Changes to Commercial Property Permitted Development Rights and What They Mean for Property Developers

What are permitted development rights? 

The UK government first introduced permitted development as a scheme that governs which extensions or renovations can be completed without the need for applications for planning permission. Many of these early rights governed homeowners who wished to alter their homes, but some permitted development rights were also applied to buildings that would have a change in ‘use class.’ 

In short, if permitted development rights apply to your project, you can assume to act as though planning permission has already been granted. 

Initially, developers heavily capitalised upon this move - with a specific focus on changing a building’s designated use class from an office to a residential space. This meant developers could take large unused office blocks and transform them into quality residential properties with high rental yields. 

In 2015, the UK government made the rights permanent, but local authorities still had the power to remove permitted development rights in their areas through Article 4 Directions. 

Unfortunately, the surge of interest in converting properties using permitted development rights led to abuse. Many buildings were deemed substandard as they did not provide adequate lighting or access to minimum space standards. 

To combat this, the government released new rules around the levels of natural light and space within a property, ensuring the resultant conversion doesn't lead to a loss of light or unlivable conditions for tenants. The gross internal area of any new home created through PDR must be no smaller than 37 square metres. Further changes are around specific classifications of buildings - with the largest changes coming into effect in August 2021. 

Let’s cover everything you need to know about permitted development, these new changes, and how to maximise your investments by taking advantage of this lucrative property opportunity. 

Permitted development use class changes

In August 2021, the UK government released the latest planning reforms around permitted development. These amendments transformed many existing permissions around building use classes and which commercial premises could be converted. The updates will help private investors transform many of the vacant commercial buildings left in the wake of COVID-19’s impact on physical venues. 

With everything from high street stores to gyms, salons and, of course, bars and restaurants all falling out of favour during lockdowns, there’s now a huge opportunity for investors to transform ailing properties into liveable spaces. 

However, to actually leverage this opportunity you have to understand PDR classes and what they mean for you. The Government lists PDR classes as they pertain to homeowners, which mainly focuses on Class A, B and C (Enlargements/alterations, additions to a roof, alterations to a roof). 

For investors, the important ‘class’ is the ‘use class’ of a building - which is what is most impacted by the PDR changes. These are The Town and Country Planning (Use Classes) Order 1987 (as amended). At a glance, they include: 

• Class B: 
  • B2 General Industrial 
  • B8 Storage or Distribution
• Class C: 
  • C1 Hotels
  • C2 Residential institutions
  • C2A Secure Residential Institution
  • C3 Dwellinghouses
  • C4 Houses in Multiple Occupation: see our recent HMO article to learn more. 
• Class E: this is an extensive class that governs lots of types of commercial business.
  • E(a) display or retail sale of goods (excludes hot food)
  • E(b) sale of food and drink for consumption on the premises
  • E(c) provision of financial, professional or appropriate services in a commercial, business or service locality
  • E(d) Indoor sport, recreation or fitness (not including swimming pools or skating rinks)
  • E(f) Creche, day nursery or day centre 
  • E(g) Uses which can be carried out in a residential area without detriment to the area’s amenities - including office buildings, research and development and industrial processes. 
• Class F: learning and local community
  • F1 Learning and non-residential institutions such as museums, law courts, exhibition halls etc
  • F2 Local community e.g. shops selling essential goods, areas for recreation, swimming pools and skating rinks 
• In 2020, two new classes were introduced: Class F1 (for learning and non-residential institutions) and Class E (for commercial, business and service). This was a simplification of use classes and designed to try and create more flexibility for landlords and tenants so more liveable accommodation could be provided in the wake of COVID-19 vacancy rates. 

2021 saw further changes with the introduction of rulings that allowed the conversion of class E buildings to C3 residential buildings under a class MA, bringing with it a size limitation where there was previously no stipulations on the maximum size of building you could convert. 

Additionally, the same 2021 changes allowed for larger extensions to many existing buildings that may be of interest to investors, such as schools, colleges, universities, hospitals and prisons. Note: in the instances we’ve just listed, the new PDR guidance is about extensions, not conversions. 

What class MA means for you 

Class MA came into effect for any conversions from 31st July 2021,  and dictates that a maximum of 1,500sqm is applied to any building. There was, before that date, 'a window of opportunity’ for developers to launch permitted development applications for buildings with no size limits - but now it seems there is a push from the government to end the conversion of large office blocks into residential use. 

While this may sound like negative news, Class MA also expanded the rights of permitted development to include the whole of Class E use buildings - so you can convert shops, offices, restaurants, cafes etc to residential areas. While you will need to hit a number of key conditions to be able to convert Class E buildings into class C, the potential benefits are there for anyone with a property to take advantage of. 

Class E permitted development considerations 

Before a Class E to Class C conversion can take place, there are a few key considerations you must bear in mind for the original building. 

