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OFFICE
REFURBISHMENT
IN GLOBAL
Which city provides
CITIES: the highest return?
1
SCOPE
OF THE
RESEARCH
Our global cities research
estimates the expected return
on investment that can be
generated from major and minor
office refurbishment projects in
twelve cities across the world.
The report shows that Europe’s
financial centres have offered
the best return for investors
considering office refurbishment
and analyses the different
markets and investment
strategies that help drive best
performance and return from
office assets.
The research considers
both major and minor
refurbishment projects
in twelve cities across the
world, and ranks them by
best return.
This is based on the return on
investment from increases in
rental income and payback
periods, and buildings that are
at least 20 to 30 years old,
which no longer meet criteria
for Grade A space.
Our research covered London,
Paris, Hamburg, Frankfurt,
Brussels, Amsterdam, Milan,
New York, Chicago, Dubai,
Singapore and Shanghai.
Executive summary
•Office refurbishment is the most effective way to improve
the income and performance of older office buildings in most
locations across the world even where there are conditions
of oversupply
•Frankfurt, Hamburg, Milan and London offered the greatest
improvement in income and a relatively fast payback (see page 8)
•The location, design and condition of the office building are
integral to the success of the investment
•In markets where there is over supply of office space, our
research shows that well targeted investment in refurbishment
will deliver a positive return whilst also defending the existing
value of the building
•In markets where large multi-occupied buildings are the norm,
such as New York, then maintenance strategies aimed at
sustaining a building’s competitive position are a cost effective
strategy
•Fast growing cities in Asia present refurbishment opportunities
that can deliver high returns when focused on retaining and
increasing occupancy levels.
•Refurbishment of older office buildings in rapidly changing
markets, like Dubai, is unlikely to be worthwhile because of the
oversupply of better quality space in good locations.
2
Paris
Return %
1
Milan
7.35%
London
2
Paris
6.99%
Chicago
3
Shanghai
6.69%
Amsterdam
4
London
5.76%
5
New York
5.43%
6
Hamburg
4.91%
7
Frankfurt
4.91%
8
Amsterdam
3.78%
9
Chicago
3.40%
10
Brussels
2.67%
11
Singapore
0.75%
12
Dubai
0.00%
Costs represent all-in build cost for each refurbishment option,
including alterations and temporary works, base build construction,
developer’s fit out and contractor’s management and profit.
Professional fees, VAT and finance charges are excluded.
Shanghai
Hong Kong
Dubai
Warsaw
Madrid
Frankfurt
1,500
Hamburg
€/m² Gross internal floor area
Major refurbishment
Analysis of return on investment
post major refurbishment
Indicative major refurbishment construction costs
Paris
London
Rank
Location
Return %
1
Frankfurt
9.93%
2
Hamburg
8.43%
Milan
3
London
7.00%
Frankfurt
4
Milan
6.03%
Hamburg
5
Paris
4.29%
Warsaw
Dubai
Amsterdam
€/m² Gross internal floor area
2,500
2,250
2,000
1,750
1,500
1,250
1,000
Major Refurbishment: the primary objective of
major refurbishment is to extend the life of the
asset by up to 15-20 years and enhance the office
environment for tenants. There will most likely be
significant structural changes, an upgrade to all
areas, a replacement of the external fabric and
major mechanical, electrical plant, machinery and
fire protection systems. Major refurbishments
which increase floor area through the re-planning
or extension of floorplates or the addition of extra
floors will generate the greatest additional return.
Major refurbishment requires a vacant possession.
The average project duration is 24 months.
750
Madrid
500
Return on investment: our assessment of return
on investment is based on a comparison of the
increase in annual rental income based on
full occupancy as a result of refurbishment.
The assessment does not take into account the
impact of reducing voids. Return on investment
is expressed as a percentage of total development
costs. The rental calculation excludes tenant
incentives. The assessment of development costs
excludes finance costs and VAT.
Milan
250
Minor Refurbishment: the primary objective of
minor refurbishment is to prolong the economic
life of the asset by up to 5 years and to keep
existing tenants. Typical works include; upgrade
to entrance hall, common areas, reception, toilets
and lifts and any superficial re-branding works
such as façade lighting, landscaping. No major
planning requirements are required and all works
are carried out with tenants in place. The average
project duration for a minor project is six months.
