Developing and repurposing for a new era

The property development market has changed considerably in the last few years, and even more so since the start of the COVID-19 pandemic.

The ability to retrofit portfolios of assets will be increasingly important to the developers’ toolkit. In a recent panel discussion with industry colleagues from Africa and the UK we discussed global and regional trends driving developers to repurpose non-performing properties into new asset classes, and what they should consider in repurposing the right space, at the right time and the right cost in the future.

Retrofitting is enhancing an existing function of the building by improving its built form, whereas repurposing or repositioning is primarily about challenging the existing function to see if it is still relevant, then remodelling the built form to suit any new purposes identified.

Regeneration is a more fundamental and complete change to the form and function of an existing asset. All these aspects play a role in what the market is currently looking for in property solutions.

Global property repurposing trends

Low returns are driving the focus on repurposing. The pandemic has accelerated a change in retail and office use patterns that have been taking place over the last five to seven years. Leases have been trending towards shorter or flexible periods (between one to five years, in sharp contrast to fixed 25-year institutional leases), which has significantly affected the risk profile of major developments.

To ensure an ongoing income stream in this new environment, developers have had to change their approach and design properties that could be quickly repurposed.

Following the pandemic, a growing number of property developers are facing lower occupancy rates, lower rentals and lower or negative capital gains – particularly in the retail and office asset classes. Many have even opted to halt investments under construction and instead look at how to repurpose properties to other asset classes, such as logistics, healthcare, biotech, specialist residential, education and data centres.

That said, not all these assets are in trouble. In the UK, for example, footfall has been declining in city centres and rising in suburban areas – triggered by the pandemic, which has kept office occupancies relatively stable in some conurbations with good quality office space.

Meanwhile, in the city centres there is a race to prime office space to embrace new patterns and ways of working, attract talent and encourage a return to the office.

“In the retail market, online is clearly the primary growth channel and will remain so for some time.”

While this doesn’t signal the end of retail property, the role of retail spaces will have to change, either to complement online or offer something compelling that can’t easily be replaced by online.

Property owners and developers are now considering a range of options, such as repurposing existing assets into large-scale residential and mixed-use schemes, to complement existing retail tenancies and customers.

Property repurposing in Africa

Multinationals entering emerging markets are considering grade A assets, sustainability, net zero, security, funding structures, credit management, technology, flexibility and designing for different uses – and most assets they find do not meet their requirements.

The pandemic and a rise in alternative property classes have driven an even greater focus on repurposing in Africa. In South Africa, for example, there was an over-supply of office space even before the pandemic.

Several office spaces have been repurposed into residential properties that are designed to meet work-from-home requirements. There’s also a growing interest in data centres, warehousing and logistics as developers seek to accommodate emerging trends on the back of the Fourth Industrial Revolution.

Focus on data centres

Data centre development has become a trend in many African markets. Tier 1 African markets are moving towards a new, wholesale environment. But how easy is it to repurpose an asset to a data centre, and should developers be considering this or not?

“The ‘machine’ that is the data centre makes up approximately 80 percent of the cost of the building, and the building needs to be highly optimised for that machine.”

Repurposing does present significant challenges for meeting international data centre standards; however, small enterprises, retail facilities and malls with a space-frame type of structure designed for flexibility, may be possibilities.

We have even seen a brewery being repurposed into a 40MW data centre, but the sheer density of services the data centre must accommodate makes it extremely challenging to find a suitable building for repurposing.

For example, wholesale data centres require a floor-to-ceiling height of six to seven metres, and a floor loading of 15kN/m2 – on both criteria, most existing office facilities fall short.

Warehouses are probably the most viable properties to consider for data centres. In Nairobi, for example, some new logistics facilities are being designed so they can be repurposed into data centres in the future. But warehouses are also high-yielding assets in the region right now, particularly in markets where there’s been a shift in focus from retail to wholesale.

Planners and developers would need to consider the compatibility of these asset classes and weigh up all their options when determining the business case for repurposing. Ultimately, the decision comes down to your business case and target tenant.

Developing for the future

Flexibility and designing for different uses are becoming more important to investors and multinationals. There are numerous complexities associated with repurposing struggling assets in emerging markets, such as Africa.

