Real estate in transition

Major social and economic changes have an impact on real estate and how it is used. But such changes need not lead to buildings being demolished. Why transformation properties are a hot topic in the real estate industry. By Christian Hunziker

Former churches are now family homes. Old slaughterhouses have become vibrant cultural event venues. Late 19th century apartment buildings are occupied by doctors’ practices. Former factories have been converted into edgy offices for startups. These examples and many more show just how adaptable buildings are, often changing use many times over the centuries.

So transformation properties are nothing new, but they are currently gaining relevance against the backdrop of sweeping social and economic changes. “Our city centres have long been dominated by shops and offices, busy during the day and deserted at night, but this familiar urban landscape and the associated real estate mix have come under growing pressure in recent years,” says Henrike Waldburg, Head of Investment Management Global at Union Investment. “It’s crucial for the real estate industry and local authorities to establish structures and use concepts that allow a flexible response to market changes going forward.”

Successful role models, but no magic formula

The aforesaid changes are evident all around us. People are increasingly shopping online rather than in brick-and-mortar stores, housing needs are evolving and offices are no longer just work environments but also spaces for networking and connection. Urbanisation and environmental sustainability are also powerful megatrends with far-reaching impacts. In a market study on transformation properties, Union Investment and consulting firm bulwiengesa examined how the real estate industry can respond to these trends. The study’s authors define transformation as “a comprehensive functional and structural redesign that enables a property to be developed for one or often several new uses, as an alternative to demolition followed by a new build.”

The Neue Höfe Herne development is a prime example of a transformation property. In Herne, a city of around 160,000 inhabitants in Germany’s Ruhr region, developer Landmarken has converted a former Hertie department store into a multifunctional space that hosts shops, a restaurant, a fitness studio and offices.

This transformation was not without complications, however, explains Thomas Binsfeld, a member of the management team at Landmarken. He points out that former retail properties often consist of large, dark spaces. “All the alternative types of use, such as offices, hotels and apartments, are typically more subdivided and need daylight.” To provide better access to natural illumination, Landmarken carved two courtyards into the existing property in Herne.

Transforming properties can make a valuable contribution towards enhancing the vitality and attractiveness of individual buildings, neighbourhoods and entire cities.
Henrike Waldburg Head of Investment Management Global, Union Investment

There is no magic formula or one-size-fits-all approach to property transformation, says Lars Jähnichen, managing director of consultancy and management company IPH Handelsimmobilien. “Each location needs to be examined carefully and the design concept tailored to the specific circumstances.” At the Gerber shopping centre in Stuttgart, for example, which was opened in 2014, IPH responded to changing retail patterns by transforming the top retail floor into a Ruby-branded hotel and co-working spaces. “In terms of construction, that’s easy to do,” explains Jähnichen, “because the rooms can be arranged to face either the courtyard or the street.” It gets more complicated if an atrium needs to be inserted into the building so that office space can be created, for example. “Whether such a transformation is economically viable depends on what level of rent is achievable and where the building is in its lifecycle,” Jähnichen adds.

Building costs are not the only crucial factor in the equation

This assessment is consistent with the findings of the study conducted by Union Investment and bulwiengesa. The experts consulted during the study agree that, while the construction costs involved in transformation vary from case to case, they are often as high as those for demolition and erection of a new build. Sebastian Nitsch, a member of the management board of Austrian firm 6B47 Real Estate Investors, likewise sees no cost benefits of taking the transformation route. In Vienna, 6B47 has so far converted seven office buildings into residential accommodation, including a former post office in the city’s 9th district – marketed as Althanpark. Such measures are, however, beneficial in terms of sustainability, which is currently gaining in importance as a result of the EU Taxonomy and Disclosure Regulation. “In conversions like these, we strip the existing building back to the reinforced concrete skeleton,” explains Nitsch. “Compared to complete demolition, this enables us to save resources, reduce the number of truck journeys and cut CO2 emissions.”

Other experts also point out that transforming existing buildings saves grey energy, something that is now a requirement for new builds. Accordingly, the study by bulwiengesa and Union Investment stresses that “transformation properties can be more environmentally friendly and cost effective in the long term than a new build.”

There are significant challenges to overcome before any environmental benefits can be realised, however. Nitsch notes that the structural conditions have to be right, particularly room heights, the spacing of pillars and the depth of the building. Fire protection requirements also need to be met. Above all, planning and construction law must permit a change of use. That’s not always the case in Germany, which is why Lars Jähnichen is calling on policymakers to “create the right conditions for conversions.”

Restructuring options for a wide variety of first-time uses

Ralf-Peter Koschny, senior manager at bulwiengesa, agrees that transforming properties is a complex process. Transformation has the best chance of succeeding if the urban environment and stakeholders are taken into account at all stages, he says. The conversions carried out in Vienna show that transformation is not limited to retail properties. Based on the qualitative analysis of German transformation properties performed by bulwiengesa, industrial and office buildings are more likely to be converted than retail properties. In the Polish city of Łódź, meanwhile, project developer Virako transformed a former vodka distillery into Monopolis, a mixed-use complex that combines offices, shops, restaurants, galleries and a fitness centre. The result is so impressive that Monopolis received a MIPIM award in 2020 in the Best Mixed-Use Development category.

Gerber, Monopolis, Neue Höfe Herne: it’s no coincidence that in all of these cases the project teams opted for a mix of different uses. According to the study, around fifty percent of transformations are implemented as a mixed-use concept. 

The reasons are compelling, explains Henrike Waldburg of Union Investment: “Transforming properties creates new opportunities to tap into smart complementary uses and user groups and make a valuable contribution towards enhancing the vitality and attractiveness of individual buildings, neighbourhoods and entire cities.”

By Christian Hunziker

Title image: Daniel Hawelka

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