Brussels
1,250
Location
Singapore
1,000
Rank
New York
750
The research focused on London, Hamburg, Frankfurt, Paris and
Milan for major refurbishment. However it is important to note that
we are seeing an increasing trend of major refurbishment in Asian
cities, such as Hong Kong, Shanghai and Singapore. This suggests
that these locations could also be considered as offering a good
return from major refurbishment.
Analysis of return on investment
post minor refurbishment
500
The analysis below shows that refurbishment in Europe’s financial
centres have offered the best return, with Frankfurt, Hamburg,
Milan and London offering the greatest improvement in income
with the fastest payback period. All of these European cities are
in the early stages of the property cycle of increasing rental and
capital growth. Crucially, these locations are in regions where the
planning and regulatory environment is most favourable to improve
floor plates and increase floor area through a major refurbishment.
This means that investors in such locations are able to re-position
and re-brand their assets to attract a different tenant profile.
For example, there has been a growing trend in London for
refurbishment of older assets with character in good locations,
targeted at the creative, media and technology sectors.
Indicative minor refurbishment construction costs
250
THE FINDINGS
Minor refurbishment
3
4
MAJOR
VS MINOR
REFURBISHMENT:
What is the best strategy?
5
The analysis shows that investment in major refurbishment
delivers high returns in Frankfurt, Hamburg and London. A key
factor of higher returns in German cities are the lower building
costs in Germany compared to the UK and other European locations.
High costs of refurbishment in London mean that, based on our
analysis, a minor refurbishment in Milan will deliver a marginally
better return on costs, excluding any asset value appreciation.
PARIS will achieve a low return from a major
investment due to very high construction costs
associated with working in the historic core, together
with constraints imposed by planning and by the
existing building fabric. These factors combine to
limit the extent to which the footprint of an office
can be extended, which reduces the opportunity
to add value through major refurbishment.
The research also shows that based on returns from
development costs alone, minor refurbishments
in some over supplied markets have delivered lower
results in the sample. In these instances, a decision
to invest in refurbishment is likely to be driven by
a defensive strategy aimed at preserving existing
income and minimising risk of obsolescence.
In instances where the refurbishment of a partly
let building results in increased occupancy, then
investment returns have the potential to be
substantially higher.
Looking at minor refurbishments, relatively high
costs can be found in New York and Singapore
as well as in some of the European cities.
6
The table below plots opportunities to improve asset performance
along axis of building performance and tenant quality. In London
for example, opportunities exist to improve values by increasing
the quality and quantum of space and by shifting the market
position of the building. By contrast, in New York, in multi-occupied
buildings there is little opportunity to increase floor area and the
objective of refurbishment is to maintain the position of the asset
in its marketplace, benefiting from general upward movements in
rent levels.
The location of a city will determine which strategy should be
undertaken to ensure the best performance and sustainable return
is secured.
TA
I
O
AI
N
SF
AN
N
HIGH
QUALITY
BUILDING
RM
New York
London
MINOR
MAJOR
LOW
QUALITY
BUILDING
HIGH
QUALITY
BUILDING
Dubai
Amsterdam
MINOR
MINOR
SE
EF
O
D
RP
U
LOW
QUALITY
BUILDING
EN
D
-P
RE
The analysis considers the
potential for an office building
to benefit from refurbishment
investment in any city.
The potential is determined
by a combination of factors,
such as the design, age and
condition of the existing building,
as well as the presence or
absence of constraints which
may limit the extent of
investment, such as planning
controls and political factors.
In addition, we consider the
potential to improve tenant
quality through asset
management activity, aimed
at increasing both rental income
and capital values. This may
include designing and creating
workplace conditions that have
lower operation costs.
As outlined in the diagram
below, there are four differing
strategies that an investor
could adopt, when considering
refurbishment we have
identified, this depends on
the quality of the building
and location, the quality
of potential tenants and the
likely return on investment.
TR
Different market locations offer
different dynamics and therefore
different strategies need to be
considered to ensure the best return
on an appropriate level of investment.
Through our analysis, we have
identified four strategies that can be
tailored to make best use of the asset
and the potential of the local market
in which they are located.
The
4 investment
strategies
M
DIFFERENT
LOCATIONS,
DIFFERENT
STRATEGIES
7
8
TRANSFORM
9
A typical case study of
major refurbishment in
LONDON
The building:
1960s office building of 14,300m² gross
floor area in the City of London is a fringe
location with the potential to re-plan and
extend floor plates.
