Opinion: Keeping the momentum with change of use

By Bridging Loan Directory 12th March 2018

At the turn of the year, Theresa May declared it her personal mission to solve Britain’s housing crisis, a vow she has made on several occasions throughout her tenure as the country’s leading politician.

Thus far, though, the government’s plans to address the UK’s lingering homes shortage hasn’t lived up to expectations, with little being done to tackle the mix of high house prices, reduced lending levels and a fall in income for first-time buyers.

The chancellor’s pledge to build 300,000 affordable new homes year-on-year has injected some impetus into solving the housing shortage. However, what’s arguably had more impact is the permitted development (PD) rights policy, a government initiative introduced in 2013 that allows developers to turn redundant office space into residential flats without the need for conventional planning permission. This has caused commercial-to-residential unit conversions to soar, and there remains a sizeable opportunity for both intermediaries and developers alike.

With a surplus of empty commercial units in the UK, coupled with a housing shortage, change-of-use conversions have been rising over the past five years, consistently contributing to the UK’s housing stock.

Making the most of what’s available

The rise in office-to-residential conversions is also a by-product of changing working practices across the UK’s major cities, which have resulted in a decline in office usage. Developments in digital technology – namely cloud computing – has allowed entire offices to become completely mobile.

With reduced dependence on long-term space and flexible working trending upwards, shared office spaces are fast becoming a mainstream alternative to signing long-term leases. This has been well received by UK businesses which have long suffered the contractual imbalances of landlord/tenant agreements, but has left many properties previously used as offices unoccupied and a target for conversions.

London and the South East have been at the forefront of residential conversions, accounting for more than a fifth of new housing added to the capital in 2016/17 – 16 per cent in the rest of country. These statistics are likely to be the result of larger housing demand, appetite in financing and the availability of commercial space suitable for conversion.

PD rights policy was proposed to accelerate new developments that look to meet the UK’s ambitious house building targets, and since the policy’s inception, change-of-use conversions have gone some way to meeting these goals.

There has been a duty-bound effort from councils to support these conversion projects, and the numbers speak for themselves: change-of-use conversions increased by 48 per cent between 2015 and 2016 with 41 per cent of these being office conversions. More importantly, new residential units have been formed from unwanted or unfit office spaces, which might otherwise blemish the surrounding area.

Despite the continued year-on-year growth, change-of-use conversions have been met with some resistance. Some mortgage lenders have been unwilling to lend against certain PD units due to worries around future demand. This is because many of the converted buildings were purely designed to be offices and are situated in the middle of commercial sites, such as suburban office parks.

In 2014, a well-publicised example occurred in Islington where the council decided to issue article 4 directions across the whole borough. This decision was blocked by the planning minister on the grounds that it had been applied disproportionately, resulting in a direction that covered specific clusters of office space rather than the entire borough.

The government’s stance on PD rights has been welcomed by developers, especially with capital values and housing demand growing much more quickly for residential property than for commercial. Further to this, developers do not need to go through the traditional costly and time-consuming planning process, providing a much faster process of fulfilling the demand in housing.

Oblix Capital has financed multiple change-of-use projects over the past three years, with conversions ranging from office to residential, student accommodation and semi-commercial. Recent cases include an 80-unit office-to-residential conversion in Manchester, a 77-unit office-to-residential conversion in St Albans and a 75-unit office-to-student conversion in Leicester.

With a large number of commercial sites still free for conversion, the industry must continue to support change-of-use – enabling the PD policy to achieve what it set out to.

Rishi Passi, CEO and founder, Oblix Capital