Office to Residential Conversions.
In this article, we look at the recent changes to Permitted Development Rights and discuss the implications for residential valuers.
History and Overview
Permitted Development Rights (PDR) are the rights to undertake certain types of building or conversion work without the need to first apply for planning permission
In effect, PDRs are a general form of planning consent granted by central government rather than by the relevant local planning authority. For example, subject to certain conditions, you would not usually need to obtain planning consent if you wanted to build a conservatory, though it is worth remembering that PDRs for many common projects for houses do not automatically also apply to flats or maisonettes and that commercial properties have different PDRs to dwellings.
PDRs do not apply automatically for every property. In some locations, known generally as ‘designated areas’, permitted development rights are restricted. For example, properties in:
- Conservation Areas
- National Parks
- Areas of Outstanding Natural Beauty
- World Heritage Sites
- The Norfolk or Suffolk Broads
Since 2013, the right to convert office space to residential homes has come under Permitted Development Rights.
In October 2018, the government launched a consultation proposing to amend PDRs to explore permitting the demolition of commercial buildings to provide new housing, allowing certain types of buildings to be extended upwards and extending PDR to include retail to residential conversions.
In January 2019, the then Ministry of Housing, Communities and Local Government defended the use of PDRs saying they were good for regeneration – something Labour does not agree with having previously pledged to scrap office to residential conversions.
In February 2019, the think tank ‘Centre for Cities’ was also critical of some of the effects of office to residential conversions, arguing that this permitted development right had made it more difficult to address competing demands for commercial and residential use when allocating land.
One of the aims of readily enabling office to residential conversions was to help those high streets and town centres suffering economic decline by making it easier to convert empty offices into homes. However, not everyone wants to live in struggling town centres as they do not offer the benefits that people look for from city centre living in the major cities. Consequently, this policy has had little impact in the centres of struggling towns, while in some of the major cities, where industrially inspired ‘loft’ dwelling is aspirational, the policy has almost been ‘too successful’.
For example, between 2014 and 2017, there were just six conversions across the whole of Barnsley (not just in the city centre), while in Blackburn only one took place. Whereas in Manchester, for example, PDR has impacted already successful city centres creating competing demands for both commercial and residential space. Parts of Manchester city centre are exempted from this PDR to manage this competition and much of central London has been fully exempted to stop any such conversions.
Even with this development right in place, there are concerns that returns on UK commercial property will continue to deteriorate. High streets and shopping centres are continuing to see vacant premises suggesting the scope for such development rights will continue.
What’s new in permitted development for 2021?
In March 2021, Robert Jenrick, then Secretary of State for Housing, Communities and Local Government, announced a big change to PDRs in England & Wales, and on 1 August 2021, the government introduced the new Class MA change of use permitted development rights.
What is Class MA?
Class MA is intended to offer a solution for struggling high streets and town centres by offering a new opportunity for commercial to residential conversion to either retail buildings that have never recovered from the financial crash a decade ago or vacant offices unlikely to recover from the working from home trend, post-COVID. These buildings and spaces could offer a unique opportunity to meet the unending housing crisis.
All permitted development rights have certain clauses and restrictions, and Class MA is no different. The restrictions for the use of Class MA extend to location, size and historical use and occupation.
Use Class E
In order to understand Class MA, it is essential to understand Use Class E as under Class MA, commercial buildings can only be converted to residential if they fall under ‘Use Class E’.
Use Class E is itself a new category having been created in September 2020 by combining several other use classes (the old use class system having been introduced to protect traditional retailers and town centres). These are the property uses that now come under E:
- Retail/shops (previously Use Class A1)
- café and restaurants (previously A3)
- financial and professional services (previously A2)
- indoor sport and fitness (previously within D2(e))
- medical or health services (previously D1(a))
- crèche, day nursery or day centre (previously D1(b))
- office (previously B1(a))
- research and development (previously B1(b))
- light industry (previously B1(c))
In other words, the use classes of A1 (shops), A2 (financial and professional), A3 (restaurants and café) as well as parts of D1 (non-residential institutions) and D2 (assembly and leisure) are no longer individual use classes, they have all been regrouped under Use Class E. And under the new Class MA, any Class E building can be converted to residential.