The approach:
A major refurbishment strategy to deliver
a 25% increase in net floor area to
12,500m² of Grade A space and updates
in all building services.
Development expenditure
€44.4m
Development expenditure (GIFA)
€2,800/m²
Increase in rental income
€3.1m pa
Increase in asset value
€41.3m
Return on expenditure
7%
Total return per € million of development expenditure
€940,000
Payback
14.1 years
This case study demonstrates that investment in a major
refurbishment delivers significantly better long term returns in
markets where there is the potential to extend and reposition the
asset in its marketplace. By contrast, in London, a minor
refurbishment delivers a lower return on expenditure (5.8%)
and a significantly lower total return (€646,000 per € million).
London
MINOR
LOW
QUALITY
BUILDING
HIGH
QUALITY
BUILDING
Dubai
Amsterdam
MINOR
SE
O
LOW
QUALITY
BUILDING
EN
D
MINOR
EF
RP
7%
MAJOR
D
RETURN ON
EXPENDITURE
U
Strong markets for the
transformation strategy include
London, Hamburg and Frankfurt
because these are locations
where many older buildings have
the potential for extension and
increased efficiency through the
replanning of the floorplate.
These buildings may benefit
from character that attracts
tenants and a planning consent
that is better than could be
obtained in the current market.
RM
M
O
AI
N
SF
TA
I
N
HIGH
QUALITY
BUILDING
New York
-P
RE
•increased rental income as a result of delivery
of Grade A space
•increased floor area
•enhanced capital value driven by tenant
covenant.
Value
AN
These are locations that reach their desired
potential when investment is made in major
refurbishment. The transform strategy typically
requires fully vacant space to enable major works
to be carried out. Benefits include;
•The improvement in the quality of space
drives a 25% increase in head line rent
to €700/m²
•Refurbishment costs include loss of
rental income during a 22 month
construction period.
Performance Metric
TR
1
The expected outcome:
Analysis of refurbishment costs and returns:
10
11
New York
London
MINOR
2
HIGH
QUALITY
BUILDING
Dubai
Strong markets for this strategy
include cities in the US, such as
Chicago and New York, where
periodic refurbishment to meet
tenant expectation could be
considered to be a cost of
business rather than a major
investment.
The building:
EF
LOW
QUALITY
BUILDING
EN
D
SE
O
NEW YORK
MINOR
D
RP
A typical case
study of minor
refurbishment in
Amsterdam
MINOR
U
-P
RE
•improved tenant retention as part of a wider
asset management initiative
•minimisation of loss of rental income associated
with refurbishment.
MAJOR
LOW
QUALITY
BUILDING
MAINTAIN
These are locations that benefit from investment
in minor refurbishment to retain a position in a
diverse and competitive market that presents
plenty of options for tenants. The maintain
strategy is essential for large, multi-tenanted
buildings in good locations, where rental growth
will be influenced by general market dynamics
as well as the condition of the buildings.
Benefits include;
RM
M
O
AI
N
SF
N
TA
IN
A
TR
HIGH
QUALITY
BUILDING
5.4%
Return on expenditure
Analysis of refurbishment costs and returns:
Floor by floor refurbishment of multi-tenanted
1960s office building located in Central
Manhattan.
Performance Metric
Value
Development expenditure
€2.7m
The approach:
Development expenditure (GIFA)
€1,100/m²
Minor refurbishment focused on improvement
works to tenant space with some upgrade work
to landlord areas on the affected floor only.
Increase in rental income
€0.15m pa
Increase in asset value
€0.23m
Return on expenditure
5.4%
The expected outcome:
Total return per € million of development expenditure
€90,000
•The refurbishment helps to secure a 13%
increase in rent to €695/m²
•The tenant remains in situ during
refurbishment works and there is no loss of
rental income.
Payback
18.4 years
This case study illustrates the need to invest in minor refurbishment
work as part of an asset management strategy to sustain the
attraction of an older asset in an attractive location. To succeed
on aspects of refurbishment that contribute directly to securing a
rental increment and the need to work around tenants in situ is vital.
12
A case study of minor
refurbishment in
SINGAPORE
The approach:
€13.7m
Development expenditure (GIFA)
€580/m²
Increase in rental income
€1.5m pa
Increase in asset value
€23.2m
Return on expenditure
10.7%
Total return per € million of development expenditure
€1.6m
Payback
9.3 years
In this scenario, the business case for refurbishment is based wholly
on increased lettings from new tenants. However, in markets with
low yields, increased rental streams can deliver very strong returns.
