It’s been five years since the government kick-started the changed outlook of commercial property by allowing developers an easier way to apply for change of use.
Since the initial rollout of permitted development rights (PDRs), which was at first a temporary permission to allow offices to become residential dwellings in the aftermath of the recession, the net has widened and recent additions now include light industrial.
This broadening of potential across the commercial category, coupled with the higher stamp duty exemptions applicable to non-residential and mixed-use properties, has meant this once niche sector has become a thriving hotbed of opportunity appealing to a new range of buyers.
What are PDRs?
PDRs are granted by parliament rather than local authorities and mean applicants no longer have to go through the lengthy planning process and instead can make a “prior approval” application to the local authority.
This is a light-touch application process by which a local planning authority is permitted only to consider transport and highways impacts, contamination risks and flooding risks. Under the prior approval process, the local authority has no discretion to apply any other planning policies in determining the application such as minimum space standards or affordable housing contributions or equivalent Section 106 developer contributions.
Such “lack of” considerations have made PDRs become a game changer in the commercial market. Between May 2013 and April 2015, London boroughs approved a total of 834,000 sq m of office floor space to be redeveloped as residential (londoncouncils.gov.uk). Across the country, 37,190 gains from change of use of non-domestic into residential were made, with 18,887 being added through PDRs in 2016-17. (DCLG: Housing Supply; net additional dwellings, England: 2016-17).
Too good to be true?
The key to understanding PDRs is that it is only the change of use that is permitted. Under PDR, shops and other retail premises (Class A1 and A2) can be converted to residential, but this is limited to buildings of less than 150 sq m. Offices (B1a) can be converted to residential; and light industrial properties up to 500 sq m (B1c) and storage and distribution centres up to 500 sq m (B8) can also be converted to residential.
Agricultural buildings also fall under PDR, with the limit here for residential conversion being up to 450 sq m and a maximum of three dwellings.
The effect of PDRs means these buildings can, with a “prior approval” from the local authority, be converted to residential without the need for an onerous planning application. However, PDRs do not relate to the actual conversion. That means if you need to redesign the layout of the building, add an extension or alter the appearance, you may still need planning permission. Also, all new dwellings delivered under PDRs are required to meet building regulations.
Be aware of attitudes
It is also important to be aware of your local planning authorities’ attitude towards PDR. Research last year by Carter Jonas found that nearly half of all the largest local planning authorities in England believe that PDR is a problem in their area, up from 40% in 2016. Of the 73 local authorities surveyed, the primary concern regarding the conversion of offices to residential centred on the loss of jobs and the impact that this would have on the local economy.
Local authorities can remove PDR using an Article 4 direction: at the time of the Carter Jonas survey, the number of authorities outside London with an Article 4 direction in place had doubled to eight. However, the 80% that do not currently have a direction in place remained firm on their decision not to introduce one in the future. In contrast, a slight increase was observed in London, with over half of the LPAs surveyed in inner and outer London now adopting the direction and 70% confirming that they are either considering implementing or planning to introduce one.
PDRs have clearly opened up a range of commercial property possibilities that attract a new breed of buyer keen to leverage the potential on offer. But, as ever, the devil is in the detail.
Case studies
‘Realise what can be done”
Inspired by their entrepreneurial parents, husband-and-wife team Mike and Victoria Stenhouse, both 30, of Inside Property Investing, quit their graduate blue-chip jobs to make their way in property. They have converted six commercial buildings to residential.
“In the beginning we were naïve and bought our first office without knowing what we were doing. We’d done a few residential refurbs and were amazed by the potential on offer and the price per square metre. The building had been empty for more than five years, was a complete wreck and wasn’t financially viable as an office. But, as it turned out, it took more than a year to get planning, went to committee twice and the refurb cost us way more than we initially thought,” says Victoria.
The gamble paid off. They bought building for £215,000 and spent £130,000 to convert it into a large HMO, which was valued at £460,000 with an annual rent of £60,000.
“We’ve learned a lot since that first one. Now we’ve managed to get the pre-build process down and our costings are much more realistic. Commercial buildings cost about 50% more than a usual residential refurb and you need to factor in building regs and make sure you involve the officer at the start to get sign off. Under development rights you don’t have to apply for full planning, but you still have to get approval and there can be objections.”
The rewards on offer can be large, but it’s still a long wait. After allowing six to 12 months for organising the consents and drawing up plans, six months for the renovation and six months to refinance or sell, capital is typically tied up for two years.
“The key to success is in understanding what can and can’t be done,” Mike says, such as looking at buildings only up to 150 sq m to use PDRs. “You need to study the local development plan and look for the challenges and opportunities. Understand what schemes were approved and which were turned down – and why.”
“Converting commercial property offers big rewards, but it’s more complicated and risky. The properties need more work, the projects are longer and everything is more expensive.