Use Class E was introduced to support ailing high streets. Even before COVID-19, town centres have been in decline for years due to the combined effect of Amazon and other online retailers and high business rates. The thinking was that if you combined several use classes into one new use class, thereby removing the necessity for planning permission to change the use, it would help property owners and occupiers be more creative and agile in the way they brought previously redundant buildings, and thus locations, back to life. The government has a laudable vision for the high street where a greater mix of retail, leisure, and business activity will engender life and prevent urban decay.
And Use Class MA is a natural progression to this strategy, but there is one important restriction on E to MA and that is that the property in question must be vacant. In other words, Class MA only applies to vacant buildings. There can be no tenants in situ and the property MUST BE vacant for a minimum of 3 months before this point and have been in Use Class E for at least 2 years prior to the proposed change. Also, unlike other use classes, work cannot just commence on a residential conversion. An application does have to be made to the local planning authority for ‘prior approval’ before doing anything – not quite the same as a full planning application – and the authority can consider the suitability of the conversion. The rules associated with Class MA Permitted Development Rights are contained in detail in the General Permitted Development Order (the GPDO)
here: https://www.legislation.gov.uk/uksi/2015/596/contents, but some other key points are:
• The total accumulated floorspace of the building to be converted cannot exceed 1,500 square metres ( all previous applications under Use Class MA count towards this total area – so say you apply first to convert a ground floor, but later under a separate application, the first floor, then the total area converted cannot exceed 1,500 square metres).
And what about Class O?
Class O was the class that authorised a change of use from office to residential use. To be clear, with the introduction of the new MA class, this PDR was removed.
However, when considering the points covered above in relation to Class MA, it is obvious that the Class MA requirements are likely to be more onerous in a straight office to residential conversion, principally because of the new cap of 1,500sqm. There was some speculation that this might cause a rush of Class O prior approval applications being submitted before 31 July 2021, but a swift search of the internet cannot confirm, or otherwise, this thought.
Are these conversions any good?
On the face of it, this question may imply an existing prejudice, but it was the Ministry of Housing, Communities and Local Government that commissioned research into the quality standard of homes delivered through permitted development rights for the change of use.
• Listed buildings and scheduled monuments are excluded
• If the property is located on a site of special scientific interest (SSI) or within an area of outstanding natural beauty (AONB) it is excluded and it is also excluded if it sits in the Norfolk or Suffolk Broads, a National Park or a World Heritage Site.
Also, when an application for prior approval is made, the local planning authority can assess the following issues:
• Transport and parking
• Contamination
• Flooding
• Noise from nearby commercial premises
• The impact on the character and sustainability of a Conservation Area if the subject property is within a conservation area
• Whether there will be adequate natural light in all habitable rooms of the proposed dwellings
Published in July 2020, the research, commissioned from UCL and Liverpool University, found:
- In terms of access to services, transport and green space, and the general level of deprivation within a neighbourhood, there is overall little difference between PDR and planning permission schemes.
- PDR schemes were more likely to be in primarily commercial or industrial areas than the planning permission schemes, with some offering very poor residential amenities.
- Of the schemes studied as part of the research, only 22.1% of the dwellings created through PDR would meet the nationally described space standards (NDSS), compared to 73.4% of units created through full planning permission.
- A greater proportion of the PDR residential units were found to be one-bedroom or studio accommodation.
- A greater proportion of the PDR units had single aspect windows (72%, compared to 29.5% of planning permission developments, suggesting worse natural daylight; indeed, some units covered by the research had no access to natural light and others had such contrived floor layouts as to make any daylight far removed from the useable floor space).
