Across Birmingham, it seems office chairs are being replaced by comfy beds. The conversion of a prime office development site opposite Birmingham Cathedral into a budget hotel is something few would have envisaged during the height of the property boom, when commercial demand was soaring and prime sites in the city were attracting huge values.
Today, in the aftermath of the downturn, hotel conversions, rather than office redevelopments, are becoming an increasingly attractive option for landlords. Demand from hotel operators remains strong and a soon-to-expire tax incentive scheme has proven to be a useful tool in facilitating deals in what remains a difficult market.
This means that the number of office-to-hotel conversions in Birmingham looks certain to grow, with developers and hotel operators already deep in conversation on a number of sites around the city.
Opus Land is the developer behind the scheme at 3-6 Waterloo Street, close to Birmingham Cathedral, which has been trading as a Premier Inn since last year. The company acquired the 1960s building with a view to carrying out a conversion into 90,000 sq ft of grade A offices but aborted the idea when the downturn took hold.
Opus managing director Richard Smith says: “We realised it would be some years before we would be able to get funding and see the demand return for an office scheme of that size, so we had to think a bit laterally and quickly about what to do.”
Change of use
Having realised that a more straightforward office refurbishment would be unlikely to attract occupiers or provide satisfactory rental returns, the idea of a hotel conversion took hold. An application was made for change-of-use and a deal with Premier Inn’s owner, Whitbread, was signed.
“We didn’t make any money on it – there’s no point pretending we did. But it saved the day, so to speak,” says Smith.
There are a number of reasons why this deal, and others like it, work for both hotel operators and developers. Most obviously, the architecture of 1960s and 1970s buildings, which generally fails to enthuse office occupiers, lends itself perfectly to hotels.
“Generally speaking, offices are good to convert into hotels because the width of their floorplates is perfect for putting a central corridor down the middle and bedrooms off either side,” says Simon Crosby, director at architect Archial, which was involved in the recent conversion of NEC House near Birmingham Airport into a 166-bedroom Ramada Encore hotel.
“All the other accommodation you need, such as central circulation and toilet facilities, are in place, so the structure is already intact,” he adds.
This means that the typical timescale for a conversion is as little as 12 months for a 100-bedroom hotel, compared to 18 months for a new-build.
As well as the interior layout, the location of city centre office buildings tends to enthuse hotel operators. Market conditions mean that the timing is now good to snap up sites.
John Bates, head of acquisitions at Whitbread Hotels & Restaurants, says: “The current commercial property market has driven us towards these opportunities. Waterloo Street is prime central business district – it’s a once-in-a-generation chance to lock down a prime site for 25 years, which is great for our customers.”
It is also good news for landlords who are keen to shift property in a difficult market. Budget operators Premier Inn and Travelodge are particularly in demand because of their covenant strength and willingness to sign 25-year leases direct with the landlord, which makes schemes easier to fund. This contrasts with other hotel operators, which tend to sign management agreements.
On the downside for landlords, the two largest budget operators tend to work with strict profit formulas, based on factors such as achievable tariffs, occupancy levels and projected shareholder returns. This can limit the amount that they are prepared to negotiate and can result in tough bargaining sessions.
Business Premises Renovation Allowance
Another reason why conversions have become popular in central Birmingham is the Business Premises Renovation Allowance, a tax incentive scheme introduced in April 2007 that is designed to encourage the refurbishment of existing commercial buildings in defined areas that the government classes as disadvantaged. Thanks to an administrative anomaly related to this historical citing of “assisted areas”, much of Birmingham’s central core falls into this category, providing a helpful tax break that has allowed deals to take place.
“It’s doing what it is supposed to do, and that is bringing redundant buildings back into occupation,” says Scott Rutherford, head of Cushman & Wakefield in Birmingham, who is currently advising clients on the availability of sites suitable for office-to-hotel conversions in the city.
“Maybe two years from now they would have remained as offices but, at the moment, the demand is for hotels. It’s the market operating,” he adds.
BPRA expires in April 2012, meaning that there will be a rush to complete deals during the next 12 months. The most frenzied activity is likely to occur towards the end of this year, when analysts expect a number of deals to be sewn up.
Among them could be the recently vacated HSBC building on New Street, which is being marketed by local retail specialist BWD. Bates confirms that Whitbread has an interest in this site for a Premier Inn and has already drawn up a scheme layout for a hotel that is slightly smaller than that on Waterloo Street.
Another likely location for a hotel is Ballymore’s 2 Cornwall Street. Development director Richard Probert says that Ballymore has spoken to a number of interested parties about the former KPMG office building, which it acquired in 2006, but it is appraising hotel options against the prospect of retaining the building as offices.
“We have to run the numbers but we know hotels are interested,” he says.
One site where a conversion has been confirmed is Cumberland House on Broad Street, which will be transformed into a 285-bedroom Hampton by Hilton hotel, operated by Sanguine Hospitality, following a £30m investment.
New-build schemes
While conversions are clearly popular, some developers are committed to new-build hotels. Developer Realis, for example, has signed Travelodge for a £7m, 88-bedroom hotel on the former Marks & Spencer car park site on Carrs Lane.
Outside Birmingham, Whitbread is working with developer MCD on the conversion of the former City College building at Earlsdon Place in Coventry into a 100-bedroom Premier Inn and has requirements for towns including Dudley, Kidderminster, Lichfield and Redditch.
Additionally, Holiday Inn, working with developer Tavern Investments, recently announced plans for the conversion of the Burgess House office block on Coventry Road in Yardley into an 83-bedroom hotel, which is due to open in July.
Bearing in mind the level of activity, could the secondary office market be in danger of being swamped by all these hotel conversions? Mark Swallow, head of Knight Frank, believes not.
“In the main, these are old office buildings that weren’t going to work as offices. Some of them are out on a limb, perhaps too much in the retail pitch, and they won’t convert to modern office use very easily,” he says.
“In some ways, it’s actually helping the office market because it’s getting rid of older kit. Cleaning up these buildings and bringing them back to life is helpful for the market in general.”
Office-to-hotel conversions in central Birmingham
HSBC building, New Street
Whitbread has confirmed that it is looking at this building for conversion to a Premier Inn with up to 150 bedrooms.
3-6 Waterloo Street
The block was converted to a 152-bedroom Premier Inn last year. Developer Opus Land had originally bought the building with a view to an office redevelopment.
2 Cornwall Street
Landlord Ballymore is in talks with a number of parties about the potential conversion of the former KPMG office building into a hotel. No decision has been made.
Cumberland House, Broad Street
Sanguine Hospitality will operate the building as a 285-bedroom Hampton by Hilton hotel, following a £30m investment. Due to open in 2012.
