Getting a London mixed-use development to stack up has never been easier – and, simultaneously, never been harder. It is a paradox that is all thanks to money.
With residential capital values now soaring up to and beyond £5,000 per sq ft, all other uses look slightly tarnished. That office rents are looking strong, and prime retail is impregnable, is beside the point. Yet residential comes with risks and high fit-out costs, and squeezing its supersize numbers into a successful financial model produces enormous strain – think England rugby captain Chris Robshaw in skinny jeans. Many appraisals have burst apart under the pressure.
Justin Gaze, joint head of residential development at Knight Frank, says partnerships can help ease the strain. But the commonly used tactic of returning the commercial space to the site’s vendor or freeholder can provide an easy off-the-shelf solution.
“In effect, the developer builds the residential space for themselves, builds the commercial space to shell and core for the freeholder, and the value of that space, in turn, depresses the land value. This is ideal if residential developers want to shy away from the commercial element,” he says.
Deals like this make the upfront capital costs a little more affordable – but at the price of losing revenue from commercial floorspace once it is built.
Spencer Leslie, financial director at Dukelease Properties, says this kind of deal underpins its £200m scheme at Cleveland Street, W1, which mixes 30,000 sq ft of office space with apartments on the upper floors. Yet at 61-67 Oxford Street, W1, Dukelease is blending 33,858 sq ft of retail (let to Zara), 13,563 sq ft of offices and six flats. There is no element retained separately for the freeholder.
“If you have the skills and resources to develop the lot yourself, that is the best thing to do,” says Leslie. “It is simple common sense: you have to build the ground floor space anyway, because you cannot sit upper floors full of apartments on thin air. If you then hand that commercial space back to the freeholder, you lose value. So if you can let and market and manage the office development yourself, then you should do it.”
A mirror-image variation on this theme is being pioneered by serviced office provider Workspace. Its aim is to offload the residential and keep the offices.
Workspace has just won planning permission for 96 flats and 19,000 sq ft of offices at Lombard House, Purley Way, Croydon. A block valued at just £5m will be replaced by something much more valuable – Workspace will not say how much – and deliver a new Croydon outpost at the same time.
Leslie is a fan of an alternative way to squeeze the maths of residential into mixed-use appraisals: the golden brick approach. “Normally, buyers of apartments would not be happy seeing their deposits released, mid-construction, to pay for the building works,” he says. “But if you deal with housing associations, they may agree to release funds upfront once you reach the golden brick – meaning two courses of bricks above the damp-proof course. We recently did a scheme like this in Hounslow and it released 100% of the funding very early on. So if you can develop this way, then you will. It is common sense.”
The maths of mixed-use depends on circumstances, says First Base commercial director Barry Jessup. Its 7m sq ft Silvertown scheme is divided into three areas – residential, office and brand space – and in the neighbourhood, land values for different uses are not as wildly distant as they can be in the West End.
“Residential does not cause regeneration, but it is a necessary support for the bars and the jobs, and that alters our view of the value equation,” says Jessup.
“The commercial elements provide income – but they also enhance the value of the scheme, have different risk profiles and different development timeframes, and the timing of cash flow from them is very important.”
Getting the maths right for a mixed development has never been simple. But who said mixed-use was ever easy?
Helical Bar: All in the detail
Helical Bar is best known for offices – but at Barts Square, EC1, it is dipping a toe into residential. “You have got to let the site speak for itself,” says development executive Nikki Gibbard. “Residential developments needs a lot more attention to detail, to the nitty gritty. You have to check everything.”
That means everything from door handles to bathroom taps to… what view you get sitting on the toilet.
“We work with consultants, we listen to them because they know about the market, but we keep execution in-house,” says Gibbard. “That’s because to succeed, a mixed-use scheme has to have everything joined up, and a core integrity. Core values have to run through it all.”
St Modwen: Assume nothing
St Modwen began work on the Wembley Central project in the very different world of 1999. What started as the £40m revamp of the 1960s shopping centre became a seriously mixed £90m development of 155,000 sq ft: car parking, shops, a hotel and 170,000 sq ft of flats. Killian Morris, senior development manager at St Modwen, has been nursing Wembley Central since day one. He says there are lessons for everyone.
“You need to be problem-led, not planning-led,” he says. “You need a bespoke response to that particular site. A mixed-use scheme requires a lot of scratching beneath the surface – it is about real problem solving.”
The scratching process involves some simple but often neglected tasks, says Morris: how about just watching the site to see who walks where, what they do, and why? How about talking to people? How about working out what people want rather than selecting from a menu of the highest-value uses?
He says: “Taking off-the-shelf plans, and not taking responsibility yourself, are common mistakes. That is where developers come unstuck.”
Lend Lease: Listen
Listening is an important part of the process and Kevin Chapman, UK head of offices at Lend Lease, says the firm learned this at its £1.5bn Elephant & Castle development.
“It is too easy to go and talk to all the usual agencies and the council, when you should be getting a handle on what the community wants,” he says.
“We discovered the importance of the large number of mature trees on the Heygate Estate, SE1. People really cared about that. Lend Lease didn’t realise how important the trees were at the beginning. Now those trees are integral to the development. All the apartments in the 235-unit Trafalgar Place phase have a view of a tree, and that is a powerful reference point for the rest of the development.
“So it is really important to understand local preferences before you get into planning.”
Lunson Mitchenall: Take risks
Apartments are a lot more valuable than seminar rooms, yet Peter Courtney, head of the London team at Lunson Mitchenall, says Argent got it brilliantly right when it invited Central Saint Martins art school to its 67-acre Kings Cross development.
“It is true of all the big schemes,” he says. “Good developers throw out the rule book. Obviously they need a bit of luck – but it is not random, it is not just someone saying ‘let’s give it a go’. It is taking a calculated risk and at an early stage, which can pay dividends over more obviously bankable ideas, ideas that would not actually have provided the point of difference that makes a scheme work.”
Courtney says this approach is bearing fruit at Canary Wharf’s new 110,000 sq ft Crossrail station. “It is a beautiful building, which helps, but we also looked for everything we did not have in Canary Wharf and said, we will have some of that. So it is funky, cooler, less corporate. If we had bunged together a gym, some restaurants and so on, we could probably have got more rent, but we’re curating here for the long term. Even before a single Crossrail train arrives, it is trading well, which shows we got it right.”
