A Thinking real estate publication
Last year, the Old War Office (OWO) on Whitehall, a Grade II listed building designed for important, often secretive, Government and military work, opened its doors to the public for the first time, having been converted to a luxury Raffles Hotel. The project was an extreme example of the conversion of a building whose location and historic and aesthetic appeal made it a perfect candidate for a hotel but, given that it was never designed for that purpose, presented a huge challenge for the developers.
The design and construction team at OWO, including EPR Architects, Elliott Wood, Keltbray, Toureen and Ardmore, undertook an ambitious top-down conversion, adding four additional below-ground levels and a 26-metre supporting truss across the courtyard. Their mantra was, as far as possible, to re-use and adapt. The result is stunning.
Office-to-hotel conversion isn’t anything new, but an increase in flexible working, coupled with an increased demand for hotel beds, creates an opportunity for those with underused office assets; often, like OWO, in prime locations with good access to existing transport and infrastructure. Whilst the market has already seen an increased demand for office space being converted to residential use (driven by the housing crisis and smoothed by permitted development rights), fewer owners and developers have explored the opportunities for hotel and serviced apartment conversions, even though a lot of the same principles apply.
Converting offices appeals to all sorts of hotel brands, not just luxury operators like Raffles. Given that hotel assets come to the market fairly infrequently, building new or converting present a good opportunity for brands to add to their portfolio.
As mentioned, a city centre office building is likely to well positioned for public transport and with good utility infrastructure in place. Added to this advantage, many local authorities are looking at ways to boost footfall in areas that have seen a dip because more people are working from home and shopping online. Attracting more tourists to a city centre can help re-build activity.
Depending on the hotel, it can also bring amenities such as restaurants, cafés, meeting spaces and leisure facilities, which may be attractive to residents and workers. Such facilities might be within the hotel footprint, as part of the hotel's food, beverage and leisure offering, or simply the captive audience generated by the guests may prompt local businesses to cater for the tourist market. With all of this comes added social value; all the more important in this era where businesses are keen to demonstrate their ESG credentials and where the "S" is often the most difficult of the criteria to evidence.
Whilst those undertaking a change of use from office to living accommodation (temporary or permanent) will encounter many of the same issues as any other construction project, there are some key considerations before embarking on such a conversion.
Whether opting for a landlord/operator leasing deal or sale subject to planning, some initial steps will help smooth the conversion process.
Is the office building suitable?
It’s important to ensure the building can be acquired on a genuinely vacant basis or that it is cost-effective to get vacant possession. Whilst this includes the likes of office tenants, it is also equally important to be mindful of telecoms providers with rooftop leases for their equipment.
Sometimes conversion work involves ambitious development proposals such as building up or out from the existing building, says Pete Bond, Senior Associate at Trowers & Hamlins.
“Third-party access on neighbouring sites might be required to erect scaffolding or for crane oversailing,” says Bond.
“And if you haven't got the principles of those third-party access rights in place, then it can be quite risky to push a button on a multimillion-pound deal.”
Rights to light, if you are upwardly or outwardly extending the existing building, may also need to be negotiated, and compensation can involve significant sums. This is particularly relevant within densely populated or high-rise areas.
Navigating planning
Work to convert an office to a hotel might be mostly internal, with perhaps some changes to the façade. However, unlike conversions to residential use, a change of use from an office to a hotel isn’t covered by permitted development rights, so planning permission is required.
Local authorities may be actively looking at ways to bring empty buildings back into use and, therefore, amenable to change of use, but planning permission isn’t a given.
Doing due diligence, including a review of the planning policy framework for the area where the conversion will take place, is critical.
Rory Stracey, a Planning Partner at Trowers & Hamlins, says: “Some local authorities may have protective policies in place for office space. Or they may give primacy to residential if that is a viable option for an alternative use. So it is important to see what policies would apply to the loss of office space and assess the potential for alternative uses. This planning due diligence should be done at the outset.”
Due diligence should also include checking the Community Infrastructure Levy (CIL) schedule, which is set locally and varies with use.
“A local authority that wants to encourage certain land use might decide to have a lower or zero CIL rate for that use,” says Stracey.
Similar scrutiny is necessary with Section 106 obligations and planning conditions: it is important to consider what kinds of things a local planning authority might seek in order to grant a change of use consent.
OWO and the former Port Authority Building in the City of London are just two examples of high-profile listed buildings that underwent office-to-hotel conversion. The latter, at Ten Trinity Square, is now a successful Four Seasons hotel with 100 bedrooms and 38 private apartments having been completed back in 2017. However, the fact that planning permission was originally granted in 2009 shows the journey that developers need to undertake to secure and deliver the right scheme.
The character and history of these often-landmark buildings give added appeal as a hotel, but their listed status will naturally make planning more complex, and early engagement with the heritage and design team will be crucial with these kinds of assets.
Construction considerations
Converting a listed building will also require contractors with the skills and experience of working in that environment. If the building hasn’t been touched for a while, walls and shell may need to be removed to check the underlying structure is suitable.
Regardless of the age of the building, there are cost considerations, particularly given the inflationary pressures and its impact on material prices in the last two years. And each hotel will have brand standards to follow.
David Cordery, a Partner in the Projects and Construction team at Trowers & Hamlins, says: “As in almost all sectors in the 21st-century, brand standards for the large hotel operators now embed a business' corporate environment and sustainability goals, alongside making the most of the guest experience. In the hotel sector in particular, that can be a tricky path to navigate. That journey starts when the hotel is converted.”
Alongside the usual challenges of urban development, such as site access and construction traffic, passing the hotel's ESG goals through to its construction supply chain represents a test of the supply and procurement chain as much as to the ultimate client.
The key lesson here is that when considering conversions or adaptive re-use, it's important to consider a multitude of factors beyond the basics of planning, funding and efficient design", says Theo Constantinides, Partner at Gardiner & Theobald and author of an enlightening article setting out the practical challenges involved in a typical office to hotel conversion, which can be found here.
And as for the new Building Safety Act, arguably the most impactful piece of legislation to hit the sector in a generation; hotel developments do not necessarily escape its ramifications. David Cordery: “Although the full gateway provisions of The Building Safety Act will not apply to buildings whose sole use is a hotel, hotels with two or more residential dwellings, such as apartments, within the same building structure will fall under the remit of the Act. And competency provisions and changes to the Building Regulations encapsulated in the Act must also be taken into consideration, as with any construction project.”
Given the increasing performance of hotel assets in the luxury class, there is huge potential value for those with the right assets and the willingness to undertake a conversion project.
