London offers investors best returns for major office refurbishment

September 3, 2014 2:35 pm

London offers the best returns for investors seeking to boost the performance and returns of their aging office assets through major refurbishment, according to a new report from ARCADIS, the leading global natural and built asset design and consultancy firm.

The ARCADIS report ranks 13 global cities by the expected net rental income return that can be generated from completely refurbishing office stock that is at least 20-30 years old. ARCADIS found that investors could expect nearly 10% returns on capex following a major refurbishment in London compared to 7.5% in Warsaw and 6% in Milan.

Top five city refurbishment rankings – ‘major’ refurbishment
1.London 9.9%
2.Warsaw 7.5%
3.Milan 6%
4.Frankfurt 5.8%
5.Amsterdam 5.5%

Note: a major refurb aims to extend the life of the office asset by 15-20 years.

Matthew Cutts, Global Financial Institutions Sector Lead at ARCADIS, said, “These European cities all have large volumes of old office buildings that offer enormous potential to be extended or redesigned to increase their returns for investors. In London, for example, there has been a growing trend for older offices with character and in good locations to be refurbished. We are also seeing investors interested in investing to create workplace environments that align to support occupier business and brand strategies.”

The report found that, in other cities, a programme of minor refurbishment would be a better strategy to gain the strongest returns. For investors taking this approach, Madrid and London were judged to be the most attractive, whilst Shanghai and Singapore also made it into the top five.

Top ten city refurbishment rankings – ‘minor’ refurbishment
1.Madrid 9.6%
2.London 8.5%
3.Shanghai 7.9%
4.Singapore 7.53%
5.Warsaw 7.47%
6.Milan 7.35%
7.Hong Kong 7%
8.Paris 6.99%
9.Frankfurt 6%
10.New York 5.4%

Note: a minor refurb aims to extend the life of the office asset by up to 5 years.

The report also highlights that investment strategies can vary depending on the location of the office asset. In many cities modern, accessible new office space is being delivered in city quarters away from the establish Business District, for example Marina Bay in Singapore, Kings Cross in London and Amsterdam Zuid in the Netherlands.

If vacancy levels increase due to these new, competing areas, the report recommends investors focus on the protection of office asset revenue streams by taking a ‘defend’ refurbishment strategy which will prevent the offices from becoming obsolete where there are relatively low tenant voids. The least attractive market for office refurbishment was found to be Dubai where the large supply of quality new commercial space makes the disposal of old office buildings potential a better option to maximise the value of the asset.

Matthew Cutts, continued, “Office refurbishment offers an excellent opportunity to improve the income and performance of an older office building in most financial city centre locations, even in some cities where there is an oversupply. The higher the current, or future, tenant space void the greater the opportunity for higher returns on capex investments. However, in order to ensure they get the best possible performance, investors need to adopt different investment strategies that are tailored to the particular local market requirements.”