Airspace - making money out of thin air
Things may quite literally be looking up in the property market
The space above existing buildings could be a goldmine for developers thanks to some changes to planning laws. We look at those changes, what they could mean to the market, and how you could start making profits out of thin air.
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The UK has a housing shortage. But finding an answer to that shortage is not simply a matter of building on more greenfield sites. Suitable plots of land are becoming scarce and are rarely in the key locations - central, with easy access to amenities and transport - that people actually want.
Brownfield sites, where old industrial units have been torn down, are already at a premium in city centres, with developers competing to fill them with as many units as possible.
But there could be a huge and unexploited area ready for development in every city and town in the UK. The unused airspace.
What is airspace?
The area above an existing property is known as the airspace, and changes to the planning rules have opened it up as an area for development.
When you own a property, you own the airspace.
This prevents your neighbours from erecting overhanging eaves, advertising hoardings, or even cantilevered extensions over your home. But because the space belongs to you as the property owner, it could provide an opportunity for rewarding development.
Airspace, or rooftop, development is the delivery of new homes above existing buildings Airspace or rooftop developments can usually be found in dense cities or town centres where land is scarce. The idea of airspace is already well established in other locations. In New York, for example, airspace is worth an average of $225 (£176) a square foot. Prices in London are hard to benchmark - but are likely to be substantially higher.
Of course, this is not a new idea. People have been building penthouses on top of existing buildings for more than a century, since steel framing made it possible to accurately calculate the loads involved. Many highly-desirable properties combine spectacular views with an address in the very heart of great cities because they were built on top of an existing, and usually commercial, structure.
But airspace development is no longer confined to the luxury end of the market. Airspace doesn’t just offer the opportunity to build more expensive penthouses in desirable locations. It is also suitable for developing affordable housing, by allowing better use of the existing footprint of local authority and housing associations homes, as well as adding residential property on top of commercial premises.
Airspace development has been gradually gathering pace in the UK, and especially in London, over the last few years. Now, some changes to the planning laws may have opened up many more opportunities.
What has changed?
With the UK economy in turmoil after Covid, the government is looking at ways to stimulate activity – and especially the building market. In his ‘Build, Build, Build’ speech in Dudley last month, Boris Johnson set out a number of radical planning reforms. This included the confirmation of the extension of permitted development rights to make it easier for people to build upwards.
Back in March, housing secretary Robert Jenrick said in the Ministry of Housing, Communities and Local Government's 'Planning for the Future' document that the government would introduce new permitted development rights for building upwards on existing buildings by summer 2020.
That promise has now come to fruition.
Now, since August 1, a new class of permitted development rights will come into play to make it possible to build up to two additional storeys to provide additional flats on top of purpose-built, detached blocks of flats without requiring full planning permission.
The government’s announcement of the new Permitted Development Right (PDR) could shorten the planning cycle, making a whole new class of buildings suitable for airspace development – and opening the way for profitable deals and projects.
The permitted development includes the construction of up to two additional storeys of flats immediately above the existing topmost residential storey on a building which is an existing purpose-built, detached block of flats. This is subject to a prior approval process, details of which need to comply with the regulations. It is essentially an ‘in-principle’ agreement.
In simple terms, where there is a flat roof, there is a potential building plot - ready to be developed.
The potential for airspace development could be huge. It is believed that, by making use of existing flat roofs in London alone, there would be sufficient room for around 140,000 new homes.
140,000 new homes above London’s public buildings would be worth approximately £74bn, based on an average house price of £534,785.
Of course, things will never be quite that simple in practice. Although it may be possible to find the spaces where building is feasible, there will still be problems of access to overcome – and many older buildings will simply not be structurally suitable to an additional imposed load.
