Examining the growing trend of office-to-multifamily conversion

Associate Director at Acuity Knowledge Partners discusses the advantages and challenges associated with office-to-multifamily conversion.

Acuity Knowledge Partners discusses the advantages and challenges associated with office-to-multifamily conversion | BTR News

Office-to-multifamily conversion is not a new concept. The UK real estate market witnessed a substantial upswing in the trend following the implementation of the Permitted Development Rights (PDR) policy in 2013. This policy was originally introduced as a temporary solution to address the shortage of housing, making it easier for developers to transform underutilised office spaces into much-needed multifamily properties.

By Rajeev Hota, Associate Director, Acuity Knowledge Partners

The government changed rules for office-to-multifamily conversion in 2021, tightening standards for lighting requirements and minimum unit sizes. Despite the constraints, the new rights present property developers with opportunities to expand their portfolios and contribute to the regeneration of abandoned and underutilised sites. By eliminating the requirement for full planning permission, developers can allocate less time to administrative tasks, enabling them to expedite the completion of new projects efficiently.

The UK is experiencing significant demand for housing, particularly in urban areas. Such demand is likely to continue or even increase in the long run. Converting office spaces into multifamily properties provides an opportunity to capitalise on this demand.

Office-to-multifamily conversion has the following advantages:

Opportunity for higher returns: Office-to-multifamily conversion could offer higher sales value and rental income than from their original commercial use. Amid strong demand for residential units in prime locations, investors could achieve increased returns. JLL expects UK rents to grow 4% in 2023, while annual rentals in the country grew by 9.9% in April 2023, according to the Homelet Rental Index. Average rent stands at £1,199, a 1.3% increase from March 2023. In London, rental rates saw an annual growth of 11%.

Portfolio diversification: Diversification is a key strategy in any investment portfolio. Investing in office-to-multifamily conversion allows investors to diversify their real estate portfolios and offers the advantage of a broader asset mix. It also enables investors to navigate the changing market conditions and capitalise on the consistent demand in the residential market.

Sustainable investment: Converting existing office buildings to residences promotes sustainability and adaptive reuse. Investors can contribute to the revitalisation of urban areas, effectively reducing the need for new construction and minimising the environmental impact associated with building from scratch.

Converting office spaces into multifamily properties also comes with the following challenges:

Regulations and planning: Converting office spaces to multifamily units involves navigating through complex planning and regulatory processes. Investing the time and resources required for obtaining the necessary approvals can be a significant challenge for investors. Local authorities may have specific requirements, such as obtaining change-of-use permissions, complying with building codes or addressing environmental concerns. Investors face additional regulatory challenges if the office building is classified as a listed building or located in a conservation area. This could add complexity to the conversion process and potentially increase project costs.

Structural limitations: Converting an office building into residential units often requires modifications to the existing structure. Adapting the existing infrastructure to accommodate the needs of multifamily units requires careful consideration. Structural limitations, such as the need to install additional windows, adjust floor height or improve soundproofing, could present technical challenges, and increase project costs.

Financing and initial investment: While converting existing office buildings can be cost-effective compared to new construction, the initial investment required for the conversion itself could still be substantial. Investors need to secure financing and carefully evaluate the financial feasibility of the project, considering acquisition costs, renovation expenses and potential return on investment.

As demand for multifamily housing continues to grow, office-to-multifamily conversion is set to play a vital role in shaping the future of the UK real estate market. It provides attractive investment opportunities, but investors need to carefully navigate the associated advantages and challenges, helping them make informed decisions and maximising potential returns.