Spending money to make money

29 March 2002

Aim high to make money

from farm offices

What are the chances of a redundant farm building

converted to office space making any money? It depends

on where you are and how you do it, as Daniel Jones of

Bidwells explained to David Cousins

FOR most people, the idea of turning a disused farm building into a set of offices is mildly terrifying. Exciting too, of course, and probably very important to the future of your overall business. But investing typically £200,000-£750,000 to carve half a dozen offices out of that agriculturally-useless barn is not an undertaking for the faint-hearted.

Daniel Jones of property consultants Bidwells fully understands the nervousness of farmers pondering such projects. A farmers son from Gwynedd, he has spent the last few years advising on conversions of redundant farm buildings to Rural Business Space (RBS) on behalf of farmers and estate owners and is all too familiar with the hurdles that have to be crossed.

In that time he and his colleagues have completed 20 projects totalling 100,000sq ft and have another 50 or so in the pipeline. A lot of these are in East Midlands and the Eastern Region where Bidwells has its headquarters, but increasingly theyre being called in to other parts of the country. Many are destined to become offices, though RBS also includes storage and distribution, light industrial and retail use.

So how does he answer some of the questions often asked by those setting off down this potentially rocky road? For instance:

What are my chances of success?

Quite good, provided you have the following, says Mr Jones.

&#8226 Location – are you reasonably near to a large town or city? Is there a major trunk road nearby? Being down a long, winding single-track road is more difficult, but if this is you, dont give up.

&#8226 Quality of building – fantastic stone buildings or 16th century oak-framed buildings are great, but not essential. However tenants do like original features like beams and ironwork and the more of these you can retain, the better youll stand out from more mundane buildings. Money spent on landscaping is cash well-spent too.

&#8226 All mod cons – companies looking to relocate in rural properties want ample parking, good data and telecoms services, air-conditioning (sometimes) and good quality of fittings like lights and windows. Meeting areas, a small conference room and a kitchen area (or better still a proper kitchen) could swing the deal in your favour.

How much rent can you charge?

That depends on how well youve met the above criteria. "Rents in towns and cities vary from £5/sq ft/year to £30/sq ft/year, with an average across the country of £10-£15/sq ft/year," says Mr Jones. "However, good quality RBS should be able to achieve a 20-30% premium on that."

How many units do you create? It depends on your likely tenants, he says. In some areas you will only attract small businesses. In more business-orientated areas there may well be a medium-sized firm that will take the whole building at a premium rent and be persuaded to sign a 10-year lease. The security of your investment will depend on the covenant of the firm, that is the strength of its business.

"The difference in total rent can be considerable," says Mr Jones. He cites the example of a 5000sq ft scheme divided into three units and let out to three smaller companies on three-year leases at rents of £12/sq ft.

With two similar Bidwells projects, the bold step has been taken of aiming for a single larger business to take the whole scheme. More money has been spent on the project but the result being rents of £18/sq ft and longer leases. Also, one big project will involve less duplication of facilities and hence yield more useable space.

Bidwells have, for example, overseen a scheme at Castle Howard, N Yorks where these premium rents have been achieved.

How big is the market for this kind of thing?

Again, location is crucial. Theres obviously a much bigger reservoir of potential demand in populous, prosperous areas than there is in sparsely-populated, economically depressed ones.

It depends, too, on what youre offering. Most of your potential tenants will not have seen RBS before. They will be weighing the advantages of a rural location (good parking, easy to get to by car, nice environment) against those of a town or city one (close to shops and restaurants, easier to get to by public transport).

So if you can offer them something slightly different from the average, the potential market is strong. If, on the other hand, your conversion has nothing special about it, either architecturally or in terms of access, youre more likely to find it difficult to let the offices in more difficult times.

Remember, too, that tenants are getting increasingly sophisticated in their requirements from an office building. So their decision may turn on something as trivial-sounding as the presence of good kitchen facilities or an attractively landscaped amenity area.

How good is the market for selling a farm building converted into offices?

If youre just starting down the barn conversion road, youve probably thought no further than getting tenants in. But such buildings are saleable commodities, with the value dependant on the strength of the tenant(s) business, the terms of the lease and the amount of rent theyre paying. Potential buyers like high rents and long-term tenants, so much so that the 10-year, £18/sq ft/year example above could well be worth three times as much as the three year, £12/sq ft/year one.