This scenario shows that a 10% increase in lettings to 75%
occupancy will generate a 10.7% return and a payback period
of nine years. In this case, vacancy levels are higher than in other
locations, creating further opportunities to increase the rent toll
and demonstrate higher return. Nonetheless, this option is high risk,
because if occupancy levels cannot be increased, there is little
opportunity to increase income levels.
HIGH
QUALITY
BUILDING
London
MINOR
MAJOR
LOW
QUALITY
BUILDING
HIGH
QUALITY
BUILDING
Dubai
Amsterdam
MINOR
MINOR
D
10.7%
M
AI
N
TA
I
Strong markets for this strategy
include Singapore and Shanghai,
and to a lesser extent
Amsterdam and Brussels.
New York
RM
•the avoidance of obsolescence
•the protection of existing
revenue streams.
RETURN ON
EXPENDITURE
O
SF
Benefits include;
AN
N
•Increase occupancy from 65% to 75%.
Development expenditure
-P
RE
RP
U
These are locations where investment in minor
refurbishment works is required to differentiate
older office buildings in a market typically
affected by an over supply of higher quality
space. In many cities modern office space is being
delivered in new city quarters, providing corporate
tenants with the high quality space they now expect.
This is encouraging them to relocate away from
the old City Business District (CBD). Examples
include Marina Bay in Singapore, and Amsterdam
Zuid. Therefore, office space in the older CBD will
need to be repositioned effectively to retain existing
tenants and to attract a new target market.
The expected outcome:
Value
TR
3
A refurbishment of the entire building is
designed to improve the attractiveness
of the building to new tenants. Rents are
stable at €675/m². The success of the
refurbishment is determined by an
increase in occupancy levels and the
retention of existing tenants.
Performance Metric
SE
O
LOW
QUALITY
BUILDING
EN
1970s office building of 17,000m² GFA
located in the old CBD. This building has
been vacated as a result of the relocation
of a large corporate tenant to the new
Marina Bay CBD. The building has been
repositioned as a multi-tenanted building,
has a 35% vacancy rate and is competing
for professional and commercial tenants
in an over supplied market.
Analysis of refurbishment costs and returns:
EF
The building:
D
DEFEND
13
14
15
New York
London
MINOR
4
MAJOR
LOW
QUALITY
BUILDING
HIGH
QUALITY
BUILDING
Dubai
The building:
1990s office building of 30,000m² GFA located
outside of the core commercial area. This building
is in an off-pitch location, is inefficient, with a net
to gross ratio of 0.65, and is underspecified
compared to modern office product.
The approach:
Significant investment is required to bring the
building up to standard and re-purpose of the
asset should be considered.
The expected outcome:
•A minor refurbishment of the entire building
will cost €10.6 million, and is unlikely to deliver
a positive return
•In this situation, a better investment strategy
might be to re-purpose the asset.
EF
LOW
QUALITY
BUILDING
EN
D
SE
O
This trend can be seen in city
economies that have seen a
dramatic change in the growth,
fall and re-emerging growth of
GDP and therefore the quality
and location of office stock in
places such as Dubai has
improved significantly in other
areas. In these circumstances,
there will not be an investment
case for additional expenditure.
Disposal or conversion into
alternative uses may be a better
option to maximise asset value.
MINOR
D
RP
DUBAI
Amsterdam
MINOR
U
-P
RE
A typical case
study of minor
refurbishment in
RE-PURPOSE
These are locations where further investment
in an asset is not appropriate because these
assets are already considered to be obsolete
in terms of location, layout or performance.
RM
M
O
AI
N
SF
N
TA
IN
A
TR
HIGH
QUALITY
BUILDING
€7.7m
Increase in asset value
Analysis of refurbishment costs and returns:
Performance Metric
Value
Development expenditure
€10.6m
Development expenditure (GIFA)
€260/m²
Increase in rental income
€0m pa
Increase in asset value
€7.7m
Return on expenditure
nil%
Total return per € million of development expenditure
€1m
Payback
9.3 years
16
17
TIMING IS CRUCIAL
AS OUTLINED in the diagram, many European office markets are
currently entering a rental growth phase. This is driven by a general
recovery in developed economies that has extended to the Eurozone.
