London is not the only market where swathes of secondary office buildings are set for glamorous new leases of life.
Driven by a booming housing market, record-low interest rates, sluggish office rents and falling tenant demand, older office blocks in Australia are being snapped up and converted into an array of sky-high flats. Figures from JLL show that in 2014 more than 50,000m2 (540,000 sq ft) of space was taken out of Australian office markets – predominantly in Sydney and Melbourne – and this follows 47,000m2 taken out in conversions to flats in 2013.
Chinese state-owned developer Greenland Holdings is one example, buying the former Sydney water board site to create a 67-storey tower of 470 flats and a hotel. Greenland is just one of a number of developers seeing lucrative uses for older sites. Singapore-based Far East Organization Centre is another.
Much of the surging demand is coming from Australia’s Asian neighbours. Research last year by Credit Suisse suggested that almost one in five buyers of new homes in Sydney was either an ethnic Chinese resident in Australia or a Chinese-based investor. According to Australia’s Foreign Investment Review Board, more than 6,500 applications were approved worth A$10.8bn (£5.8bn) by overseas investors alone to develop residential property in the year to June 2014, with the Chinese leading the way.
Residential prices in Sydney have soared by 31% since 2011 (14.6% in the last year), while high unemployment levels have lessened office demand, alongside a commercial pipeline of around 800,000m2 in the next five years in the city. Colliers International says there is “phenomenal demand for sites with conversion potential”, adding that the number of conversion approvals currently granted in the city could bring 4,200 new homes over the next 10 years.
The potential removal of about 130,000m2 of Australian offices through residential conversion over the next three years will help prevent a ballooning office vacancy rate, experts say, as new space comes to market. Conversions can also help to meet urban housing demands. And for developers and investors, conversions can be heartily lucrative, with typical returns around 20%.
Nonetheless, too many office conversions can cause jitters. Once properties are turned into homes, it can prove trickier to turn them back. In New York, for example, a campaign to encourage office conversions is now being reigned in as demand drives up existing office rents. A study by the city’s Economic Development Corporation estimates that high-growth companies will need 17m sq ft of space in the period to 2025; in the same period more affordable class B and class C space is forecast to be reduced by 7.8m sq ft. And in London, some fear office conversions will involve evicting established tenants, damaging businesses and emerging companies.
For Australia, though, the appeal of conversions shows no sign of abating. In what one agent calls the “major trend” for its property market this year, secondary assets continue to be snapped up at top prices, despite having long-term leases and no development approval in place. Confident investors seem to be happy to play a long game for conversion.
Helen Roxburgh is EG‘s Asia-Pacific correspondent
