Hammering home office conversions

WHEN Geoff Marsh floated the idea of switching commercial premises to homes five years ago, the silence was deafening.

I thought it was a clever wheeze, like futuristic ideas about cars changing to solar power and everyone working from home," says one leading landlord. Today, the silence is shattered daily by a cacophony of conversions.

More than 100 buildings have been finished or given planning approval since the idea took hold in 1993, according to Mr Marsh's London Residential Research. In Westminster, Kensington and Chelsea, almost 50 schemes were completed last year providing 1,500 homes.

The early problem was that no one dared believe commercial property would fail to recover from recession. Now it is generally accepted many buildings will never be used for offices again. They are too inefficient for most occupiers, and upgrading would cost too much. Estimates suggest 15 to 25 per cent of buildings are obsolete - a lot of dead space considering the West End has more than 100 million square feet of offices.

It also means there is a lot more to come, considering that only about four million square feet has been converted so far in central London. "Simple economics show that the whole area north of Wigmore Street makes better sense as residential," says Mr Marsh.

Recovery in office rents has posed little threat to the trend because residential prices went up even more over the past couple of years in some cases by 35 per cent. The only pressure is from developers considering hotels rather than homes, says Mr Marsh. More than one million square feet had been approved for these conversions up to the middle of last year.

This has created a frenzy as traders and developers scramble for secondary stock being shed by larger landlords.

Safeland, for instance, has raised £7.5 million Sterling this year alone from buildings it bought, gained permission for conversion and then sold on. It has recently pierced the heart of the prime office core, buying the Great Smith Street library and BTR's building in St James's for similar treatment.

This kind of deal is raising fears that the West End could suffer even greater shortages of prime office stock in future. Leading names such as Burford have jumped on the bandwagon, putting two buildings around St Martin's Lane and the Sanderson Building, Berners Street, into a joint venture for conversion into hotels.

Any building with "light, height and parking" is vulnerable to this trend, providing the floors are no deeper than 60 feet and the ceilings less than 7 foot 6 inches, says Mr Marsh. He and consultants All sop Co calculate that a fringe building let at £15 a square foot has a likely capital value of £120 a square foot. Residential conversions are worth £250-350 a square foot.

But there is a point when conversion loses its attraction. Mr Ralph Pearson, of property consultants Chesterton, says that when rents hit £20 a square foot, converters will move on to cheaper pastures.

Even where a landlord has to pay £50 a square foot to renovate and can let as offices only on short leases, the return would be better than prices of less than £100 a square foot being achieved in sale for conversion, he says.

Risk profiles have also changed. A year ago a landlord would have faced a long void before letting offices, compared with a deluge of pre-sales for flats. Media companies are scrambling for space, reflected in a 15 per cent jump in rents.

Meanwhile Far East money, which accounts for a quarter of central London residential investment, could begin to fade as Hong Kong joins mainland China and the pound strengthens.

The prime West End property is likely to be priced out of the conversions market by the end of this year - which comes as no surprise to Mr Marsh, who always believed the best deals were in fringe areas such as Marylebone Road, where Berkeley Homes is converting Marathon House into flats. But conversion could still make sense on individual buildings unable to meet modern commercial needs.

Prime targets could be period mansions off the main office streets in Mayfair - an apt choice, as they were built to live in. The stately homes in areas such as St James's will remain commercial, however, which is ironic when the purpose-built offices of recent decades are gradually switching to residential.