secondary offices to other uses is fairly unprecedented".
What are the vacant offices being converted into?
According to commercial real estate company JLL vacant office space in Central London could equate to 43,000 flats, or €21 billion in investment opportunities. However, it is not only residential property that vacant offices are being converted into.
For example, in September 2022, React News reported that the GIC sovereign wealth fund of Singapore decided to invest in the "Ugly Brown Building," a former Ted Baker headquarters located close to St Pancras station. Given that the site is close to important universities and hospitals, plans include space for a laboratory.
What factors are influencing the London office market?
The changing market comes in the wake of the "mini" Budget last autumn and the rising cost of debt which has unnerved investors. Although high-end offices continue to earn high rents, older and less desirable properties are less in demand as businesses reduce their workspace needs.
Is all vacant office space ripe for conversion?
Concerns exist that some surplus office buildings in the UK may end up as unwanted due to their physical design, applicable planning laws, and the cost of conversion. To attract tenants or be appropriate for new uses, outdated offices frequently require significant renovation, which reduces their appeal as an investment.
What is being done to avoid vacant offices remaining empty?
According to the FT the City of London is planning to fast-track applications to convert unused older offices for new purposes such as hotels to avoid buildings remaining empty as “wasted assets”.
Proposed changes to the current planning approval process include speeding up the process and reducing the amount of evidence required to justify a change of use. Shravan Joshi, chair of the City’s Planning and Transportation Committee told the FT that the Committee was “sympathetic” to new uses that complement the City’s identity as a business centre, including hotels and “educational and cultural uses”, such as galleries, universities and research spaces. However, there was no appetite from the Committee for more residential development in the business district as it would mean extra constraints on noise and light when planning for new modern high-rise office developments.
Which offices are in demand?
In their market analysis from May 2023, leading real estate information provider CoStar reported that London office requirements were 12% up on the long-term average but point out that prime office space remains a key driver for occupiers, with 92% of all take-up this year focused on Grade A offices.
What obstacles do developers face when considering converting vacant office space?
The idea that vacant offices could be converted into new dwellings has been impeded by planning restrictions. In 2021, the government tightened regulations for office-to-residential conversions by establishing minimum unit sizes and lighting requirements.
Changing the designated use of office space may not be straightforward. Our April newsletter “How to change the designated use of vacant office space” gives good insights into some of the issues involved.
What are some of the key legal considerations surrounding office conversions?
- Planning permission - In most cases, planning permission will be required to convert office space to another use. The local planning authority will assess the application and decide whether to grant permission. The process can be lengthy and complex, and there is no guarantee that permission will be granted.
- Building regulations - Building regulations must be complied with when converting office space to another use. This includes ensuring that the building is safe and meets the required standards for fire safety, accessibility, and energy efficiency.
- Environmental impact assessment - If the conversion of the office space is likely to have a significant impact on the environment, an environmental impact assessment may be required. This is a detailed study of the potential environmental impacts of the project, and it can be a costly and time-consuming process.
- Rights of light - If the conversion of the office space will block out light from neighbouring properties, the owners of those properties may have legal rights to compensation. This is a complex area of law, and it is important to seek professional advice if there is any doubt about whether the rights of light may be an issue.
- Landlord and tenant law - If the office space is rented out, the landlord will need to obtain the consent of the tenants before converting the space to another use. The tenants may be entitled to compensation for any loss of amenity or rent as a result of the conversion.
How 3CS can help
It is important to note that these are just some of the legal challenges that may be faced when converting UK vacant office space to another use. The specific challenges will vary depending on the circumstances of the project. Therefore, we would urge you to seek professional legal advice from us before embarking on any such project.
If you require help with an office conversion or any commercial property legal matter, please get in touch with your usual 3CS contact.