Housing Gives Offices
A New Lease on Life

Offices are getting a makeover. As the downturn in the office market across Europe continues, developers are turning obsolete or hard-to-let buildings into cash cows by converting them into sought-after apartments.

In three of Europe's hot markets, the U.K., Spain and Italy, office-to-residential conversions are giving old offices a new lease on life.

"As offices become obsolete, it presents an opportunity, irrespective of where the office is located in Europe, to see if there could be a better use for it," said Nick Jopling, managing director of residential services at CB Richard Ellis Hamptons International. "It's all about the 'cappuccino society' and re-embracing city living. As it becomes more desirable and acceptable to many people to live in the city center, office-to-residential conversions make sense," he said.

Such conversions could ripple out to other European markets. While they aren't taking place in markets like Sweden, where residential rents are regulated by the government, and in Germany, where the residential market is flat, other countries are likely to follow suit, Mr. Jopling said.

In London, office-to-residential conversions started in the mid-1990s, according to Pascal Levine, senior research associate at real-estate advisory firm King Sturge. "There was a real boom then, as government-planning policies encouraged the reuse of employment space," Mr. Levine said.

Today, London's local authorities are realizing there is a surplus of old office space that can be put to better use. In January, an amendment was made to the Central Government Planning Policy, making it easier to convert offices into apartments.

King Sturge estimates that in London's popular borough of Westminster, where Parliament is located, around 30% of all new supply takes the form of office-to-residential conversions. Many of the offices being renovated are buildings from the 1960s and 1970s.

The most prestigious conversion in the cards in the capital is that of Bowater House, near Harrods department store in Knightsbridge. U.K. design firm Candy & Candy Ltd. and its affiliated development company, CPC Ltd., which is based in Guernsey, plan to demolish the former office building and replace it with a luxurious apartment block for the "super rich," said Candy & Candy Chief Executive Philip Davis. The U.K. firm expects to learn by the end of the year whether planning permission has been granted. Renowned architect Lord Richard Rogers is designing the new space, which, if planning approval is obtained, should be completed by 2010.

While Mr. Davis declined to comment on the price of the apartments, he said that he expected the new building to house some of the most expensive penthouses in the world. "We expect to break some records with the price," he said.

Mr. Levine of King Sturge estimates the new apartments are likely to be valued at around £1,400 to £1,500 per square foot, or about €2,030 ($2,471) to €2,175, when completed.

Also in Knightsbridge, an office opposite Hyde Park that was formerly owned by financial-services company Prudential PLC is being converted into apartments. The building, 199 Knightsbridge, is being developed by Knightsbridge Developments Ltd., which has hired Australian real-estate and construction firm Multiplex Group as the contractor.

Mr. Levine estimates that as an office today, 199 Knightsbridge would be valued at around £25 to £30 per square foot as a rented property, which equates to a capital value of £400 to £500 per square foot. He expects the luxury apartments to sell for around £1,250 per square foot. In general, good-quality offices and apartments have a similar value in central London today, he notes.

The conversions aren't all smooth sailing. As a result of London Mayor Ken Livingstone's affordable-housing policy, most local authorities stipulate that 25% to 50% of housing in any new development has to be affordable; meaning inexpensive and made available for key workers such as teachers and nurses, or people receiving public assistance. So-called affordable-housing apartments are often half the price or less of the other apartments in the building, especially in central London, Mr. Levine said. As a result, the number of conversions could decrease, because the affordable-housing component will squeeze developers' margins, he added.

In Spain, office-to-residential conversions have been a trend only for the past couple of years, said Sir John Thompson, head of King Sturge in Madrid.

In particular, Catalan developers Restaura & Renta Corp. (formerly known as Corp. Renta Antigua), have a history of acquiring offices or empty buildings that can be converted to apartments. Restaura has made several acquisitions this year, totaling €115 million. It is renovating properties in Madrid, Barcelona, Zaragoza and Paris.

In April this year, German fund Deka Immobilien Investment sold the office building Paseo de la Castellana 35 in Madrid to Pontegadea, the real-estate investment company of Armancio Ortega, the man behind Spain's Inditex Group. Last year, Deka sold another office building to Pontegadea, Paseo de Gracia 16 in Barcelona, that will shortly be converted to luxury apartments. Pontegadea couldn't be reached for comment.

Upmarket conversions in Spain are selling for around €15,000 per square meter, or around €1,400 per square foot, according to Roger Cooke, managing director of advisory firm Cushman & Wakefield Healey & Baker in Madrid.

These conversions are typically targeting mid-to-top-end buyers, with apartment sizes typically ranging between 120 square meters and 170 square meters, said Sir John of King Sturge.

But buyers at the other end of the spectrum aren't being ignored. In Spain's big cities, loft developments are also becoming popular. In Spain, lofts are aimed at first-time buyers and are typically around 50 square meters to 70 square meters, says Sir John. In the U.K., a loft tends to encompass a sprawling apartment in a former warehouse and commands a high price.

This month, King Sturge advised on the sale of a warehouse in San Sebastian de los Reyes in northern Madrid to a Spanish developer that intends to turn it into loft space when the current tenant's lease expires in a couple of years. Terms of the deal remain confidential.

In Italy, the growth in office-to-residential conversions has been spearheaded by companies' moving from city centers to the outskirts in order to lower costs, said Paolo Bellacosa, head of investment at CB Richard Ellis SpA in Milan. Office rents in the center of Milan cost €450 to €500 per square meter a year, compared with around €150 in the periphery, he says.

Fund manager Doughty Hanson & Co. is converting an office complex in Milan to apartments. The project, Ortiantichi, or Ancient Gardens, comprises 10 office buildings on one site that are being converted into 110 luxury apartments. The first show apartments were due to open later this month. Doughty Hanson acquired the complex from Italian bank UniCredit SpA in 2003 for an undisclosed sum. According to Harry Farthing, head of Cushman & Wakefield Healey and Baker in Milan, the apartments are likely to sell for around €8,000 per square meter.