With some reports suggesting house prices in central London have cooled dramatically and increasing demand for commercial space in the Capital will the market now cool the mania for office to residential conversions?
When the Government's reforms to planning law came into force in 2012, the new rules told developers councils "should normally approve planning applications for change to residential use and any associated development from commercial buildings." Westminster City Council won an exception from this for Central Activities Zone, recognising the unique nature of our City - but that has not stopped the surge of developments seeking, and winning, consent. Some 5,000,000 square feet of commercial space in Westminster has been converted or is consented for conversion and many more schemes are in the pipeline.
Westminster's City Plan, produced when commercial values were significantly higher than residential, sought to address the then market pressure to convert from residential to office by establishing a presumption in favour of commercial to residential. That presumption is now being revised so that developers will have to prove special circumstances to undertake commercial to residential conversion and provide replacement commercial space. Although this is a welcome move has the market itself already begun to correct this?
There is no doubt about the market's appetite and the need for more homes across London, but sacrificing valuable and desirable commercial space in the engine room of the London economy is no longer the right solution, particularly if these homes remain unlived -in and are merely safe havens for investors to park their money, rather than homes for London's workforce. Converting prime-commercial into residential accommodation is not how we will maintain and enhance vibrant communities in the centre of our city nor will empty flats support the local shops, restaurants and services which make the very glue that holds such communities together. It is ironic that these very factors which make London such an attractive place in which to live should be threatened by a policy designed to build more homes.
So as the London Land Commission seeks to identify brown field sites for 400,000 new homes in London they should be mindful of the need to preserve commercial space for firms to expand. Failure to do so could leave thousands of businesses literally squeezed out of the Capital and with them the jobs relied up to by the thousands of new tenants for those homes. Particularly from amongst the creative industries, small start-up businesses, professional firms and other SMEs which have thrived in the properties now being converted and permanently lost to commercial use.
We have already seen the market shift as tax changes on residential property have kicked in, including (ATED) on properties held within corporate envelopes and higher rates of SDLT, the froth at the very top of the London residential market has faded away. Talk to Estate Agents in Westminster and they will tell you properties are sitting on the books for longer than they have for some time, bucking a national trend which has seen the number of homes for sale fall to their lowest level in nearly 40 years.
When the assumption of developers is that even poorly equipped and located properties will necessarily achieve £2,500 per square foot in the West End just because of their post code the market has clearly overshot. The market which has now caught them out and many units remain unsold or unlet as the investors come to terms with real return (often sub 2%) that they can obtain from their investment. These properties will now come back to the market at more realistic sale or rent prices and help to lessen the shortage of homes which they were planned to address.
At the same time, news this week of the continuing success of London's £18bn tech industry and the inflow of investment to the sector, which is now rivalling the City as the powerhouse behind the UK's economy, shows the growing desire for international firms to locate in London, and they are increasingly looking for office space outside the traditional silicon roundabout hotspot. Not only does this inward investment help to rebalance the UK economy away from financial services to a broader base, it also signals the need to ensure our city can continue to grow. The opening of Crossrail in 2018 will add significantly to this demand as Central London become easier to access. There is no question that Greater London needs more homes of all tenures.
Office rents have now reached record levels in central London and the ripple effect is being felt far beyond the Central core where rents of £120 per square foot on the best space has seen the small office suites in Marylebone, Fitzrovia and Bloomsbury head up to £75 per square foot and beyond.
As the market changes again and with booming demand for commercial premises across the city seeing West End vacancy levels fall to just 2.3% and booming rents, developers are now looking again at their numbers and schemes like Derwent Valley's Savile Row and others across Fitzrovia, Soho and St James which have consent for conversation but increasingly look unlikely to be developed as residential.
As a very famous Lady once put it "You can't buck the market".