Conversions converted

Central Birmingham’s secondary office sector is reviving, as falling demand for expensive city-centre apartments makes office refurbishment a more viable proposition than residential conversions. Adrian Morrison reports

The centre of Birmingham is not famed for the ample supply of its offices, so it is hardly surprising that office agents lament when the already tight market is diminished further through conversion to other uses.

This has been the picture for the past couple of years in the city centre, as residential and hotel developers have outbid those intent on refurbishing offices. As a result, a number of large enquiries still sit on agents’ books, for new grade A stock is too expensive for certain service-orientated occupiers and older buildings are often unsuitable for modern office use.

However, in the past six months the secondary office sector has undergone a revival. Apartments built in formercity-centre offices tend to sell for £200,000 to £250,000, but the demand is now for cheaper homes and these cannot generate the same profits. Combined with a rise in secondary office rents, this means similar returns can be gained from either sector.

Events at 111 Edmund Street demonstrate this swing. Residential developer Linden Homes owned the property and had planning consent to build flats with a restaurant on the ground floor. But commercial developer Barwood has now bought the property and regained consent for offices.

Marcus Little, development executive at Barwood, had been searching for a reasonably sized building to refurbish but until recently found it impossible to compete with residential developers. He says: “The office market is rising and the residential market has been oversold. I do not believe that Birmingham can sustain the amount of flats being brought in.”

Similarly, the Kennedy Tower building on Snowhill Queensway was considered for residential use before developer Hilstone Corporation decided to opt for an office refurbishment.

Richard Adams, from the scheme’s agent Nattrass Giles, says: “We can see a massive increase in the supply of apartments available to rent, purchased by funds or investors looking to spread risk across a mixed property portfolio.

“With a large question mark over the extent of demand for residential rental accommodation at the levels required to produce an adequate return, the choice of office refurbishment becomes a far more attractive prospect.”

Agents say that refurbished office use can compete equally with residential in the central business district, on Broad Street up to Fiveways, and around Paradise Circus.

Companies likely to benefit most are those with medium-sized to large requirements for quality space in a central location.

Philippa Pickavance of King Sturge says: “It is the service-sector companies that have this kind of requirement. Financial services will benefit, companies like ourselves, and a lot of solicitors’ firms in the city.”

Local law firm Shakespears took the entire 4,150m² (44,656 sq ft) of Somerset House in Temple Street. Pickavance, whose firm was joint letting agent with GVA Grimley, says: “They wanted top-quality space but did not want to pay £25 per sq ft, so we did a deal on a refurbished building at £14 per sq ft.”

Several other law firms in the city are also looking for space. Wragge & Co is looking for up to 23,230m² (250,000 sq ft), Martineau Johnson has a 5,570m² (60,000 sq ft) requirement, and Lee Crowder wants 4,650m² (50,000 sq ft).

Some agents doubt the increase in available office space will be significant enough to satisfy demand. They say the vast majority of apartment developments in the centre are new-build and are not competing with potential office schemes at all.

David Tonks of DTZ believes the effects of conversions to non-office use have been blown out of proportion, because the original fears expressed a few years ago never came to fruition.

“There is very little secondary space that has been taken out of the market through conversions. It probably stands at about 1% of the total supply,” he says.

Tonks also describes the single case of a commercial developer buying out a residential one – at 111 Edmund Street – as a flawed example, because it was a new-build opportunity rather than a conversion.

Even those who are likely to benefit from an increase in refurbished office values concede that the problem has hardly reached epidemic levels. Many buildings are unsuitable for conversion due to layout or location.

Colliers CRE’s Ian Cornock says of the conversion of former offices: “It was of benefit to the city because it took out a lot of older stock and brought life back into the city.”

Nevertheless, those concerned about the threat from residential development must be reassured by recent events. Insignia Richard Ellis’s Julian Shellard does not necessarily agree that a trend is emerging, but says: “The ingredients may well be there to support a reversal of the residential trend in the central business district area.”

