The Three 'Res' and Barriers to Repurposing
The Three ‘Res’ - To Retrofit, to Refurbish or to Repurpose?
- Retrofitting, refurbishing and repurposing are very distinct disciplines, requiring varying levels of intervention and with very different risk vs reward curves.
- Values ultimately determine viability, with benefits being netted off against associated costs. Each project is unique and, by definition, there is no ‘one-size-fits-all’ solution.
- Knight Frank Research shows that offices undergoing retrofit/refurb from EPC C and below to EPC B and above have seen, on average, the gap of rents relative to prime close by 18 percentage points. Conversely, the average cost of inaction is -27% relative to prime.
- The hypothetical scenario of upgrading an EPC D-rated office building in London to EPC B minimum using the four most common interventions would cost an estimated £113 psf. When combined with a high level of amenity, this figure would rise to an estimated £268 psf.
Five Great Barriers to Repurposing
- Converting surplus and/or redundant floorspace to other undersupplied property uses may seem a no-brainer on paper, but the reality is often very different.
- There are at least five key divides that any repurposing journey must traverse: Geography, Configuration/Ownerships, Asset Compromises, Planning and Value Alignment.
- Acknowledged as an over-supplied market with significant obsolete stock levels, retail should provide a repurposing blueprint - but actually reveals more of the pitfalls.
- Planning has historically been perceived to be the biggest obstacle, but reform to PD rights has been significant. Value underpins everything – and is the most important factor in any repurposing journey.
The Three ‘Res’ - To Retrofit, to Refurbish or to Repurpose?
- Retrofitting, refurbishing and repurposing are very distinct disciplines, requiring varying levels of intervention and with very different risk vs reward curves.
- Values ultimately determine viability, with benefits being netted off against associated costs. Each project is unique and, by definition, there is no ‘one-size-fits-all’ solution.
- Knight Frank Research shows that offices undergoing retrofit/refurb from EPC C and below to EPC B and above have seen, on average, the gap of rents relative to prime close by 18 percentage points. Conversely, the average cost of inaction is -27% relative to prime.
- The hypothetical scenario of upgrading an EPC D-rated office building in London to EPC B minimum using the four most common interventions would cost an estimated £113 psf. When combined with a high level of amenity, this figure would rise to an estimated £268 psf.
Five Great Barriers to Repurposing
- Converting surplus and/or redundant floorspace to other undersupplied property uses may seem a no-brainer on paper, but the reality is often very different.
- There are at least five key divides that any repurposing journey must traverse: Geography, Configuration/Ownerships, Asset Compromises, Planning and Value Alignment.
- Acknowledged as an over-supplied market with significant obsolete stock levels, retail should provide a repurposing blueprint - but actually reveals more of the pitfalls.
- Planning has historically been perceived to be the biggest obstacle, but reform to PD rights has been significant. Value underpins everything – and is the most important factor in any repurposing journey.
The Three ‘Res’ - To Retrofit, to Refurbish or to Repurpose?
Authors: Stephen Springham & Flora Harley
Retrofit? Refurbish? Reposition? There's no one-size-fits-all solution, but we have crunched the numbers and identified a range of factors which drive value, viability and the potential to drive short and long term performance.
The Three ‘Res’ - To Retrofit, to Refurbish or to Repurpose?
Authors: Stephen Springham & Flora Harley
Retrofit? Refurbish? Reposition? There's no one-size-fits-all solution, but we have crunched the numbers and identified a range of factors which drive value, viability and the potential to drive short and long term performance.
Some assets fail. Period. Obsolescence may be the key driver behind this, and this may take on any number of guises.
How the situation arose is a secondary consideration to the remedial action required to restore value. Understanding and assessing obsolescence risks is key - and having the right strategy to remedy the issue.
There is no ‘one-size-fits-all’ solution to obsolete assets - there is a plethora of remedial options available. These fall broadly under three ‘re-’ headers - retrofit, refurbish or repurpose.
All our analysis comes with the caveat that there is great variation between assets.
On average, an office retrofit/refurb from an EPC C and below to B and above saw the gap of rent relative to prime close by 18 percentage points. Amenity provision is also key and certain amenities correlate with higher uplifts.