- Having regard to amenity space, the research found only 3.5% of the units they considered had access to private amenity space compared to 23.1% of the planning permission units.
Overall, it concluded “… it is the combination of very small internal space standards, a poor mix of unit types, lack of access to private amenity space/outdoor space, and inadequate natural light which can provide such a poor residential experience in some permitted development units. Looking within the categories of change of use, space standards, window arrangements and access to amenity space are all worse in office-to-residential schemes than the other categories of PD.”
The full report can be found here: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/902220/Research_report_quality_PDR_homes.pdf
And there can be vocal opposition to some developments. Recently, a long-vacant office building in a good location on Portsmouth Harbour was described as ‘rabbit hutch flats’ and slums of the future: https://www.portsmouth.co.uk/news/politics/portsmouth-ravvit-hutch-flats-listed-ps825-rent-month-former-office-block-prove-popular-3082609
Where does all this leave the valuer?
As has been discussed, the market for some residential conversions has already been established; lofts in city centres such as Manchester and parts of London and, of course, the well-established Barn Conversion are all aspirational living. But, as the Home Owners Alliance correctly points out in this article https://hoa.org.uk/2020/07/permitted-development-rights-office-to-residential/, some conversions just don’t carry that aspirational tag, and if a property is less attractive by definition, there will be fewer buyers interested (or at a significantly reduced sum) and lenders are concerned about the ‘risks’ associated with its lending book.
The relevant guidance
When undertaking valuations of conversions, the valuer must be familiar with the various relevant practice and guidance notes issued by RICS and, when acting for a lender, the guidance issued by that lender.
The Red Book will apply, but for new conversions, the ‘Valuation of individual new build homes – 3rd Edition December 2019’ will apply and the ‘Valuation of residential leasehold properties for secured lending purposed – 1st Edition May 2021’ is also very likely to apply – particularly for the Class O conversions which did not have the ‘size cap’. (Sava published an article on the new build valuation guidance note here https://resources.sava.co.uk/kb/articles/valuing-new-build-property).
Inspection, Valuation and Acceptability
Since we know that many conversions do not have the same amenities as planning permission developments when considering suitability for secured lending, valuers should take care to address the following points:
Inspection/Access/Marketing
- If a new conversion and work are still underway, ideally, the valuer should have a look at the site access and view the subject flat/dwelling or ‘show’ accommodation. Does it live up to the marketing hype?
- Are floor plans available? Where they are, the valuer should consider all the units in the development in terms of:
- general suitability for residential use
- any access issues
- is the level of natural lighting suitable?
- size of rooms and overall size of the accommodation (Several conversions struggle to work within the limitations of the original building, leaving small bedrooms or living accommodation, for example)
- other amenities such as poor views
- Is there a local sales office to make the appropriate enquiries?
In addition, if there are scaffolding or developer hoardings shielding the development, it should be noted that it is difficult to ascertain the external appearance.
Location
As some PDR schemes are more likely to be located in non-residential areas, careful consideration should be given to the following locations/scenarios:
- Properties located on, forming part of, or adjacent to;
– Light industrial/industrial parks
– Business Parks
– Retail Parks
– Distribution/Warehouse parks
- Located in an area that is predominately commercial/retail/business and there is no other residential
- Areas with no residential infrastructure i.e., amenities such as transport/schools/shops etc.
- Areas subject to excess heavy-duty traffic/deliveries/distribution
- Access via commercial areas
- Impact of any adjacent restaurants/food outlets/public houses
- Parking: some city-centre developments may not have parking, it should be considered if this is in keeping with other developments in the area.
Construction and Condition
Valuers should be aware of the limitations of the original structure, suitable construction types (lender specific) and, of course, any concerns around claddings. Some lenders will require a structural engineers report. Consideration should also be given around any borrowed light, suitability for conversion, and condition of key elements.
