Office-to-residential market

For many, the extension of Permitted Development Rights from May 2013, which simplified greatly the conversion of offices into other uses, was a potential game-changer.

But it’s not really happened in Manchester and Liverpool, unlike in other big regional cities of England. Bristol’s 106,000 sq ft Lewins Place and 180,000 sq ft Pithay, the city’s largest office block, contributed to 300,000 sq ft signed over for conversion in year one of PDR alone.

While the big two North West cities have been quiet on office-to-resi, in Chester numerous conversions have happened across a range of building types. In the city centre along with a raft of above-shop changes, there’s Heritage Court, where 30,000 sq ft of offices were converted by Blueoak Estates. The former Bonhams auction room was sold for retail and residential. The old Chester Chronicle offices are being turned into 62 student rooms by Knight Knox and Fortis, available to investors off-plan for £64,995.

In Birkenhead, developer Goodman Wells has taken to Hamilton Square with relish. It has completed a 15-apartment conversion of the former NatWest bank, purchased prior to auction for £365,000 and revalued after completion at £1.5m. Having held back a luxury duplex, total sales for the apartments reached £1.2m, sold to buy-to-let investors inside 24 hours in December 2014.

Goodman Wells then bought 15-16 Hamilton Square, which cost £370,000 and, pending approval, will be turned into 10 apartments, all already reserved off-plan. This phase is expected to generate a return of 53% on investment. There is also a deal in place on 37-38 Hamilton Square. Director Paul Burgess cites the Wirral Waters development as being a trigger. Burgess said: “The appetite for office-to-resi schemes has slowed down slightly because developers were worried that they would not finish schemes by the May 2016 deadline. But with the Conservatives in power, I suspect this deadline will now be extended and demand will heat back up. We aren’t waiting around.”

There’s been activity in Preston too: Tuston Developments converted Robert House, a 16,000 sq ft 1980s office into 20 rental apartments. Thirteen have been let since completion in February. Tuston’s Richard Hargreaves reckons more could be on the way. “There’s a lot of older office blocks in Preston, but the rental market isn’t massive – do landlords have the funds to do it?”

Liverpool isn’t short of old office buildings that could do with a change of some sort, but it hasn’t really happened yet. Goodman Wells is looking to shake things up. The locally based developer is working on a project of 35 apartments and commercial space at Princes Buildings on Dale Street; and is looking at two other schemes, one a conversion into 152 apartments and one a mix of new and converted, totalling 200 units.

For Guy Butler, the ex-Grosvenor man now running Glenbrook with business partner Ian Sherry, land values are at the core. “I’d suggest land prices are generally lower in most North West locations than in places where office-to-resi has become popular, making new build the most obvious way to proceed. The economics of converting offices are very, very challenging.”

According to the April 2015 Land Registry House Prices Index, average prices in Manchester and Liverpool are respectively £99,222 and £89,518, compared to £199,901 in Bristol. There’s still a major gap to the cities where office-to-residential schemes are prevalent. As a region, the North West’s average house price is £111,149, against a national average of £178,007, so where there is land available there’s less need to make the most of what’s there already.

With Moorfield as funder, Glenbrook is developing the former HMRC building at Liverpool’s Queens Dock, a private rental scheme named The Keel. This is something of a one-off, not just as a PRS pioneer in the region, but as a conversion of this size; 240 units in the 300,000 sq ft building, with gym, storage, outside areas, a terrace and a decent concierge area.

“Nobody’s done a scheme like this, designed for PRS from scratch in the North West,” says Butler. “And it’s something that wouldn’t be possible in a lot of office buildings. The shape and configuration has to be right.”

There are two big reasons why Manchester’s not seen much office-to-resi: firstly an exemption zone granted in May 2013; and secondly, the success over 20 years of the city’s developers in re-presenting 1960s office buildings. Paul Kelly, agency and development partner at Knight Frank, said: “There’s a lack of suitable opportunities. It’s difficult – the light requirements are greater, and the net-to-gross can make it hard to stack up. You’re not starting with a blank piece of paper.”

Manchester was one of 17 areas to have an exemption area granted (11 of these are in London), with the area from Spinningfields to Piccadilly, and the NOMA area covered. Also, the fact is that the office market is red-hot.

Bilfinger GVA offices director Chris Cheap said: “In other cities, buildings like Churchgate & Lee House or Bridgewater House – peripheral, potentially requiring significant capital expenditure, close to universities – would probably go down the conversion route. But both are very well let and have been traded at eye-watering levels in the last 18 months.

“Tertiary stock here has been refurbished in far greater levels than other cities. This is down to the veracity of the players in the city and the firm interest local governance takes in the built environment.”

In a rare exception, Equity First Holdings won consent for a scheme of nine apartments at 6 St Ann’s Square in December 2014. Upper floors on King Street are also being converted into apartments.

How the factors at play out – land values, supply and demand of offices and residential, the local authority approach – in each market is determining the volume of conversion.