Chart 1: Amenity levers Percentage of office renovations with each amenity, grouped by relative rental uplift
Source: Knight Frank Research
Our analysis of average rents achieved for offices rated EPC C and below shows a widening gap relative to prime. The cost of inaction, or base case, is growing and is likely to continue doing so.
Rent is only one piece of the puzzle. ESG-focused improvements are likely to lower a property’s risk premium. This is a key component of yield, potentially supporting yield compression and enhancing value and performance.
This upside will, of course, need to be balanced by cost implications and can be explored through a number of scenarios. A key one is upgrading to EPC B. Our hypothetical scenario of an EPC D-rated office building in London being upgraded to meet the potential EPC B minimum would cost £113 per square foot (psf). When layering on various amenity levels in our scenario, the cost rises to £268 psf.
On average, an office retrofit/refurb from an EPC C and below to B and above saw the gap of rent relative to prime close by
Table 1 : Cost benchmarking The average cost per intervention using Central London as a base, £psf
Source: Knight Frank Cost Consultancy
Some assets fail. Period. Obsolescence may be the key driver behind this, and this may take on any number of guises.
How the situation arose is a secondary consideration to the remedial action required to restore value. Understanding and assessing obsolescence risks is key - and having the right strategy to remedy the issue.
There is no ‘one-size-fits-all’ solution to obsolete assets - there is a plethora of remedial options available. These fall broadly under three ‘re-’ headers - retrofit, refurbish or repurpose.
All our analysis comes with the caveat that there is great variation between assets.
On average, an office retrofit/refurb from an EPC C and below to B and above saw the gap of rent relative to prime close by 18 percentage points. Amenity provision is also key and certain amenities correlate with higher uplifts.
Chart 1: Amenity levers Percentage of office renovations with each amenity, grouped by relative rental uplift
Source: Knight Frank Research
Our analysis of average rents achieved for offices rated EPC C and below shows a widening gap relative to prime. The cost of inaction, or base case, is growing and is likely to continue doing so.
Rent is only one piece of the puzzle. ESG-focused improvements are likely to lower a property’s risk premium. This is a key component of yield, potentially supporting yield compression and enhancing value and performance.
This upside will, of course, need to be balanced by cost implications and can be explored through a number of scenarios. A key one is upgrading to EPC B. Our hypothetical scenario of an EPC D-rated office building in London being upgraded to meet the potential EPC B minimum would cost £113 per square foot (psf). When layering on various amenity levels in our scenario, the cost rises to £268 psf.
On average, an office retrofit/refurb from an EPC C and below to B and above saw the gap of rent relative to prime close by
Table 1 : Cost benchmarking The average cost per intervention using Central London as a base, £psf
Slide from left to right to view the full table.
Source: Knight Frank Cost Consultancy
To Refurb or Retrofit: The Property Manager View
A landlord with an obsolete asset has a difficult decision to make – to update the existing asset through a retrofit, or to completely overhaul with refurbishment. There are two fundamental considerations here - the first is disruption.
If retrofitting, the building will remain operational, but complex retrofits can cause significant interruptions. Refurbishing projects typically involve much more visible disruption. Planning and communication are key - the occupiers should be able to input and buy into the plans.
The second fundamental consideration is the comfort and functionality of the asset. Enhancing the usability of the space leads to higher levels of occupier satisfaction and increases the chances of attracting higher-quality occupiers. Careful consideration needs to be afforded as to how the amenities will function, and whether they will actually be used.
Table 2: Levelling up The amenity provision in our Group 1 and Group 2 scenarios and the Gross Internal Area (GIA) each would require
Source: Knight Frank Research, Knight Frank Project Building & Consultancy
KEY TAKEAWAYS FROM PROPERTY MANAGERS:
Understand the building and asset.
Engage with occupier(s) to understand their needs.
Work in partnership with occupiers.
Use your Project Manager in the renewal discussions.
Operational costs are invariably the main driving factor in the decision-making process, inevitably hinging on balancing initial costs versus long-term savings. Retrofitting generally has high initial outlay, but also has potential for long-term savings through lower operational budgets.
