A plug-and-play floor lets faster and at a higher rent, then lets again sooner: price it as a strategy over several letting cycles, not as a capex with an uplift.
A Cat A+ fit-out pays only if its rent premium survives the shorter leases it attracts. On an illustrative 1,000 m² floor, spending 700 per m² to let it fitted at a 20 per cent premium, with a three-month void instead of nine, looks like a 12.9 per cent yield on the capital; over ten years at 7 per cent it is worth 20.31 per m² less than letting it as Cat A, because the tenants sign five years instead of ten and the floor must be re-let and refreshed. The break-even premium is 20.7 per cent.
Worked in full in Office Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A Cat A floor is finished to a shell standard: raised floors, ceilings, lighting, air conditioning, toilets. The tenant designs and pays for its own Cat B fit-out, which is why it signs a long lease and asks for a long rent-free. A Cat A+ floor, often called plug-and-play, arrives with meeting rooms, kitchen, furniture and IT backbone already installed. The landlord pays for those, and the tenant can move in within weeks.
The calculation compares the landlord's two letting strategies on the same floor, month by month, for ten years:
NPV of a strategy = − up-front capex + Σ (rent − void costs − letting fees − refresh − extra opex) / (1 + r)t
Excel, monthly: =-Capex+NPV((1+7%)^(1/12)-1,MonthlyNet)
| Item | Cat A | Cat A+ |
|---|---|---|
| Rent a year | 450 | 540 |
| Void before each letting, months | 9 | 3 |
| Rent-free, months | 12 | 3 |
| Lease term, months | 120 | 60 |
| Letting fees, share of first-year rent | 15% | 10% |
| Landlord's fit-out at the start | 0 | 700 |
| Refresh at each re-letting | 0 | 200 |
| Extra running cost a year (furniture, IT, management) | 0 | 25 |
Service charge and rates on empty space cost the landlord 230 per m² a year, 19,167 a month on this floor. The Cat A+ lease is shorter because tenants who did not pay for a fit-out have no reason to commit for ten years: that is the whole trade-off.
Cat A. Nine months empty at 19,167 a month, a 67,500 letting fee, twelve months free, then 99 months of rent at 450 a year to the horizon. Undiscounted the floor earns 3,472,500; at 7 per cent its NPV is 2,288,680, or 2,288.68 per m².
Cat A+. 700,000 of fit-out on day one, three months empty, a 54,000 fee, three months free, rent at 540 until the first lease ends in month 63. Then three more months empty, a 200,000 refresh, another 54,000 fee and three more months free, then rent again. Over ten years it collects 108 months of rent against 99, but pays 25,000 a year to run the fittings. Undiscounted it earns 3,499,500; its NPV is 2,268,366, or 2,268.37 per m².
| Lettings | Months of rent | Undiscounted | NPV per m² | |
|---|---|---|---|---|
| Cat A | 1 | 99 | 3,472,500 | 2,288.68 |
| Cat A+ | 2 | 108 | 3,499,500 | 2,268.37 |
| Cat A+ less Cat A | 9 | -20.31 |
The extra 90 per m² of rent a year, 90,000 on the floor, is a 12.9 per cent return on 700 of capex if you stop there. It is not a return on the strategy. The fit-out is bought up front, the refresh and the second letting fee come back at year five, and the faster first letting adds only nine months of rent over the ten years, because the second letting gives six of them back in void and rent-free. Over ten years the two are worth almost exactly the same, Cat A+ slightly less.
| Rent premium | Cat A+ rent | Void 3 months | Void 6 months | Void 9 months |
|---|---|---|---|---|
| 10% | 495.0 | -301 | -575 | -841 |
| 15% | 517.5 | -161 | -444 | -718 |
| 20% | 540.0 | -20 | -312 | -595 |
| 25% | 562.5 | 120 | -180 | -472 |
Cat A+ pays when two things are true together: a premium of more than 20.7 per cent, 543.25 against 450, and a void as short as the marketing promised. A six-month void at each letting wipes out a 25 per cent premium. And if the tenants sign three-year rather than five-year leases, the floor is let three times in ten years and the strategy loses 536 per m² against Cat A.
The re-letting cycle of fit-out, void, rent-free and fees that decides this answer is set out line by line in the free workbook for this case, and its effect on the yield in how to compute a capital-adjusted yield on an office.
Cat A is a finished shell, with floors, ceilings, lighting and air conditioning, and the tenant installs its own fit-out. Cat A+ adds meeting rooms, kitchen, furniture and IT so the tenant can move straight in. In the illustrative case the landlord spends 700 per m² for Cat A+, lets at 540 instead of 450 per m², but on five-year rather than ten-year leases.
Enough to cover the fit-out, the refresh at each re-letting and the extra running cost over the shorter leases it attracts. On the worked 1,000 m² floor, with three-month voids and five-year leases, the break-even rent is 543.25 per m² against 450 for Cat A, a premium of 20.7 per cent. A six-month void at each letting turns even a 25 per cent premium negative.
Because it compares the extra rent with the capex and ignores the lease length that comes with fitted space. 90 per m² of extra rent on 700 of capex is 12.9 per cent, yet over ten years the Cat A+ strategy is worth 20.31 per m² less than Cat A, once the second letting, the 200 per m² refresh and the running costs are counted.
This article is one calculation from Office Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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