The conversion of office buildings: myth or reality?

The market potential for conversions already exists. Owners should examine this option above all for properties in need of renovation in good to very good residential locations with weak demand. A well-founded product definition with a focus on target groups and costs is decisive for a successful implementation.

After more than a decade of growth in value and construction volumes, the challenges on the Swiss real estate market have increased. Investors must carefully define where they want to invest in which segment and at what price. In order to avoid bad investments, they need a clear idea of what potential can still be mobilised in the future and where the risks lie, especially in the case of old properties. This requires planning for alternatives.

Conversion as an investment option

The topic of conversion is once again topical as an option due to the residential and office segments being at different points of the property cycle. Vacancy rates in the rental housing market are generally still low and the average rental price development is positive. While it is true that letting problems are intensifying in many peripheral communities, absorption is holding up in urban areas. This situation is also affecting the investment market. In the large centres, high prices are being paid for residential properties that are in high demand. The yields are correspondingly low. On the other hand, investors in office properties have become more cautious in view of the weaker rental market outlook. In contrast to the rental housing market, there is more price differentiation of property of various qualities in the office sector. Demand for A-class office properties with long-term leases also remains brisk in metropolitan B-locations, while interest is significantly lower in properties in C-locations and in those with unattractive tenant or building structures.

High potential in certain areas

Where office space is particularly difficult in comparison to rental apartments, a local comparison of rent levels shows that the rent levels are very low. There is no potential in very good office locations in attractive business districts with immediate proximity to railway stations. Here, the earning potential of older office properties is still higher than for residential uses. The immediate inner-city areas are also better than their reputation, with vacancy rates in the office segment falling in some cases. On the other hand, if you move into the vicinity of attractive residential areas or central zones away from the main business districts, the potential will grow very quickly in areas where conversions become an option that secures returns and reduces risk. In Geneva, for example, this affects the area to the south-east of the city centre and the communities bordering the south-west of the city. In Basel, the Gundeldingen district stands out, while in Zurich, where the greatest potential lies, it is districts 9, 10, 6 and 12. In terms of their attractiveness as business locations, to a certain extent they fall between the three stools of the main business areas of City, Zurich North and Wallisellen.

The right product in the right location

The decision to aim for a conversion must ultimately be based on a precise product definition. In the event of a flawed concept, even the greatest market potential is of no use. Potential is often too strongly reduced to the earnings side. Costs play a central role and are often misjudged. For example, only the value-enhancing conversion costs have to be borne by the future additional yield, but not the sometimes high repair costs of older properties. This is because repairs would still have to be carried out if the property strategy provided for a continuation as office space. Ultimately, the factors governing the success of long-term profitable conversions are good local market knowledge, clear ideas of target groups, realistic assessments of future yield potential, innovative and creative ideas for the creation of attractive areas and spaces and early cost security.