To Refurb or Retrofit: The Property Manager View
A landlord with an obsolete asset has a difficult decision to make – to update the existing asset through a retrofit, or to completely overhaul with refurbishment. There are two fundamental considerations here - the first is disruption.
If retrofitting, the building will remain operational, but complex retrofits can cause significant interruptions. Refurbishing projects typically involve much more visible disruption. Planning and communication are key - the occupiers should be able to input and buy into the plans.
The second fundamental consideration is the comfort and functionality of the asset. Enhancing the usability of the space leads to higher levels of occupier satisfaction and increases the chances of attracting higher-quality occupiers. Careful consideration needs to be afforded as to how the amenities will function, and whether they will actually be used.
Table 2: Levelling up The amenity provision in our Group 1 and Group 2 scenarios and the Gross Internal Area (GIA) each would require
Source: Knight Frank Research, Knight Frank Project Building & Consultancy
KEY TAKEAWAYS FROM PROPERTY MANAGERS:
Understand the building and asset.
Engage with occupier(s) to understand their needs.
Work in partnership with occupiers.
Use your Project Manager in the renewal discussions.
Operational costs are invariably the main driving factor in the decision-making process, inevitably hinging on balancing initial costs versus long-term savings. Retrofitting generally has high initial outlay, but also has potential for long-term savings through lower operational budgets.
To Refurbish or Repurpose: The Building Consultant View
What are the practical considerations? The main driver is for the project to be economically viable - striking a tricky equilibrium between market trends, user expectations and financial constraints, as well as regulatory challenges. The key is to not let unrealistic project goals prevent a viable scheme.
With the three ’res’, there are some key practical considerations facing the industry:
Legislative: With the tightening of legislation on demolition, the refurbishment and repurposing of existing buildings reduces waste and carbon emissions, certainly compared to a re-development project.
For example, Knight Frank is currently undertaking a refurbishment project on an asset constructed in 2003. Due to insufficient base build design information, surveys and laboratory assessments have had to be undertaken to prove the design intent under the original Fire Strategy - reverting to regulations when the building was constructed is now very challenging.
Physical requirements: In order to achieve EPC B rating and above, significant intervention will usually be required. However, the necessary level of intervention can only be assessed on a building-by-building basis and is often dependent on the age of construction.
Above all else, a Sustainability Strategy needs to be developed from the outset, with clear targets that can be measured against to demonstrate value.
Functional: Refurbishment or repurposing projects often involve more intrusive works – this needs to be assessed in detail to review the sequencing of the project events. If the building can remain part-occupied during the project, then a strong communication plan is essential.
Common denominators
Each ‘re’ has its own merits, risks and rewards and the viability will vary dramatically by project and asset.
Whether retrofitting, refurbishing or repurposing, thorough and effective contingency planning is essential. Risks need to be considered at the outset, to ensure the project is viable and unexpected costs and delays are mitigated.
Each asset is unique, each project is different - there are no ‘one-size-fits-all’ solutions.
KEY TAKEAWAYS FROM BUILDING CONSULTANTS:
Understand the building’s construction.
Be aware of changing regulations.
Work with Project Managers at the earliest opportunity to undertake the development appraisal.
Ensure value is protected through each stage of the project.
To Refurbish or Repurpose: The Building Consultant View
What are the practical considerations? The main driver is for the project to be economically viable - striking a tricky equilibrium between market trends, user expectations and financial constraints, as well as regulatory challenges. The key is to not let unrealistic project goals prevent a viable scheme.
With the three ’res’, there are some key practical considerations facing the industry:
Legislative: With the tightening of legislation on demolition, the refurbishment and repurposing of existing buildings reduces waste and carbon emissions, certainly compared to a re-development project.
For example, Knight Frank is currently undertaking a refurbishment project on an asset constructed in 2003. Due to insufficient base build design information, surveys and laboratory assessments have had to be undertaken to prove the design intent under the original Fire Strategy - reverting to regulations when the building was constructed is now very challenging.
Physical requirements: In order to achieve EPC B rating and above, significant intervention will usually be required. However, the necessary level of intervention can only be assessed on a building-by-building basis and is often dependent on the age of construction.
Above all else, a Sustainability Strategy needs to be developed from the outset, with clear targets that can be measured against to demonstrate value.