“Ultimately, you need to be realistic about costs, have back-up resources and be prepared to wait. It’s a long game, but it’s worth the wait.”
“It’s all about the deal”
Roger Brown, 53, of Parkhill Homes, has been developing “higher end” houses since he was a teenager, after following his father, a successful property developer, into the construction business. Parkhill Homes has converted 20 buildings, including a range of former agricultural buildings and offices, into residential dwellings. It’s a business he has excelled in, but it is not without its pitfalls.
“Converting commercial properties to residential is high risk and time intensive. There’s a reason why I say every project is like betting the ranch,” Roger says.
He explains how, typically, planning – even if PDRs are in place – means most building projects take at least one to two years before building work can begin and costs quickly mount even before the first spade has been struck.
“People don’t realise the amount of paperwork and fees that are involved in converting a building. This includes surveys, soil analysis, architect fees, planning consultant fees, artists’ impressions, engineers, and environmental searches. For a typical planning run, you’re talking a minimum of £50,000 to £75,000 before you’ve even started work.”
And even then, there’s no guarantee of success.
“There was a site I was looking to do a joint venture on. It was a range of redundant commercial buildings which looked like they should be ripe for resi conversion.
“The adjoining site had been given approval and this was a sizeable site. But arguments over flooding meant it was not proceedable,” Roger recalls.
The experience taught him the importance of knowing whom to trust and rechecking everything.
“Attitudes can change and what was once not acceptable for residential conversion can become so, depending on the pressures planners face,” he says.
He predicts the commercial market will become more competitive, saying “The general public is much more sophisticated today. That means I have to come up with increasingly complex solutions to make a deal work.”
The problem he sees nowadays is that people are paying inflated prices for sites and operating on too-thin margins. “To make money in this game, you have to see a gain that nobody else has spotted,” he says.
Expert views
Chris Coleman-Smith, Savills
Savills’ head of auctions, Christopher Coleman Smith, sold a large-scale residential or mixed-use conversion opportunity on Peckham High Street, SE15, in May. Guided at £2.25m and offered without planning, it was snapped up prior to auction.
Coleman Smith says he’d noticed a trend for buyers of opportunities like this to carry out the conversion with a view to holding the investment for three to five years, rather than trading it on as soon as the project is complete, because of the uncertainty around resale prices.
“Medium-sized landlords looking at opportunities for five to 20 flats are tending to do the conversion and hold it, taking some equity out so they can go on to another property. This may also be part of the fall-out from the changes affecting buy-to-let,” he says.
Those who snapped up PDR opportunities a year or so ago would likely be in the same position, he adds.
“A lot of people hopped on the PDR bandwagon. If you bought something like that a year ago, it may be that your resale prices have come back a bit. You might as well hold it, refinance, and go on to another project.”
Ian Tudor, SDL Auctions
Ian Tudor, SDL Auctions’ head of commercial auctions, says commercial properties with conversion potential have become more saleable since the government changes to permitted development rights came into force.
“I don’t think it’s necessary to have PDR in place to get a good price, but people are obviously more aware that it may be easier to convert,” he says.
SDL has noticed keen appetite for former banks, which tend to be in prime high street spots, ideal for coffee shops with flats above, and for unwanted police stations without any form of planning permission in place for conversion.
Last year’s sales included the 1904-built police station on Canterbury Road, Perry Barr, in Birmingham, a five-minute drive from Aston University. The 5,600 sq ft block sold in December for £730,000 off a guide of £275,000 and plans are being made to convert it to apartments with an eye on the student market.
However, Tudor says he has noticed a slowdown in pub companies selling off surplus properties over the past 12 months, partly because many are now looking to add value themselves through planning and conversion.
Lender view
Specialist lender Together provided a total of £806,000 to finance the purchase and part of the development of the 1960s-built Fell House office block in Wakefield, West Yorkshire.
Investors Paul Rothwell and Emma Thompson are now embarking on a major conversion project to turn the previously empty block into 32 one-bedroom flats under permitted development rights.
Rothwell’s Empire Property Concepts has built up a £33m portfolio in 13 years, investing heavily in disused commercial buildings, renovating them, and letting the properties. Together provided a £300,000 short-term loan for the purchase of Fell House and £506,000 towards the cost of developing the four-storey office block, which was previously used as offices for West Yorkshire Police.
Barry Dillon, Together’s regional development director for Yorkshire, says: “This just shows how popular buy-to-let remains among forward-thinking property investors, despite changes to the sector.”
Rothwell says: “It is a building that has been stood empty and we are looking to modernise it to transform it from quite an uninspiring building into a great place to live.
“We generally buy commercial buildings such as old offices and add value by refurbishing them and renting them out as self-contained flats, rather than converting existing residential properties.
“This latest project will go towards meeting the growing demand for housing and attract people into the city centre.”
