Plans are in progress to find a viable future for HSBC tower in London’s Canary Wharf once the bank’s employees move out in 2026. These may include conversion into apartments and hotel space. The future of HSBC tower is just one example of decisions that need to be made in business districts across the world.
One third of institutionally owned real estate in large European cities is: “no longer fit for purpose and set to be repurposed in the next five years,” according to Valentina Shegoyan, founding partner, OPREIM. First, ecommerce reduced the need for bricks and mortar retail. Now, post pandemic, it’s the turn of offices.
Traditionally there were a limited number of real estate sectors to invest in: retail, office, logistics, residential, and anything else was marked as ‘other,’ explained Shegoyan. Today, the importance of that ‘other’ sector has grown exponentially, with multiple verticals — self-storage, purpose built student accommodation, data centres, serviced apartments, hotels — once considered niche but now attracting significant institutional investment.
Is it better to knock down an obsolete building and start again, or do a conversion? That’s a key question for HSBC tower’s owners. ESG prerogatives tend to favour conversions, but demolition might be the cheaper alternative.
Hubert Viriot, CEO, Yotel, has had to answer the same question several times, and the correct answer is not always obvious: “Depending on the macroeconomic environment we’re navigating, it may be cheaper to build new or convert. But right now, we see a lot of conversion opportunities.”
Having done several conversions, he has found that 1980s office buildings are a good fit for the Yotel product, and easier to convert than existing hotels, especially in the US.
His most difficult conversion was of an existing hotel in Washington DC: “We converted three rooms into four, so we increased the room count significantly and that proved to be one hell of a structural challenge. I think it probably would have been cheaper to build a new hotel, although maybe from an ESG point of view, what we’ve done is a better result. But the cost was over $150,000 per key.”
Minimal structural change and maximum profitability are key goals when doing conversions. Navneet Bali is the CEO and founder of LyvInn Hotels, a new brand that combines hostel-style shared accommodation with conventional hotel rooms in the same building.
He said: “It's not rigid. It's a very flexible concept. Like everything, it’s all about finance and feasibility. And what we are trying to do is to create the maximum EBITDA per square metre. That's the mantra. And with that you look at the square meterage and you see how efficient it can be without changing the structure of the building. For example we converted a brewery in Brussels into a hostel hotel; that’s okay because with some of the larger spaces you can in put five or six beds.”
Conversions are frequently mixed-use developments and/or taking place in the wider context of urban regeneration schemes. Shegoyan cited King’s Cross in London as a particularly successful large-scale project.
Obviously, not all schemes have the advantages of a prime central London location, but hotels and businesses within such developments tend to trade well thanks to the multiple demand drivers on their doorsteps. But is this extra value being accurately recognised by valuers?
Shegoyan said: “Mixed use is usually seen by surveyors as a riskier business, so they assign a higher cap rate. You could equally argue that the combination of tenants reduces risk because the use cases are synergistic. But for now, this is not being picked up by surveyors, banks, and lenders and that creates an opportunity for equity and smarter capital to play.”
Luc Boschmans, managing director, Tristan Capital Partners, noted that it was much more difficult to find exit buyers for assets within mixed use buildings, and suggested that real estate professionals have some catching up to do when it comes to fully understanding how the market is evolving.
“We have a lot of people who are really specialised in hotel investments or office investments. In mixed use? There’s not that many out there,” he said.
All above quotes are taken from the IHIF Berlin 2024 Panel: Reimagining Spaces: The Art and Impact of Real Estate Adaptive Reuse.