Conversion of commercial property into residential units has accelerated in the Covid years in South Africa

The conversion of commercial space into residential units is nothing new in the South African property sector. It’s a trend that started long before Covid-19, but has accelerated dramatically in the past two years. The lockdown has forced businesses to accept that a remote workforce is not only viable, but can also improve cost efficiencies and productivity.

One of the drivers of this trend is that real estate funds continue to offload much of their office stock, which most now view as less viable from a yield standpoint than most properties. from other sectors. Fortunately, this offloading of office space is somewhat fortuitous given the surge in demand for well-located residential properties that align with the changing lifestyles of a changing working population.

This rise in residential demand is due to a number of factors, the most obvious of which has undoubtedly been historically low interest rates as the National Treasury has struggled to minimize the impact of Covid-19 on households. But at the same time, the pandemic has also brought a number of benefits to the supply side of the residential real estate equation, as historically high barriers to entry have fallen for developers and investors. who recognize the valuable opportunities in the commercial-residential conversion space. . Prices for empty office buildings are lower than ever, the costs involved in converting these spaces are much lower than building them from scratch (especially from a utility infrastructure perspective), and local governments are actively seeking opportunities to partner with developers to take advantage of downtown residential projects as a way to address growing social housing backlogs.

Eligibility criteria for the relaxed home loan

In fact, the government is now participating in these real estate public-private partnerships with the entry into force of robust service level agreements between developers and social housing agencies for grant funding of up to 70% costs involved in eligible social housing projects. And most banks are following the government’s lead with far more willingness today than they were in the past to provide financing for much of the remaining 30% of development capital needs. On the demand side, banks are also largely turning to residential real estate with more relaxed qualification criteria for real estate loans and a willingness to once again consider loans at 100% or even 110% of the value for eligible applicants. .

The result of all of this is a very compelling case for investing in residential commercial conversions – especially those that include a significant social or affordable housing component. However, this certainly does not mean that investing in such conversion projects is an automatic ticket to success and wealth. As with any real estate development in any sector, caution is in order.

Understand the target market

On the one hand, it’s essential for any developer or investor looking to get into the commercial-to-residential conversion game to have a very clear understanding of their target market and potential buyers, then design and price the units. Consequently. For example, offering a small studio in the heart of Sandton for less than a million rand is sure to generate huge interest among young upwardly mobile employees who would otherwise pay the equivalent of their bond repayments on that amount for rent a similar unit. . But try to market the same 25m2 units in an older market, even if they have the financial means or credit history to readily accept the offer, and your selling strategy is unlikely to take a long day. of magnitude.

A second key success factor for commercial-to-residential conversions is the age-old adage about location, location, location. Fortunately, the majority of vacant office buildings that become available for purchase are already very well located for conversions that meet the growing demand of young employees who basically need enough space to be able to hammer their laptops almost every day, but also need to be relatively close to their office spaces on days when they are needed for work.

Balancing Living and Lifestyle Spaces

Related to the previous point, the most successful conversion projects are also those that have achieved the right balance between living and living spaces. The majority of buyers of these small, high-density residential units do not feel the need to own a vehicle or prefer to use it as little as possible. As such, their primary consideration is less whether one unit offers a few more square feet of space than another, and more whether it’s easy for them to live the lifestyle they desire. , without having to travel long distances to do so. Thus, integrating local and lifestyle shops into the development mix, or at least choosing a location with easy access to public transport, becomes a non-negotiable success factor for most conversion projects.

‘Can this last?’

Of course, the most common question asked by those considering taking advantage of the property conversion trend is “can it last?” The reasons for this concern are relatively obvious. The work-from-home trend is now shifting to a more hybrid way of working for most businesses, which means office space will once again be needed. In addition, interest rates are rising, which could dampen demand for and access to home loans. While both of these concerns are valid, it is highly unlikely that the demand for or use of office space will ever be what it was a decade or two ago. Hybrid work arrangements require significantly less office space than full office workforces. And although interest rates are rising, it will be some time (if ever) before the cost of servicing a home loan is so high that it makes paying rent more attractive.

It is very likely that the trend of conversion from commercial to residential is here to stay and that it will even accelerate in the medium term. And for developers and investors who do their homework and are open to partnering with local authorities, there is huge potential for lasting success.

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