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Making offices into flats post-Covid a profitable model

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Developments would suit range of accommodation – short- and long-term lets, hotels, backpackers

The conversion of office buildings to residential apartments could be a lucrative venture post-Covid-19 and is one of a few options available to property owners facing rising levels of unused office space.

Such conversions will not only address the concerning issue of high office vacancy rates but also provide more housing in and near major urban hubs. 

Converting unused office buildings to flats in the country’s CBDs has been a common-sense trend for more than a decade, says Erwin Rode of Rode & Associates, adding that the Cape Town CBD was “saved just in time” by the Cape Town Partnership which created the Central City Improvement District. 

“With crime and grime under control, the CBD remained a sought-after office node. As a result, the conversion of old grade C buildings in Cape Town could be aimed at the upmarket segment. For instance, parents buying pads for their student children.”

Rode says Durban’s CBD also has had some conversion activity but these are aimed at the “affordable” market. “The reason is that the Durban CBD lost its allure as an upmarket node due to crime and grime, which resulted in the great decentralisation trek to the north.”

While there are pros and cons for both models, he says the upmarket residential segment is naturally more profitable for brownfield developers. “For this reason, the conversion trend in Durban and Johannesburg CBDs is slower than one would have hoped for.

Thus, there are still a few decades’ worth of old, unused office buildings for future brownfield developments. This will strengthen the work, stay and play trend in the CBDs so beloved with town planners. “The proviso is the South African middle-class must keep on growing, which for the foreseeable future seems unlikely.”

The conversion of private sector office complexes to rental accommodation post-Covid may become a “very attractive” income model for developers who will see profit in the conversion of office to residential, says Chad Shapiro, sales and marketing manager for Lew Geffen Sotheby’s International Realty Cape Town.

These developments are equally suited for resale; long-term let; hotels; short-term, low-end backpacker accommodation and even higher-end corporate short-term let accommodation. “A number of office complex owners have experimented with the shared office environment. Regus, Cape Town Office and Workshop 17 are good examples. This has not always proven to be successful but new types of workspace ideas seem to be developed all the time.”

He says the allure of mixed-use developments could also come into play as it is not yet known whether the office component will still be attractive to companies. Current office block owners, however, will lose as they probably paid premium prices to buy these large buildings which are now empty.

“Unless they are able to structure prices that will be attractive to new buyers, while not selling at a loss, they will sell at prices below their purchase price.” In the public sector, Shapiro ponders whether the government will take unused office space to create low-cost housing. If so, they will have to consider how to compensate the property owners. Furthermore, he questions whether the government can afford to create a low-cost housing environment without substantial budget being made available to not only make these building habitable, but also fill the loss of income gap generated by top-end commercial office buildings. This income generates municipal revenue in the form of rates, taxes and other benefits.

“I think, for these reasons, the private investor or property owner will be called on to assist as large office buildings in main cities are currently generating revenue for government as they are and will need to continue to do so.” Durban’s CBD area is seeing conversion of vacant office space into student accommodation, reports the Broll Property Group.

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