(Jan 27): Swathes of London offices have been sold to hotel developers as they look to take advantage of plunging property values and a bounce back in travel demand after the pandemic.
Since 2019 almost four million sq ft (370,000 sq m) of offices in the UK capital have been sold to investors who intend to convert them, enough to fill the city’s Gherkin skyscraper eight times over, according to data compiled by CoStar Group Inc. The bulk of that — 2.7 million sq ft — was sold in the last two years.
Soaring inflation and higher interest rates following the pandemic upended the city’s office market and caused values to fall. At the same time the return of travel demand after lockdowns helped support investor appetite for hotels. Daily changing room rates — in contrast to the fixed long-term leases typical of offices — also enable hotel owners to immediately pass on higher costs.
“It’s unquestionably been a trend which has taken hold over the last 24 months or so,” Felix Rabeneck, a director of central London investment at broker Savills plc said. “People have begun to think about alternative uses where values might be higher.”
Shifting office demand following the pandemic and increasingly stringent environmental regulations have rendered swathes of office space in fringe locations obsolete and struggling to find tenants. But office developers were cautious about committing the capital needed to modernise them against a backdrop of uncertain demand and soaring construction costs, as they waited for the long-term impact of increased home working to become clear.
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That’s paved the way for a string of hotel conversions on the edge of London’s historic financial district.
Dominus Real Estate and Cheyne Capital Management last month completed the acquisition of Ibex House in Aldgate, a district on the City of London’s eastern fringe. The venture is seeking planning consent to convert the art deco office building into a 382 room hotel.
To the south of the City, Whitbread plc bought Dorset House on Stamford Street, an office it plans to convert into a 400-room Premier Inn hotel.
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“The City of London has seen the largest amount of space being traded for conversions — over 1.3 million sq ft between 2019 and 2025,” said Cristina Balekjian, a director of UK hospitality analytics at CoStar Group.
The bout of conversions has prompted a pushback in some areas including Westminster, as lawmakers seek to protect offices that generates significant tax revenue through the UK’s business rates regime.
“They have a slightly stronger office market but they also have a more resolute planning view that they don’t want to lose office space to further hotel,” Rabeneck said.
Still, Surinder Arora’s eponymous property company is pursuing plans to convert an office in London’s Victoria district that it acquired from Land Securities plc. The Arora Group wants to turn the building, which was previously home to the UK’s Ministry of Justice, into either a hotel or short-term rental apartments, the billionaire said in an interview.
The erosion of supply and little new development is now helping to push office rents higher, with companies seeking high quality new space finding there are few options. That could spell the end of office to hotel conversions, as developers seeking the most profitable use for buildings expect higher office rents to boost valuations.
“We are probably going to see the pendulum swing back the other way,” Savills’ Rabeneck said. “We are seeing office values beginning to recover and therefore the viability of converting to hotels will become more marginal.”
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