Which Commercial To Residential Conversions Are Most Promising For Landlords?
As the UK continues to fall short of its housebuilding goals, will converting disused commercial properties into residential homes help solve our housing crisis and create opportunities for property owners and investors?
With recent changes to permitted development that have impacted the way developers can treat use class conversions, some older investment opportunities are becoming outdated or less desirable.
At the same time, these changes also highlight a swathe of new residential unit opportunities for smaller-scale property developers, landlords and investors who want to capitalise on a whole new era of permitted development rights and a direction that seems almost government-mandated (more on that further down).
Whether you’re starting to grow your portfolio or are already a seasoned property expert, these changes stand to benefit you and create an enticing new commercial to residential conversion project that avoid the need for planning permission and deliver high ROI.
Commercial to residential conversions: what permitted development changes mean for you
Changing a building’s use class is nothing new. Permitted development has been around for long enough that most investors are aware of what it is. If you’re not, read our full guide on it and all the changes it has experienced since its introduction here.
However, permitted development has entered a whole new era thanks to Government-backed directions that have changed the way the right applies to a far wider variety of buildings. Where traditionally permitted development rights around commercial properties were often used for office to residential property conversions, a new square limit maximum size has made it clear that the government wants investors to steer away from large scale office block conversions.
Where do they want us to refocus our attention? Based on the new changes, the evidence is clear: the hospitality sector and the high street in general. After the COVID-19 pandemic transformed the way that the public used the high street, many retail and hospitality units were left vacant. Those properties which fall into ‘Class E’ categorisation are now able to be turned into Class C3 residential homes without the need for planning permission (though there are some exceptions thanks to local authority intervention.) This process is known as Class MA ‘Mercantile to Abode’ and simplifies the conversion of Class E to Class C3.
The Government’s own ‘Build Back Better High Streets’ plan highlights a strategy based on Use Class changes. It discusses how an ailing hospitality venue should be able to switch to a nursery or fitness business without the red tape. It also states that for venues left “derelict or empty”, it should be simple to change Use Class to provide “much-needed homes.” This is another callback to their affordable housing goals.
Commercial properties converted under Class MA must not be made into HMOs, which can limit your potential landlord income. They must also conform to minimum standards around natural light and living space, as well as other standard building codes. Click here to learn more.
With a focus on smaller conversion projects into quality homes, the biggest opportunities are for landlords and small-scale developers. Large housebuilders and developers are likely to overlook or ignore the opportunity provided by small retail or office to residential conversions despite the housing shortage.
Mixed-use communities as an opportunity
The government plan also states the importance of creating mixed-use communities - referencing John Lewis’ announcement around launching 10,000 rental homes that utilised their existing property portfolio. The government even goes as far as to say: “We strongly encourage more housing around high streets and there are likely to be many opportunities as we emerge from the pandemic, for example for good quality conversions of offices to homes.”
For investors looking to source property ripe for conversions within their operating costs and budgets, there are some limitations to bear in mind. Firstly, permitted development rights do not apply on conversions with floor plates larger than 1,500 square metres. Secondly, in areas where Article 4 Directions have been issued, you’ll need to source planning permission as standard.
Despite both of these limitations, the landscape of opportunity is clear for landlords who wish to take advantage of it. By buying disused office buildings, retail units and other types of properties in high street locations, then converting into a residential property, you can enjoy a strong return on your real estate investment without worrying about planning permission - all the while capitalising on the popularity of a high street location. This is especially true in university-style towns where city-centre living is always in-demand and affordable housing is truly lacking.
However, landlords must be smart about their decisions. If an area is flooded with shop or office building conversions, the high street itself will lose its appeal and simply become another residential area - so you should research potential areas carefully.
Office to residential conversions
The change in lifestyle brought on by the pandemic has forced many businesses to reassess their office requirements. There’s more demand around working from home and flexible work, which means businesses are less likely to want to invest heavily in office costs if they don’t have staff to utilise the space. According to PIMCO, global office leasing rates were down 30% during the pandemic.
