DTZ forecasts strong growth in office-to-residential conversion schemes

Strong growth in the values of residential property in Central London is driving increased conversion of office space to residential use, says DTZ in new research. By the end of Q3 2012 planning permissions for office conversion to residential in Central London had already reached 2,197 units, the firm says, which beats all previous annual totals.

Driven by the continuing rise in residential values, the number of completions of such conversion schemes is also expected to rise significantly in 2013, increasing by 12% over 2012 levels to 1,350 units, DTZ says. And in 2014, the firm expects even more growth, forecasting a 18% increase to around 1,600 units.

This growth is not expected to have a major impact on the overall amount of available offices in Central London in the near term, DTZ notes: the currently increasing pace of development activity in the capital should more than compensate for the forecast amount of conversion to residential. The firm says the increased availability of secondhand office space in Central London – rising as leases expire or break – is forecast to support a continued divergence in values, leading more landlords to consider residential conversion schemes.

Martin Davis at DTZ says that despite the strong forecast rise in West End offices values of 20% between 2012 and 2017, the firm expects residential values to at least keep pace with this growth. “The same is similarly true for City fringe locations,” he adds. “This means office development will continue to be an attractive alternative, especially for owners of empty, obsolete stock in non-core locations.”

DTZ also expects the location of residential conversion schemes within Central London to change in the next couple of years. It expects office space in the City and City fringe offices to account for 40% of total residential units delivered in 2013-2014 whereas Docklands offices, which have been an important factor in such conversion schemes during the past eight years, now only comprise a few sites with permission and will not be such a significant source of conversion activity in future.

Ben Burston, head of UK research at DTZ, illustrates the attractiveness of such schemes to developers and landlords: he notes that average West End residential values range up to £3,250 per sq ft in the St James area, compared with price office values of around £2,100 per sq ft.

“This divergence in value has led to significant conversion activity in recent years, which has mostly centred around the West End and Docklands. The City, outside of EC1, has delivered little stock. Going forward we expect City fringe areas (E1, EC1, SE1) to deliver a larger proportion of stock over the next two years. But, unless its planning stance changes, the City Corporation area itself will see little activity,” he adds.