There is a simple process which you can follow in order that you can successfully evaluate a commercial conversion. Critical steps need to be followed in order that you can establish if there is money in a deal.
You can complete these quickly when looking at a property, which enables you to easily sort the wheat from the chaff.
1. Work out the gross internal area (GIA) of your building in square foot
This should be on the agents details (or a less accurate source could be the EPC). Net internal area (NIA) would exclude lobbies, stairs, toilets etc – some of which can be used in apartments however so Gross internal area is more relevant.
2. Work out how much of this area is useable
Buildings with a deep floor plate where natural light is not transmitted to the center of the building will have less useable space for bedrooms/conversion to residential than a long thin building. Long buildings have more external wall area and therefore opportunity to use the space more efficiently by getting light into bedrooms.
Generally bathrooms, corridors and if you are really struggling lounges can be sited towards the centre of the building where there is no natural light.
3. Work out how big you want your 1 and 2 bed flats to be
Towards London you are more likely to be going for smaller units where I have seen new 1 beds as small as 32-40 SQM, this could be as high as 55SQM for higher spec developments and those which are further into the Midlands/North. 2 beds might be more like 45-65 SQM per unit.
4. Take the overall useable GIA
Take about 10% off for corridors, stairwells etc and with the above sizes in mind you will have an idea of how many units you can get from each development, giving you a rough Gross Development Value. You can get an architect in later to sense check this and ensure you have your numbers right once you start to spend some money on the building.
5. Once you have a rough Gross Development Value you will need to take the following off your costs
- Conversion cost: £70/ft-£150/ft (and can go higher in London) depending on building type, location and spec. Get accurate quotes from builders
- Cost of splitting Gas, Electric and water
- Cost of professionals such as architect, QS, planning consultant, structural engineer, building inspector/control, Acoustic testing/engineer, surveyors
- Cost of remedial works needed to satisfy warranty plus the actual cost of warranty
- Cost of Development finance/bridging, utilities whilst empty and insurance
- Cost of legals
- Selling agents commissions
- VAT (5% on commercial conversions where you keep and don’t sell the units, this is reduced to 0% if you sell the units)
6. Once you have taken all of these costs off you deduct your profit margin
Which should give your purchase price.I look for a 15% minimum as I don’t feel it is worth the risk/my time to participate in projects which will yield less
Expect the project to take 2 years from start to finish and don’t borrow money for any less than 18 months, as in reality things will come up and delay the project.
7. Make sure you have 3 suppliers for everything
Any less and you put yourself at risk of price rises, poor service or suppliers that are no longer able to provide what they once did which could put your project at risk.