While office lets fall, demand for housing continues to rise unimpeded by factors like the pandemic. People will always need places to live, which means the residential housing sector continues to grow. Student housing also remains popular despite many universities limiting in-person teaching.
For landlords, buying an office and converting it into residential flats which stay under the correct size limitations can be a lucrative opportunity that will only see growth as city centres are rejuvenated through hospitality and leisure innovations. In the government’s vision for a more cosmopolitan city centre life, your office conversions into residential properties will be an in-demand place to live for tenants. For building owners stuck with empty offices or vacant office space, creating residential or apartment buildings can help recoup lost income and guarantee a future return.
Retail to residential conversions
Online shopping has been challenging the high street for many years - but the additional pressure of COVID-19 lockdowns and changing digital habits has led to a huge fall in retail shops. According to The Guardian, a total of 17,500 chain store outlets vanished in the UK during 2020 - with an average of 48 shops, restaurants and leisure venues closing daily. That's in addition to soaring office vacancy rates.
John Lewis’ investment in the residential space highlights the glaring opportunity here. If a department store of its size can openly admit to converting some of its portfolio into residential accommodation, it’s clear that there’s more of a market for living space than there is for retail.
The Government’s plan for high streets makes it clear that residential living within a high street area is a way to aid the economic recovery of the area. By converting disused property that has been vacant for longer than 3 months (other restrictions to permitted development apply, click here for our guide), landlords can help bring new footfall to the high street - where development will prioritise leisure and hospitality over retail.
Some groups such as the British Property Federation (BPF) opposed the building conversion implied under permitted development changes before they were passed. The group argued that changing too many commercial properties to residential properties would “impede any impetus for lower value uses - such as independent retailers, creches or community hubs, which do not offer the same swift financial returns but are vital to providing a unique identity, and more purpose and diversity”.
Whether you agree with the BPF’s concerns about building conversion or not, it’s important to recognise that it is true that a high street flooded with residential accommodation stops being a high street destination and instead becomes just another residential area. For this reason, landlords should consider mixed-use ventures and careful additions to a portfolio so that a high street doesn’t become flooded with residential conversions.
If you already own a retail unit which is underperforming, a commercial to residential conversion is a way to recoup costs and generate income - though you must ensure your conversion meets building standards and housing laws. Get legal advice if you're unsure about these areas.
Agricultural to residential conversions
While much of our focus has been on high street opportunities, one further avenue of potential is for those who own countryside properties. Agricultural buildings can be converted into class C3 residential for up to 5 separate dwellings as long as they meet the standards demanded by permitted development.
This could be a great way for landlords who have large countryside portfolios or leisure venues to provide temporary worker accommodation or other leisure-based residential opportunities.
A note on commercial to commercial conversions
Remember that the ability to change a commercial building's Use Class also applies to business ventures - so an investor can buy a failed retail unit and transform it into a restaurant or hospitality venue if required. While this may not get the same assurance of return, it could potentially lead to a more lucrative result in the long term if successful.
For investors with high street buildings, there may be a better potential return if you can capitalize on trends and demand in your area. For example, changing your retail unit to a cocktail bar in an area where you’ve noticed soaring demand. It is also work remembering that though Article 4 Directions and planning permission factors can pose challenges, your conversion project can still go ahead if you secure the various planning departments approval.
Commercial to residential conversions present immediately appealing prospects for investors. By avoiding the planning process, you are no longer hindered by specific red tape and can instead focus on producing a number of conversions to generate income quickly. As long as you stay informed around safety standards and Class MA conversion guidelines, you can capitalise on the regrowth of Britain’s high street and provide much-needed living spaces during a housing crisis, all the while enjoying a strong rental return.
Rangewell can help you find funding for your conversions into residential structures. Get in touch below and speak to our team of experts today.