Design and Exterior Appearance
- Generally, the external elements of an office/commercial building should be updated/modified to not have such an appearance. The impact of the appearance should be considered for demand and saleability
- Buildings with atriums/borrowed light should be considered carefully, and any impact this may have on saleability/marketability
- Limited privacy i.e., atriums or being overlooked
- Window size and height/adequate ventilation/heating/cooling systems should be considered
- Poorly planned or badly managed common areas
Lease terms
Individual lenders have different requirements when it comes to lease terms and the specific lender requirements, in terms of acceptability, must be considered. In general, consideration should be given to;
- The unexpired lease term (ULT)
- The starting ground rent
- Ground rent escalation terms and whether this is acceptable regarding specific lender guidelines.
Service Charge
Valuers should review the service charge and deem whether this is reasonable when compared to other comparable buildings in the immediate area.
Warranty
For new build/conversion/initial occupancy, a suitable warranty is required, as per specific lender policy
UK Finance Disclosure of Incentives Form (UKDIF)
For newly converted/initial occupancy cases, a UKDIF is required. Any disclosed incentives (financial and non-financial) should be treated in accordance with standard practice and reported in line with specific lender policy.
Market Appeal/Demand/General Lending
Consideration should be given as to where the demand will come from, for example, schemes that are aimed at BTL/Investor sectors may be unsuitable for some lenders, and more generally whether the proposed market rents can be justified by comparable rents in the area.
Lenders are also understandably nervous of future problems arising in an unproven market, for instance where a location is predominantly PRS, and, as with all ‘new developments’, do not want to be exposed in an area where sustained values are not proven. Consequently, acceptable developments will usually have a mix of both owner-occupier and BTL purchasers.
Valuers need to be aware of marketing schemes that may offer furniture packs or guaranteed rental returns. As with any new build, careful consideration should be given to how these ‘first-time owner incentives’ are likely to impact second-hand sales.
Valuation
The more relaxed attitude towards planning controls has led to smaller developers appearing without a track record of large-scale projects, and they often appear as limited companies and are not seen again after the project is completed. If sales rates are low, they can often sell the remaining scheme to investors. The legacy, in terms of quality, is questionable on some sites that have progressed via this route.
As with all valuations, careful consideration must be given to the selection of appropriate comparables. There are no hard and fast rules to determine what makes a good comparable, but you should be thinking about similar converted units, in similar locations, with similar demand. Adjustments should be made to reflect any differences, and also consideration of new-build premium and incentive and what impact these may have on valuation.
Although several issues have been noted, not all schemes are of concern. Valuers should however consider all factors before committing a valuation or a recommendation that units are a suitable security.
Summary
Whilst PDR schemes have helped to address the national housing shortage and without doubt, do offer scope to rejuvenate stagnant commercial areas, as valuers and surveyors, we need to remain alert to the concerns and potential issues with office/such commercial to residential conversions may bring. The above is not an exhaustive list but is intended to highlight some of the issues and assist valuers in considering whether a development is suitable for mortgage lending purposes (and indeed for purchase in general). Of course, each lending establishment will have their own specific lending requirements, and these should be followed in each instance.
It will be interesting to see how these schemes develop in the future.
This article refers to the former Ministry for Housing, Communities and Local Government (MHCLG), but in the July 2021 government reshuffle, the ministry was renamed the Department for Levelling Up, Housing and Communities (DLUHC). It is hard to keep up because MHCLG itself succeeded the Office of the Deputy Prime Minister.
DLUHC is the UK Government department responsible for housing, communities and local government in England, together with the ‘levelling up’ policy (which aims to reduce the economic and social imbalances, across the country). Headed by Michael Gove, the Secretary of State, it includes other ministries of state, including Housing (Christopher Pincher MP) and Building Safety and Fire (Lord Stephen Greenhalgh).
Currently based at Marsham Street in London, Robert Jenrick announced that it would be the first government department to move out of London and would relocate Wolverhampton.