However, if you do find a suitable site, the development cycle can be rapid. With existing services on-site and ready to be tapped into, homes may be built offsite using modular construction and arrive 95% complete before being installed. Modular is one of the most exciting innovations across property development and is favoured by the Government as one of the keys to addressing delivery shortages and improving efficiency – and by developers who want to reach the profit stage quickly. It is a much quicker and less disruptive means of housing delivery given the significant percentage of work that is carried out off-site. It means that there is an exciting new opportunity for developers – whether or not you currently own suitable property.
What can you build?
The new planning rules could see a boom in luxury penthouses in desirable locations, where a view across the city is matched by a short walk to the office. Prices of up to £5million are common in London, especially if river views are available. But, lucrative though these may be, they may not be the main route to profits from airspace development. Already, many local authorities are looking at putting extra floors on existing low-rise blocks when they become due for refurbishment. There are now plenty of opportunities to do the same thing in the private sector – and as public/private cooperation.
Affordable homes, from studios to family flats that can take full advantage of existing infrastructure, are a potential moneyspinner, as well as part of the solution to the housing crisis.
How can you start making use of the potential of airspace?
If you already own suitable property, you could simply start talking to an architect about ways to use the space above it. But you don’t have to own property to start looking at airspace.
The air above existing buildings can be bought, built on and sold for a tidy profit. But how much is airspace worth, and who owns it? The short answer is, a lot and whoever owns the building below owns the airspace above.
In Europe and the USA, airspace is commonly bought and sold. In the UK, it’s still fairly unusual so you will need to tread carefully and be patient. The freeholder is usually seen to own the air rights, but they might be required to offer the air rights to the building’s leaseholders first before they could be sold on the open market.
But beware - it’s no longer cheap to buy airspace. If the freeholder is a private company, a local authority or a housing association they’ll know the value of what they are being asked to sell based on how much their existing building is worth per sq ft and the potential of your plans. You may be expected to pay for roof repairs, refurbishment of communal areas, and for disrupting tenants already living in the building.
Airspace development comes with many logistical hurdles. Can the existing services be extended? Will new lifts be needed? Can the existing building take the weight, and what about aesthetic considerations? Is there crane access?
But if these can be overcome and if the price is right, the developer can make a substantial profit from the new units – but you will need to be sure that the economics stack up in your favour. This is one of the reasons why central London is the hub of airspace activity. The high value of the finished property makes the cost of acquiring airspace and the work to build homes worthwhile.
The four routes to profit from airspace
- Sell or buy airspace above an existing property
- Develop the airspace above a property that you already own
- Acquire a property with potential for airspace development
- Set up an airspace deal with a property owner
If you already own a suitable property
The relaxation in development rights means that property owners - and even individual homeowners - may be able to add two storeys to a detached property under permitted development rights without needing additional planning permission.
This means that if you have a suitable property you may be able to sell the airspace to a property developer, to build penthouses or flats – or take on the work yourself to maximise your profits.
But there will be substantial costs involved. A suitable structure to sustain extra loading development could demand between £1,000 and £2,000 per square metre in the suburbs and as much as £7,000 at the top end of the market in upmarket boroughs such as Kensington and Chelsea.
You may choose to simply sell on the development rights, gaining a large amount of cash, essentially in return for a few months of disruption.
If you decide to take on the project yourself, you may need Development Funding to help pay for the work required.
If you don’t already own the property
Alternatively, if you are a developer yourself you may be able to buy the airspace above commercial buildings or existing blocks of flats – or buy the entire block as part of a comprehensive redevelopment project.
The ability to use airspace has changed the economics of development – and will make many property deals that previously would not have been worthwhile into potentially valuable opportunities.
However, this is a new area for many lenders and although in principle it is no different from any other development project, some will not be willing to provide the funding you need to acquire airspace without the property below it.
Getting the funding you need
The concept of selling airspace is new, and many lenders will have little familiarity with the concept. Consequently, few will be able to provide the type of lending you need. At Rangewell, we can help you find the lenders who are able to take a more enlightened approach.