Well-planned, well-documented settlements and master plans are rare. Those that do exist are likely to be new, which adds complexity to the process. In some countries, the planning system enables development. In others, legislation and politics make development very difficult.

“In the UK, many civic authorities are taking the lead in driving the strategy for coordinated change in urban areas.”

Some are buying distressed assets to take control of key anchors in city centres and looking at co-locating services (for example medical and social) in a ‘hub’ for people to access. Forward-thinking developers are working with local authorities on ‘loose-fit’ designs – a shell and core that can accommodate different uses – with future planning permission being based on market needs.

In some regions, developers may be competing with similar ideas, but are not coordinating their efforts towards a bigger ideal. However, we need to be engaged as much as possible to ensure repurposing is done in a meaningful, sustainable way.

Planners and developers must work together, under regulations, to meet the needs of a changing market. They will need to consult local authorities and communities and create forums to share information on projects that will impact on zoning ordinances and planning.

Designing for sustainability

Source locally and source as much recycled content as you can. Developed markets tend to have a more mature approach to sustainability, for several reasons. Historically, they have had to make existing resources work very hard. Legislation is driving a lot of change, but so is the protection of asset values and share prices.

Increasingly, investors and corporates are concerned about demonstrating their commitment to environmental, social and governance (ESG) values and goals. Several investors are divesting their portfolios of poor-performing assets from an environmental and sustainability point of view.

“A sustainability approach is more nuanced than simply taking a ‘carbon neutral view’, however by adopting carbon neutral practices, the industry has an opportunity to correct historical errors in terms of protecting the environment – and realise other, significant benefits.”

The pandemic has interrupted construction supply chains across the world, impacting on the construction capacity and rate of delivery for developers. In emerging markets, such as the Tier 1 and Tier 2 data centre markets in Africa, being sensitive to local supply chain capabilities helps improve the rate of delivery.

Sourcing materials locally and partnering with organisations to upskill local suppliers gives you a more resilient supply chain and a faster build, while reducing the carbon and pollution associated with bringing materials to a location that doesn’t necessarily support certain building methodologies.

The use of recycled and sustainable materials also makes business sense. It’s estimated that some 90 percent of debris from construction comes from the demolition of assets that could otherwise be repurposed. Steel work and concrete – which are significant contributors to embodied carbon – can be recycled.

The use of timber (from sustainable sources) helps reduce embodied carbon and can also increase a building’s net internal area. Unlike concrete, timber enables additional floors to be added to a structure without the need for demolition.

“Cork is another biodegradable material with very low embodied carbon that can be used in development.”

Energy efficiency is another area of focus, particularly in data centres, which are the biggest energy-consuming asset class. Energy is also the biggest ongoing cost associated with data centres, so the industry is driven to be as sustainable as it can be in this regard. Systems designed for energy-efficiency can significantly reduce costs per kilowatt hour.

The use of hydropower in Nordic countries, for example, results in a cost of three to four euro cents per kilowatt hour, significantly lower than the average of 12 to 16 euro cents in some other European countries. Renewable energy – and using the right types of renewable energy – is the most exciting development in data centres currently.

Development based on data and research

Our international construction market survey, based on data from 90 markets across the world, provides a cost comparison of asset types as well as an assessment of market conditions and how we think demand and costs are likely to shift.

This information allows international investors to compare the attractiveness of potential markets, and helps developers understand potential changes in asset use and ascertain the economic viability of repurposing assets as part of their feasibility work.

Data and research key to future strategies

The combination of dynamic market shifts and a need for a more environmentally sustainable approach, is changing how the life of a built asset is viewed. Shorter leases, a need to conserve and repurpose rather than end-of-life demolish and rebuild, means clients’ requirement of base-build design solutions is changing rapidly.

Investors and developers are rapidly diversifying from traditional asset classes into new markets and leasing arrangements in response to a world that has already changed.

Currently, it’s difficult to predict how various property use dynamics will play out and what this will mean for different asset types. It’s therefore critical to obtain detailed data and conduct research on emerging trends that will drive property solutions in the short, medium, and long term. This information will be vital to underpinning strategies and decisions about property portfolios and individual assets.