In recent years, there has been an increasing “hotelisation” of residential accommodation. Moving in the other direction, accommodation which was formerly steadfastly in the category of “hotels” is looking increasingly like a home.
C class
Planning use classes are a classic case of the law stumbling hopelessly behind reality and trying vainly to catch up. Use classes, for the uninitiated, are categories into which the Town and Country Planning (Use Classes) Order 1987 (as currently amended) puts uses of land and buildings. “Change of use” can occur within the same use class or from one use class to another.
There was a major overhaul of the use classes in September 2020, but class C was unaffected. It remains:
- C1 Hotels, including apart-hotels, serviced apartments, boarding and guest houses where no significant element of care is provided;
- C2 Residential institutions such as residential care homes, hospitals, nursing homes, boarding schools, residential colleges and training centres;
- C2A Secure residential institutions, including use as a prison or detention centre;
- C3 Dwellinghouses – a use class which comprises:
– C3(a) covers use of a dwelling by a single person or a family;
– C3(b) covers up to six people living together as a single household and receiving care, eg supported housing schemes such as those for people with learning disabilities or mental health problems;
– C3(c) allows for groups of people (up to six) living together as a single household (where it is not a C4 house in multiple occupation).
- C4 Houses in multiple occupation – small shared houses occupied by between three and six unrelated individuals, as their only or main residence, who share basic amenities such as a kitchen or bathroom.
In a class of their own
The definition of C1 hotels excludes hostels, which are “sui generis” (of their own kind). Other uses become sui generis where they fall outside the defined limits of any other use class.
For example, C4 (houses in multiple occupation) is limited to houses with no more than six residents. Therefore, houses in multiple occupation with more than six residents become a sui generis use.
Large houses in multiple occupation (those with more than six people sharing) are unclassified by the Use Classes Order. They are described as sui generis. A planning application will be required for a change of use from a dwellinghouse to a large house in multiple occupation or from a C4 house in multiple occupation to a large house in multiple occupation where a material change of use is considered to have taken place.
The blurring of the boundaries
Depending on the specifics of any proposed change of use, including any building work associated with the proposal, it may require an application for planning permission or prior approval.
Traditionally, there has been a divide between hotels and residential accommodation. The key differences were security of tenure and access to things like a private kitchen and living rooms. In exceptional (and expensive) cases, a suite of rooms might be ordered but they were the preserve of the wealthy.
The substantial growth in recent years of the apart-hotel and serviced apartment segments – although short-term lets remain almost always planning class C1 – have started to blur the boundary between what is a hotel and what is housing. For example, real estate investment and development company Lamington Group has launched room2 lite as a follow-up to its room2 brand, by which the group created the “hometel” concept, described as “occupying the space between home and a hotel”.
Modern residential accommodation – for all stages of life, from student living to retirement homes and everything in-between – has a value-added offering of services such as inclusive bills; subscription laundry and housekeeping; and gyms and fitness classes, as well as the ability to move in and out at short notice. These services make them look more like hotels or serviced apartments than, for example, a block of flats.
The spectrum obviously varies, but it is a shift towards a sector of the market where you can have cradle-to-grave serviced accommodation. That level of servicing will obviously change (for example, a student might need the occasional Deliveroo, whereas very elderly people might need meals, daily care and medical support).
Add to this the “Airbnb effect”, which means that what is nominally a house or flat may be, at varying times, the equivalent of a holiday home or serviced apartment.
Can C1 still be housing?
It is rash to assume that, just because the accommodation provided does not fall within C3, that there is no obligation to provide affordable housing ownership as part of developments. Paragraph 64 of the National Planning Policy Framework 2019 states:
“Where major development involving the provision of housing is proposed, planning policies and decisions should expect at least 10% of the homes to be available for affordable home ownership, unless this would exceed the level of affordable housing required in the area, or significantly prejudice the ability to meet the identified affordable housing needs of specific groups. Exemptions to this 10% requirement should also be made where the site or proposed development:
a) provides solely for build-to-rent homes;
b) provides specialist accommodation for a group of people with specific needs (such as purpose-built accommodation for the elderly or students);
c) is proposed to be developed by people who wish to build or commission their own homes; or
d) is exclusively for affordable housing, an entry-level exception site or a rural exception site.”
The recent case of Rectory Homes Ltd v Secretary of State for Housing Communities and Local Government [2020] EWHC 2098 (Admin); [2020] PLSCS 156 is a cautionary tale in this respect. In that case, a proposal to develop extra care accommodation within the C2 Use Class was held to be housing – and therefore subject to the local plan’s affordable housing requirement. We are not aware of a case involving C1 accommodation, but with the haziness of the distinction, it can only be a matter of time before a C1 development is also regarded as “housing”.
A new asset class: the ‘living sector’
Thinking about investment and valuation considerations for this kind of accommodation is also evolving.
F3, one of the UK’s leading development management consultancies, now considers all kinds of accommodation with services as an asset class in their own right – the “living” sector.
There has been a particular focus by investors on the sector following its remarkable resilience through the pandemic. Co-living providers and serviced apartments in city centres were still reporting steady occupancy rates while city centre hotels – particularly those in tourist destinations reliant on international travel – were nearly empty. Serviced apartments limit the need for contact with staff and other guests.
According to F3: “The reliability and predictability of the income from the living sector has reportedly led to a compression of the yields. It is no longer considered an ‘alternative’ asset class, the living sectors are now mainstream asset classes having grown to become the second largest in Europe which accounted for €73bn of investment across the Continent last year.
“The growth of the living sector in Europe has been driven by an increasing demand from institutional investors for long-term yield from real assets, as well as a consumer demand for flexibility and convenience provided by specialised living formats with age-specific amenities, community creation and ‘customer’ service.”
With the reliability of the income stream, it is possible to value living assets more like rented accommodation and less like hotels. There are several ways to value a hotel, including: a direct capitalisation of stabilised EBITDA, discounted cash flow, or by using an approach which looks at comparables (price per bedroom). With living, the stability and predictability of the income means that the method, or combination of methods, used can be closer to a conventional institutional investment approach (capitalisation of the “rental” income). There does not appear to be a single valuation approach which is a recognised standard, but then that is also true of hotels.
There is still yet to be a recognisable market operating standard as a benchmark from which to value an asset in the living sector. While some brands, such as Locke, are owner-operated, some work on the basis of a separation of ownership and management.
Whether the living sector becomes a recognised asset class in its own right only time will tell, but the sector continues to grow. The demographic trends towards the flexibility of co-living over rented accommodation and homes-away-from-home for travellers means that the convergence of residential and hotel will continue regardless.
The English planning system has yet to catch up; there may in due course need to be reform to recognise that the sharp distinctions in the classes drawn in the planning system no longer reflect what is happening in the living market.
There is yet to be a consensus on how to value living assets, but their diversity means a unified approach is unlikely to be taken any time soon. Watch this (living) space.
Ed John is head of hotels and Jade Chalmers is head of planning at Howard Kennedy
