Mon. May 23rd, 2022

London’s property developers are getting ready to turn down cheap old office blocks whose current owners have a choice between investing heavily in environmental upgrades, selling at a discount or running the risk of their buildings becoming stranded assets.

Last month, the FTSE 250-listed office company Workspace paid £ 45 million for The Busworks, a 19th-century bus factory converted into a business center.

The seller owned the building for four decades but could not swallow the £ 15m- £ 20m cost needed to bring it up to the standards required for a modern office, according to Workspace CEO Graham Clemett .

Faced with more demanding tenant claims, stricter emission standards and the pandemic, is expected to sell a growing number of small-scale office owners, creating an opportunity for well-capitalized investors to pick up dilapidated buildings at a discount.

“Debtors do not lend against ‘brown’ buildings unless there is a viable plan to upgrade them to green status. . . there is a lot of money to be made by people who can buy the stranded asset and upgrade it, ”says Mike Prew, an analyst at Jefferies.

Specialist developers including Workspace, Great Portland Estates – recently renamed GPE – Derwent London and Helical have all indicated they will be targeting old, tired buildings for refurbishment.

Regulations on the energy performance of buildings will be tightened from 2023 and currently only one in 10 London offices will meet the standards that will be imposed from 2030, according to Savills. Pressure is also building on developers to refurbish existing inventory rather than build new one, which is a much more carbon-intensive process.

The Swiss bank UBS estimates that it will cost between £ 150- £ 200 per square foot to refurbish a central London office by the highest standards, equivalent to about two years’ rent on the best stock.

“In the past, one might have made a coat of paint and a new carpet. In our opinion, you should now do slightly more than that. In buildings that are 15-20 years old, the plant will have to be replaced, the internal building will be quite worn. We are talking about a major overhaul to get it up to standard, ”said Gerald Kaye, CEO of London-focused developer Helical.

The pandemic has contributed to the burden on the owners of older buildings, many of whom are small landlords, family offices or individual investors. London’s offices are currently only about 20 per cent full and older buildings have seen vacancy rates rise the fastest and rents fall the furthest due to coronavirus.

Falling staffing and rising costs have put much of London’s office market at risk stuck in hands of owners who do not have the funds to upgrade them.

Those buildings will have to be demolished, converted into new uses such as housing or refurbished, said Isabelle Scemama, global head of Axa IM Alts, one of Europe’s largest real estate investors. “In the end, we will have no option but to switch those assets into something more efficient. The price will have to adjust for those stranded assets, ”she said.

“Regulations will eventually force everyone to transition. If your buildings do not reach a certain level of [energy performance] you will have no income and no liquidity. ”

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