Development mortgages allow experienced property developers and investors to fund both the purchase of a property needing work or with potential for extension, and the funds to carry out the work required. The work may include conversion of a single building into multiple letting units, such as self-contained flats or a home capable of major extension above the existing roofline.
As with any heavy refurbishment, the lender will want to see a schedule of works. This is a detailed breakdown of the work and costs involved in the project, together with projected timings. A valuer will comment on whether the intended budget is realistic and if the time scale is achievable.
Lenders will also want to see evidence of past projects, to ensure that you have the skills and vision to complete the work.
Costs may be substantially higher than more conventional commercial mortgages, but it may be possible to roll up all payments until the property is sold on.
Development Finance is based on the gross development value (GDV) - the value of the project - once completed. This is also known as the post refurbishment works value.
Loans may be available from £100k to £10m. Lenders may consider lending up to 70% of GDV, with funds released in stages. These funds may cover both the property purchase as well as refurbishment works, although funds may also be available for developers who already own a property in need of work.
Terms of up to 18 - 24 months are often available, and interest payments may be rolled up in the total loan amount.
As with all Property Finance, there will also be fees:
- Arrangement fees: These are charged by the lender for arranging the loan and are typically 1.5% to 2% of the total loan amount.
- Exit fees: Not all lenders apply exit fees - those that do may charge a percentage of the loan amount or, sometimes, the gross development value.
- Valuation fees: Lenders will instruct a surveyor to value the property both before and post refurbishment works. The scale of these fees will depend on the size of the project.
Other types of property funding
A Commercial Mortgage is one of the most common forms of finance used to buy a commercial property and could help you acquire commercial or residential block suitable for airspace development. These operate much like a residential mortgage, with a large loan secured on the property itself.
Generally, Commercial Mortgage terms last for 15 years or more and, as with a residential mortgage, the premises will be at risk if you are unable to keep up your repayments
However, unlike a residential mortgage, the rates for a Commercial Mortgage are arranged on an individual basis. Lenders will look at your business, your accounts and projections to ensure that it has a future and set interest rates based on the level of risk they believe it presents.
Again, there will be valuation, arrangement and legal fees to consider. There can also be additional costs associated with a Commercial Mortgage for the services of professional advisors.
Because of the legal and administrative costs, it is uneconomical to borrow less than £50,000 with a Commercial Mortgage, and some lenders have a minimum of £75,000 or more, but there is no set upper limit.
A business Bridging Loan is a short-term loan secured against property. The property can be residential, such as buy-to-let flats, or commercial, such as offices, factories or warehouses.
Bridging Loans are usually repaid quickly, either by the sale of the property or by another finance product designed for the long-term, such as a mortgage and are often used to fund property purchases. The loan can be as short as one day and run up to a maximum of 12 months. Loan amounts start at around £25,000, and there is no maximum.
Lenders offering Bridging Finance will carry out detailed checks and apply conservative lending criteria but are able to make rapid decisions because they can work without the bureaucracy that slows down many traditional lenders.
Short-term finance is always more expensive than long-term lending. The costs of Bridging Finance can be relatively high but, in some cases, all fees and interest can be rolled up into the loan, which can be settled with a single repayment. A Bridging Loan could provide the funding for an Airspace development
If you are using a Bridging Loan as a short-term solution for a property purchase, it can often be paid off by a solution designed for the long-term, such as a Commercial Mortgage.
The funding you will need
With the high cost both of property and of this type of building work, getting a full understanding of all the costs will be vital.
Not only will you need to know how much you will need to borrow, but you will also need to know how much it will cost to borrow the finance you need. A fraction of a percentage point can make a substantial difference to what you actually pay, and many lenders are simply not able to provide any kind of funding for development.
At Rangewell, we know the property lending sector and can help find the lenders who are ready to help.
Whether you have a straightforward, small-scale funding need for a single property, or require a complicated ‘Jigsaw’ funding plan made up of a combination of financial products, we can work with you to find the answers.
Call us now to get our experts working for you.