Residential prices per square metre look far higher than office values. Run the same residual for both uses and the margin is a few per cent.
An office-to-residential conversion pays when the residual value of the building as a conversion site exceeds its residual value as a refurbished office. On an illustrative 10,000 m² obsolete office, refurbishment supports a building value of 7,578,459 and conversion at 8,000 per m² of saleable flats supports 9,219,580, so conversion wins by 1,641,121, but it stops winning if flat prices are 4.9 per cent lower, at 7,612 per m², or if conversion works overrun by 6.7 per cent. The margin is thinner than the headline price gap suggests.
Worked in full in Office Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The usual pitch for conversion compares prices per square metre: flats sell at 8,000, the refurbished office is worth 4,833 per m² of lettable area, so residential is 66 per cent more valuable. That comparison leaves out three things that decide the answer: how much of the floor plate survives as saleable area, what the works cost, and how long the money is out. The only fair test is to run the same residual twice on the same building and compare what each use can pay for it.
| Input | Office refurbishment | Residential conversion |
|---|---|---|
| Gross internal area, m² | 10,000 | 10,000 |
| Net to gross efficiency | 82% | 70% |
| Lettable or saleable area, m² | 8,200 | 7,000 |
| Value driver | Rent 290/m², 6.00% yield | Price 8,000/m² |
| Works, per m² GIA | 1,700 | 2,600 |
| Professional fees, on works | 10% | 12% |
| Sale costs, on GDV | 2% | 3% |
| Programme including letting or sales, months | 30 | 36 |
| Developer's profit, on GDV | 15% | 18% |
Finance runs at 7.0 per cent on half the costs over the programme, and the building value carries illustrative acquisition costs of 6.8 per cent and interest for the whole programme. The residential profit is higher because the scheme carries sales risk on every unit; the office refurbishment carries a 12-month rent-free period and a 15 per cent letting fee instead.
Residual = GDV − sale costs − works, fees and incentives − finance − profit
Building value = residual ÷ [(1 + acquisition costs) × (1 + rate)years]
In Excel, with the residual in Res: =Res/((1+6.8%)*(1+7%)^(Months/12)). Run it once per use, with the use's own efficiency, cost, programme and profit, and compare the two results.
| Line | Office | Residential |
|---|---|---|
| Gross development value | 39,633,333 | 56,000,000 |
| Sale costs | −792,667 | −1,680,000 |
| Works | −17,000,000 | −26,000,000 |
| Professional fees | −1,700,000 | −3,120,000 |
| Rent-free, 12 months | −2,378,000 | |
| Letting fee, 15% of rent | −356,700 | |
| Finance on costs | −1,875,536 | −3,057,600 |
| Developer's profit | −5,945,000 | −10,080,000 |
| Residual | 9,585,430 | 12,062,400 |
| Building value after acquisition costs and finance | 7,578,459 | 9,219,580 |
The office GDV is the rent roll of 2,378,000 (8,200 m² at 290) capitalised at 6.00 per cent. The residential GDV is 7,000 m² at 8,000. Per square metre of the building as it stands, conversion supports 922 against 758 for refurbishment: a premium of 1,641,121, or 21.7 per cent.
Residential produces 41 per cent more GDV per square metre of gross area (5,600 against 3,963), but it spends 53 per cent more on works, pays more in fees and sale costs, holds the money six months longer and demands a higher profit. What survives of the GDV gap is 1,641,121 of building value, about 3 per cent of the residential GDV. Three break-evens show how little room that is:
| Case | Residential value | Conversion minus office |
|---|---|---|
| Flats at 7,000/m² | 4,992,869 | −2,585,590 |
| Flats at 7,500/m² | 7,106,225 | −472,235 |
| Base: 8,000/m², 70%, 2,600/m², 36 months | 9,219,580 | 1,641,121 |
| Flats at 8,500/m² | 11,332,936 | 3,754,476 |
| Efficiency 65% | 6,804,317 | −774,143 |
| Efficiency 75% | 11,634,843 | 4,056,384 |
| Works +10%, 2,860/m² | 6,760,169 | −818,290 |
| Programme 42 months | 8,536,361 | 957,902 |
Every 500 per m² on flat prices moves the residential value by about 2.1 million, because the price applies to the whole saleable area while costs stay put. Five points of efficiency are worth more than the base premium in either direction. The programme matters least of the four: six extra months cost 683,219 of value, which the base case can absorb.
The common mistake is to compare value per square metre across uses without converting both to the same denominator. A residential price per m² of saleable area and an office capital value per m² of lettable area are measured on different floor areas of the same building. Converting both to gross area closes the apparent 66 per cent gap to 41 per cent before a single cost is deducted. The second mistake is to test the office option as it stands, vacant and obsolete, rather than refurbished. The comparison that decides the strategy is the best version of each use, not the best version of one against the worst of the other.
Run the residual twice on the same building and compare building values, not prices per square metre. Here conversion wins by 1,641,121, and the decision turns on flat prices holding above 7,612 per m², works staying under 2,773 and efficiency staying above 66.6 per cent: three numbers to verify before committing. The four-way comparison, including the residual for a residential conversion, is in the free workbook for this case; how to calculate residual land value sets out the single-scheme method and the residual land valuation template runs it, and the capital-adjusted yield article shows why the office option must carry its re-letting cycle.
As a residual: gross development value of the flats, less sale costs, works, fees, finance and the developer's profit, then divided by acquisition costs and finance on the building. Illustratively, 7,000 m² of flats at 8,000 per m² give a residual of 12,062,400 and a building value of 9,219,580, which is then compared with the residual for a refurbished office on the same building.
Usually less than the office it replaces, because cores, corridors and the need for daylight to every habitable room consume floor area. In the illustration the office lets 82 per cent of its gross area and the flats sell 70 per cent; below 66.6 per cent the conversion is worth less than the refurbishment.
Because the decision is between the best version of each use. A vacant obsolete office is cheap, so almost any conversion beats it on paper. In the illustration a refurbished office supports 7,578,459 for the building, and that is the figure a conversion has to beat to be the right strategy.
Chapters 14, 17 and 18 of Office Real Estate compare refurbishing, repositioning, converting and selling; the free companion workbook runs the residual for a residential conversion. 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.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: real estate investing, finance and fund management → · All 453 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.