PD is back – and this time it’s institutional

COMMENT For years, permitted development schemes carried a reputation that deterred many institutional investors. From substandard unit sizes and cladding issues to poor-quality conversions by opportunistic developers, the legacy of first-generation PD created understandable wariness. But as the sector has matured, so too has the quality and the opportunity. Early schemes, from around 2013 onwards, were associated with micro-units that didn’t meet space standards, unmortgageable layouts, fire safety risks and fewer design controls such as access to natural light and ventilation. Many were delivered quickly and cheaply by developers exploiting a regulatory gap, cutting costs and workmanship, with little regard for long-term quality or sustainability. But the landscape has shifted dramatically. What’s changed most fundamentally about PD is the quality. Today’s schemes are not only compliant, they’re increasingly being designed specifically for rental, and much more thought has been given to the end-resident experience, as well as operational efficiency. Developers have responded to past shortcomings with a new generation of PD assets that make use of flexible floorplates to deliver larger units, better ceiling heights and improved access to natural light. Many of these schemes are fully stripped back to core, enabling future-proofed architecture that avoids the legacy issues of earlier conversions. Built for the future Today’s PD schemes benefit from a combination of reduced costs, improved planning pathways and more considered design. With no demolition required and a significantly faster route through planning, PD projects offer considerable time and cost savings. They can now be delivered at around £200 per sq ft, compared with approximately £275 per sq ft for new builds. The planning route itself is fast-tracked, with a statutory six-to-eight week review period and a high likelihood of approval. Crucially, there is no requirement for affordable housing contributions, enhancing scheme viability in a climate where development margins are under increasing pressure. Lessons have been learnt from past mistakes. Developers, lenders, and investors alike now understand what’s required to deliver a PD scheme that meets institutional expectations. Developers are now working with better contractors, delivering schemes with stronger warranty and build guarantees and EWS1-compliant facades. Dual-stair cores, common in legacy office buildings, address fire safety concerns that have proven to add considerable mitigation time and cost to new-build construction. From a sustainability perspective, PD also offers a clear ESG upside. By retaining and repurposing existing structures, developers are saving significant amounts of embodied carbon, an attractive proposition for funds seeking to align with net zero goals without compromising on location or quality. The result of these changes is a new generation of PD assets that are institutionally underwritable, future-proofed and increasingly attractive from both a resident and investor perspective. PD isn’t without its challenges. Schemes are inherently constrained by the existing structure and floorplate of the building, which can lead to inefficiencies if not addressed through intelligent design. And while new developments over 18m in height require two stair cores under new fire safety regulations, most office buildings already meet this standard, making PD well-placed to comply. Window of opportunity The fundamental shift is that we are finally seeing PD schemes reach a level of design and delivery that makes them genuinely attractive to institutional capital. As this quality becomes more commonplace, we expect to see increased liquidity, stronger comparables and eventual yield compression for best-in-class assets. In a market where high interest rates, rising build costs and planning delays are all slowing down traditional development, PD offers a rare opportunity: to bring forward high-quality rental homes at scale, faster and more affordably, without sacrificing standards. PD is no longer a byword for poor quality. It’s a maturing route to rental supply with lower delivery risk and cost, ESG benefits, and growing investor interest. For those agile enough to respond to market opportunity, now is the time to take PD seriously. Alex Matthews is head of build-to-rent at Harris Associates Image from Harris Associates