Where does this leave the residential market? Although the demise of housing in the city centre has been predicted in the short term, it could re-emerge before long.

The residential developer’s problem is finding sites where it can build high-density schemes to maximise the shrinking capital value of individual units. As late 1970s and 1980s buildings come to the end of their leases, there could be more conversions.

DTZ’s Tonks says: “The spectre of conversions is looming larger on more modern space. The most suitable buildings are 1970s and 1980s because they tend to have larger footprints and floorplates, are not listed, and will become vacant over the next few years.

“But they will only become vacant if their current occupiers can move into bigger and better space.”

Investment

The city’s investment agents predict that, thanks to speculative schemes andcity-centre redevelopment, a drop in institutional investment will be turned around before the end of the year.

The first two quarters of 2001 looked bleak, with only £102m worth of investment transactions completed by May. Almost £400m worth of property changed hands in the same period in 2000, according to Lambert Smith Hampton.

“We have had quite an extended summer, but I think that by October or November we will see some more institutional activity,” says Jones Lang LaSalle’s Jonathan Hillcox.

He adds: “Something giving the market more confidence is that there has not been substantial speculative development, so when corporations feel a bit more confident rental growth can take off quite quickly.”

A number of high net worth individuals and property companies have replaced the funds. They borrow at low repayment terms with the expectation of higher yields. But a number of schemes now starting on site are anticipated to be snapped up by investors, most likely institutions, which are beginning to become more active.

Richardson and Barberry’s 1 Colmore Square and Equitable Life’s 2 St Philips Place are likely candidates for someone’s investment portfolio.

“I have no worries that the investment market will seize those,” says King Sturge’s Christopher Monk.

The lack of grade A space in the central core has discouraged London operators from locating a regional arm in Birmingham or moving back-office operations there. But agents believe investors and businesses need to reassess their views on the second city.

The redevelopment of the city centre and the number of schemes coming forward in the next few years should, from an investor’s perspective, promote rental growth.

Likewise, in the present belt-tightening scenario, occupiers will find cheaper grade A accommodation than in the South East.

Unmet demand
Agents have large requirements on their books
Company	Sector	Requirement (m²)
Wragge & Co	Legal	18,580
Hammonds Suddards Edge	Legal	7,432
Trinity Mirror (Birmingham Post & Mail)	Newspaper publishing	6,503
Martineau Johnson	Legal	6,503
Lee Crowder	Legal	3,716
Gateley Wareing	Legal	3,716
Ernst & Young	Business services	3,716
ATS Euromaster	Administrative offices	2,787
Vertex Data Science	Call centre	2,787
Equifax	Business services	2,787
Source: Lambert Smith Hampton

Development Pipeline
Speculative schemes and city-centre redevelopments are set to shift the investment market out of its recent relative doldrums
Scheme	Size (m²)	Owner	Comments
Arena Central, Suffolk Street	41,805	Hampton Trust	First phase residential scheme to be followed by speculative office scheme
1 Colmore Square	18,580	Richardson/Barberry	Start date scheduled for October
Masshouse, Eastside	n/a	Birmingham city council	Expressions of interest invited for sites 3 and 7 by September
Paradise Circus	209,025	Birmingham city council	Demolition of the Central Library for mixed-use scheme. Completion unlikely before 2008
Cathedral Court, St Philip’s Place	5,893	Prudential	15-18 month construction period following prelet
Colmore Centre, Newhall Street	13,006	Royal Bank of Scotland	Redevelopment of landmark NatWest building, Edmund House and Lancaster House
Ludgate, Great Charles Street	7,432	AMEC	Mixed-use development, including hotel and coach station
Snow Hill	46,450	Railtrack	Planning application likely late 2001/ early 2002
Source: Lambert Smith Hampton

Offices: rental growth (% pa)

Rents have risen steadily since the early 1990s