How welcoming are the planners likely to be to my proposals?

"That depends on where you are," says Mr Jones. "In many areas the planners are receiving a lot of planning applications for RBS conversions, so they may take the attitude that they have more than enough already. Theres then a temptation to try to reject applications on a technicality.

"Planners will respect your application more when they realise you know your game. Preparation for the first meeting is critical – have sketch plans and justification for your proposals ready and be firm and fair with the planners. They need to feel a strong involvement and will often then get more enthusiastic about a project."

Above: Gerald Franklins barns were converted into 4400sq ft of office space that was occupied by a single tenant.

Above: Stephen Franklin (right), a relation of Gerald, is just starting out on the RBS route. He and his wife Kate have sought Bidwells advice and are now planning to broaden their farm business by converting a series of barns into 10,000sq ft of high-quality offices.

As much or as little as you want

Converting a redundant building into offices is a complex business. The process will involve deciding on strategy, doing a financial feasibility study, gaining planning permission, organising the architectural plans, getting (and overseeing) builders, marketing the offices, dealing with tenants, maintaining the offices, not to mention getting to grips with the VAT, capital gains tax and inheritance tax aspects.

Bidwells has a dedicated team that can deal with all aspects of the project, says Mr Jones, so farmers can commission them to do part of the project (the stage up to and including getting planning permission, for example) or all of it.

Do you have to get professional advice? Apart from doing the architectural drawings, a farmer with the time and inclination could in theory manage the rest. Some like to oversee the building part themselves, for example. But knowing what potential tenants want from an office and dealing with planners, not to mention unravelling the intricacies of tax law, is probably best with some involvement from a professional.

If you do decide to employ an expert of any sort, whether its an architect, planning expert, land agent or whatever, make sure theyre familiar with RBS and have experience in this type of project. Ask them to show you some of their completed projects.

What would a firm like Bidwells charge you? For a typical 5000sq ft set of office units, getting it to the stage of achieving planning permission, the cost would be in the region of £5000, including all detailed plans, says Mr Jones. Employing them for the whole project and writing out the cheque may make you wince at the time, but remember the potential gain in income from getting the scheme right first time will pay dividends.

Daniel Jones can be contacted at 01223-559307 or djones@bidwells.co.uk

Spending money to make money

Gerald Franklin decided to convert a set of 1900s stables into offices in mid-1999. He had already put the farms 73ha (180 acres) of arable land into a whole-farm contract, but was concerned the diminishing returns of recent years would not bring in enough to live on. The location is good, just south of Cambridge itself and handy for the M11 motorway.

He brought in Bidwells to organise the whole project apart from overseeing the building work. Several years of running a plant hire business alongside the farm meant he was confident of running that side himself.

The whole project involved 4400sq ft, of which about 800sq ft was new-build. The latter can be difficult to get planning permission for, but by negotiating, Daniel Jones and Gerald Franklin were able to push it through.

Not long after the building work had started, Bidwells found a tenant in the form of Velfac (part of the Velux window group). Terms for a pre-let agreement were agreed at the equivalent of £18/sq ft.

Though financially attractive, the pre-let agreement does affect the project in a number of ways. For a start, Velfac were keen to move in as quickly as possible, so the building schedule had to be brought forward (not always as easy as it sounds) and all the barns converted in one go. The original idea was to do them in stages.

Such agreements also give the tenant scope to have an input into the design of the building itself. In this case Velfac were keen to have upgrades of some interior fittings, which Mr Franklin was happy to comply with. He also replaced a roof that might, in other circumstances, have been repaired.

The cost of converting the buildings was £340,000, says Mr Franklin. Finance for virtually the whole sum came in the form of a loan from Barclays. Bidwells agreed this and Mr Franklin said the local bank manager (himself a farmers son) was sympathetic when he went to them with a request to finance the project in one go rather than in stages.

While the normal payback period for a farm building conversion financed by borrowed money is 10-15 years, the good rent achieved at Mr Franklins units means he should see a payback in 7-8 years.

Above: Daniel Jones from Bidwells and Cambs farmer Gerald Franklin at the new farm-based office units.

Right and below: The farm buildings before and after conversion.

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