Frankfurt, Hamburg and London offer the best return on major
office refurbishment, because they are entering their peak period,
offering good quality space and high quality tenants. Amsterdam
and Brussels both represent markets suffering from oversupply,
leading to lower returns.
FRANKFURT/HAMBURG
RENTAL GROWTH
As with any investment
strategy, timing is absolutely
crucial. One of the advantages
of refurbishment is that an
asset can be turned around
at speed, which means that
investors can respond to
opportunities in recovering
markets ahead of new build
development. Our office
refurbishment cycle (see
diagram below) shows what
stage a city is at according
to the cycle of demand for
space and rising rents.
Nonetheless, as shown, Brussels is likely to see rental growth over
the next 2-3 years as it re-enters a growth phase, whilst Amsterdam
has already reached the peak of its cycle and returns may take longer
to materialise. Whilst the Dubai office market is recovering, obsolete
space outside of prime locations is unlikely to deliver a positive return
on investment in refurbishment in the near future.
AMSTERDAM
LONDON
MILAN
WARSAW
PARIS
MADRID/
HONG KONG/
SINGAPORE/
SHANGHAI
NEW YORK
CHICAGO
BRUSSELS
DUBAI
TIME
Why refurbish?
Not all buildings are suitable for refurbishment, and it is important to consider
the value drivers for an investment at the earliest stages of a business case.
There are
7 reasons
why an
investor
should
refurbish
1
2
3
4
5
6
7
Make the most of the
existing asset. Buildings
require periodic refurbishment
to maintain their value, and
refurbishment can increase
value by extending the
economic life of a building,
as well as reposition it within
the local property market.
Through refurbishment,
carefully targeted
investment can generate
significant returns.
Shorter development
period and quick delivery
back to the market.
Planning issues are usually
simpler to resolve when
refurbishing and the
construction programme
will be faster than an
equivalent new build.
Achieve extra development.
The existing building may
achieve more development
on a site than would be
allowed for a new build.
Refurbishment will retain
the advantage of the existing
building and benefit from
planning consents.
Increase the net lettable
floor area. On some schemes
it may be possible to increase
net lettable area, either
by replanning existing
floorplates and infilling
lightwells, flattening
facades, redesigning plant
areas or through physical
extension. Better floor
plates may attract higher
quality tenants.
Maintain and improve
character to attract
tenants. Original features
which give a building
character are very popular
with tenants. Some
investors are now focused
on improving the workplace
environment to create
a brand for perspective
tenants.
Lower costs. Reuse of
elements of the existing
fabric means that costs will
be lower than new build,
and that expenditure can
be focused on value adding
features. Depending on the
scope of refurbishment,
costs are in the range of
30-80% of an equivalent
new-build.
Reduce the effect on the
environment. Reusing the
building fabric and improving
building performance will
reduce the environmental
impact of delivering good
quality office space.
18
19
CONCLUSIONS
Office refurbishment offers an excellent
opportunity to improve the income and
performance of an older office building
in most financial city centre locations
across the world, even where there are
conditions of oversupply. To ensure and
drive the best performance from an
existing office building in any location
different strategies must be deployed,
and these must be tailored to the
particular local market requirements.
We believe that more science
in the assessment of relevant
returns on investment is
required to help investors
decide where to prioritise their
asset management spend or
to help pre-acquisition bidding
strategies. Our research
suggests that the best and most
sustainable returns can be made
in office assets that are in
locations where major
transformation can easily take
place and therefore where there
is good quality tenant demand.
As these locations change
frequently, investors therefore
should be tracking the key data
that impacts increased rental
income. In the current cycle,
Frankfurt, Hamburg and London
are where we expect most
refurbishment to take place for
at least the next couple of years.
However, in addition, Asia market
trends are presenting us with
potentially good opportunities
for the future.
Methodology
We engaged with our
colleagues from EC Harris
and Langdon & Seah to
collect essential data and
commentary about their
respective markets.
All data on office
refurbishment markets
in selected locations was
sought locally, using
expertise of local agents.
We worked on standard metrics (Office NIA,
GIA, efficiency, rents, yields, construction costs,
professional fees) and used common and standard
assumptions for all locations (transactional,
agents’ and statutory costs; loss of service charge;
letting, marketing, legal fees). In addition we have
undertaken desktop research to review all
information and made sure it reflects as best
as possible, the reality of chosen locations.
20
CONTACT
Matthew Cutts
Global Market Sector Leader.
Financial institutions
T +44(0)20 7812 2482
E [email protected]