Functional: Refurbishment or repurposing projects often involve more intrusive works – this needs to be assessed in detail to review the sequencing of the project events. If the building can remain part-occupied during the project, then a strong communication plan is essential.
Common denominators
Each ‘re’ has its own merits, risks and rewards and the viability will vary dramatically by project and asset.
Whether retrofitting, refurbishing or repurposing, thorough and effective contingency planning is essential. Risks need to be considered at the outset, to ensure the project is viable and unexpected costs and delays are mitigated.
Each asset is unique, each project is different - there are no ‘one-size-fits-all’ solutions.
KEY TAKEAWAYS FROM BUILDING CONSULTANTS:
Understand the building’s construction.
Be aware of changing regulations.
Work with Project Managers at the earliest opportunity to undertake the development appraisal.
Ensure value is protected through each stage of the project.
Five Great Barriers to Repurposing
Author: Stephen Springham
Repurposing - the magic bullet for obsolete assets? We've identified and assessed the five great barriers to repurposing in this insights article.
Five Great Barriers to Repurposing
Author: Stephen Springham
Repurposing - the magic bullet for obsolete assets? We've identified and assessed the five great barriers to repurposing in this insights article.
Repurposing: a massive industry buzzword, the supposed silver bullet to all real estate’s manifold challenges. If an asset is obsolete, at risk of becoming obsolete or not delivering adequate returns, simply turn it into something else. Job done.
If only it were anything approaching that simple. The logic may be sound – repositioning an asset that is no longer fit-for-purpose in its current guise into another use which meets strong market demand – but the actual realities and practicalities are fraught with complexity.
But if retrofitting, refurbishing and effective asset management are not the solution to a problem asset, repositioning and repurposing options will need to be explored. The repurposing journey is a long, potentially treacherous one, beset with barriers and requiring meticulous navigation.
Five Great Repurposing Divides There are at least five divides that must be crossed before any potential repurposing journey becomes in any way viable. In broad terms, these are:
- Geography
- Configuration/Ownerships
- Asset Compromises/Fabric Issues
- Planning
- Value Alignment
Repurposing: a massive industry buzzword, the supposed silver bullet to all real estate’s manifold challenges. If an asset is obsolete, at risk of becoming obsolete or not delivering adequate returns, simply turn it into something else. Job done.
If only it were anything approaching that simple. The logic may be sound – repositioning an asset that is no longer fit-for-purpose in its current guise into another use which meets strong market demand – but the actual realities and practicalities are fraught with complexity.
But if retrofitting, refurbishing and effective asset management are not the solution to a problem asset, repositioning and repurposing options will need to be explored. The repurposing journey is a long, potentially treacherous one, beset with barriers and requiring meticulous navigation.
Five Great Repurposing DividesThere are at least five divides that must be crossed before any potential repurposing journey becomes in any way viable. In broad terms, these are:
1. Geography
2. Configuration/Ownerships
3. Asset Compromises/Fabric Issues
4. Planning
5. Value Alignment
Geography can often render a repurposing project a non-starter from the outset. In very general terms, failing assets are often located in less-than-thriving places and these are often towns where over-supply is at its most acute. For example, if a place is failing as a retail centre, it may well be failing as a wider town centre. The fact remains that the town centres that are most challenged and have the highest vacancy rates are not necessarily those with high occupational demand from other uses.
Planning historically may have been the main stumbling block, but recent sweeping reform to Permitted Development (PD) Rights and Use Classes Order has rendered it less an obstacle than it may have been previously. From 1 September 2020, there has been a new Use Class (E) to include all current A1, A2 and A3 Classes, alongside B1, D1 and D2 - potentially meaning far greater fluidity between existing commercial classes. Furthermore, based on evidence to date, the Labour Government is intent on speeding up Planning and, in particular, boosting the supply of housing.
Configuration/ownerships may or may not be an obstacle, depending on the nature of the asset. As a rule, large footprint, free-standing, single-ownership, single-occupancy assets are far more compliant to repurposing than those that do not tick these boxes. Within the mainstream real estate use classes, offices are far more likely to do so than retail. Fragmented ownership remains a massive barrier to many would-be in-town retail repurposing projects.
Value alignment, finally and most critically, values must stack up to make repurposing financially viable. This is a non-negotiable, but is also often an insurmountable issue. In essence, why would anyone embark on a repurposing journey that ultimately loses them money?
Valuation is, of course, massively complex. Values vary dramatically, not just according to the two obvious measures of asset class and geography, but by the perceived quality, spec, sustainability and risk of individual assets.
The reality is that many repurposing projects, however sound they may appear on paper, with need considerable government or Local Authority subsidy. They just won’t work purely under private sector funding.
Asset compromises/fabric issues may pose physical constraints on repurposing ambitions. A great deal will hinge on the scope of any re-modelling that is required. For example, total demolition and rebuilding from scratch may circumvent many of these challenges.
Most will require some retention of the existing stock, even if only for cosmetic purposes.
Surmountable issues maybe, but ones that will nevertheless impact values, capex requirements and development costs, again ultimately putting pressure on viability.
Value underpins everything – and is the most important factor in any repurposing journey.
Lessons learnt from retail to date
In theory, retail should therefore be the poster child for repurposing, given that market over-supply is acknowledged in a way that it is not other use classes. But evidence of retail repurposing is still relatively thin on the ground, for a very simple reason – we are only at the beginning of this journey and the process is far more complex than most give it credit for.
Probably the best examples of successful retail repurposing projects come from former department stores, opportunities brought about by the demise of Debenhams and retrenching of both House of Fraser and, to a lesser degree, John Lewis.
Most of the ‘repurposing quick wins’ in this space have been free-standing stores in major city centres, such as London, Manchester and Edinburgh, with a mix of alternative uses emerging, most notably offices- or hotels-led, but actually fairly mixed use.
Fig 1: Retail Redevelopment Activity 2019 - 2023 No. of Units
H1 2019
H1 2020
H1 2021
H1 2022
H1 2023
Source: LDC, Knight Frank Research
Lessons learnt from retail to date
In theory, retail should therefore be the poster child for repurposing, given that market over-supply is acknowledged in a way that it is not other use classes. But evidence of retail repurposing is still relatively thin on the ground, for a very simple reason – we are only at the beginning of this journey and the process is far more complex than most give it credit for.
Probably the best examples of successful retail repurposing projects come from former department stores, opportunities brought about by the demise of Debenhams and retrenching of both House of Fraser and, to a lesser degree, John Lewis.
Most of the ‘repurposing quick wins’ in this space have been free-standing stores in major city centres, such as London, Manchester and Edinburgh, with a mix of alternative uses emerging, most notably offices- or hotels-led, but actually fairly mixed use.
Fig 1: Retail Redevelopment Activity 2019 - 2023 No. of Units
H1 2019
H1 2020
H1 2021
H1 2022
H1 2023
Source: LDC, Knight Frank Research
Fig 2: Retail Redevelopment Activity 2019 - 2023 No. of Units
Source: LDC, Knight Frank Research
Some perspective
If there is one lesson we have surely learnt from retail, it is that there cannot be a “one size fits all” solution to real estate challenges. Every town centre is different and has its own story to tell. And its mix of uses has to reflect that, as underlined by our analysis of UK Cities DNA.
There are undoubtedly opportunities to repurpose assets – primarily, but not exclusively, offices and retail - to other uses and indeed, we shouldn’t be precious about preserving surplus or obsolete property stock. But the fact remains that the window of repurposing opportunity is perhaps less large and infinitely more complex than many imagine.
Fig 2: Retail Redevelopment Activity 2019 - 2023 No. of Units
Source: LDC, Knight Frank Research
Some perspective
If there is one lesson we have surely learnt from retail, it is that there cannot be a “one size fits all” solution to real estate challenges. Every town centre is different and has its own story to tell. And its mix of uses has to reflect that, as underlined by our analysis of UK Cities DNA.
There are undoubtedly opportunities to repurpose assets – primarily, but not exclusively, offices and retail - to other uses and indeed, we shouldn’t be precious about preserving surplus or obsolete property stock. But the fact remains that the window of repurposing opportunity is perhaps less large and infinitely more complex than many imagine.