1. Commercial properties must have been vacant for a minimum of three months before they can qualify for PDR conversion rules. 
2. They must have been in Class E use for a period of at least two years. 
3. Before prior approval is granted, the local planning authority must have considered safety measures such as flood risk, contamination risks and other factors - including local disruption and impact on amenity (this is especially important in high street development). 
4. The floor space of the unit must be no larger than 1500 square metres of cumulative floor space for PDR to apply to it.
5. Any land subject to an agricultural tenancy requires consent from the tenant and landlord before conversions can occur. 

In addition, it pays to be sensible and strategic around what these changes mean and more specifically, why they are happening. PDR was withdrawn from some industrial buildings recently, showing that the government is keen to ensure housing is built in sensible places and not on industrial estates/agricultural land. PDR being given to most Class E buildings is a sign that the government wants developers to build more homes on high streets and other pedestrian hubs - all referenced by their ‘Build Back Better High Streets’ campaign. 

For developers, this means considering your plans against the government’s clear direction. If you’re planning conversions that will be done shortly, assess whether they are in line with the rulings outlined here. If you have future plans, know that the government’s direction may change, and PDR may no longer apply to your specific property's use class. 

Why build back better high streets presents opportunity

Government minister Christopher Pincher has said, “We all know of the challenges that the high street faces. We believe that building new homes on or near high streets will better revitalise those places that have suffered a great deal over the last few months and, indeed, the last few years.”

For investors, buying small retail units in premier high street locations to convert into lucrative housing opportunities for city-centre workers presents great opportunities. A high street commercial listing’s initial cost can be recouped heavily by converting into high-income rental properties that have the benefit of being located in desirable areas and require no planning permissions.

City centre property has always been a viable commercial avenue thanks to capital growth and rising property prices - but this has also led to heavy competition when buying a residential property. More affordably priced failed commercial properties are now up for grabs as class E buildings - meaning there’s a lot more potential for investors to buy into city centre areas. 

In addition, for those investors or landlords who already own commercial properties but are seeing their investments struggle thanks to COVID-19 disruption (for example, if your office spaces were failing to attract tenants thanks to the rise of remote work), you can more easily convert the property to residential use. 

Article 4 considerations against permitted development rights

What is Article 4? 

A local planning authority can remove permitted development rights in its geographical area, which can cause havoc for investors and lead to large swathes of property opportunities being restricted by local planning authority control. For Article 4 areas, you'll have to submit a planning application and wait for the approval process. 

However, the government is changing things regarding Article 4 directions related to the office to residential conversions. Article 4 will remain in place regarding residential conversions until 31st July 2022 - with a clear signal to local councils that they must act to preserve directions after that date. 

What do these changes mean? 

Article 4 is often used for town centre properties, such as shopping centres. The government’s official guidance from Robert Jenrick is that Article 4 direction should: “where they relate to change from non-residential use to residential use, be limited to situations where an Article 4 direction is necessary to avoid wholly unacceptable adverse impacts (this could include the loss of the essential core of a primary shopping area which would seriously undermine its vitality and viability, but would be very unlikely to extend to the whole of a town centre)."

It seems likely that this change to Article 4 and proposed changes to the National Planning Policy Framework will mean that, going forward, it will be harder for local authorities to be granted Article 4 Directions on properties. However, this may lead to a lot of new opportunities for budding investors who can spot the gaps in town centre properties that are not critical enough to a local amenity to fall under Article 4. 

The aim is clear: reduce the usage of Article 4 Directions and give more opportunities for conversions that target disused retail and office space and convert underused buildings to residential use. Local councils are reminded of the housing crisis and that they: “should recognise the value to housing supply and increasing resident town centre footfall from supporting ‘flats above shops’; for example, councils can consider applying different policies to residential conversions above ground floor level. This is important to support mixed and flexible high streets, deliver additional homes more efficiently, and support jobs in the construction industry while increasing demand for local high street services through new high street homes.

How to invest in permitted development projects

Before you begin development, identify commercial spaces in areas where unused/vacant buildings are in Class E and can be converted. Check that these buildings fall under PDR and are not subject to an Article 4 direction. Remember: you can still convert a property protected by Article 4, but you’ll need to seek planning permission as usual. 

Even if your project falls under permitted development rights, you may need to submit a prior approval application to gain permission for development. To check this you’ll need to find the most recent version of the General Permitted Development Order Regulations. These documents will outline what types of development are subject to prior approval and what documents you’ll need to submit. Prior approval is a faster process than standard planning applications. 

Permitted development rights in ‘designated areas’ 

In some areas which are not subject to Article 4, local authorities may still deem that certain conversions or changes will impact the overall aesthetic of a key area and therefore fall under more restrictive guidelines. If that is the case, you’ll need to consult with your local authority before undergoing development. 

Generally, these situations only happen in conservation areas, national parks and areas of national beauty - so if you’re planning a project in a place of historic or cultural significance, it’s safe to assume you should discuss work with your local authority's planning team before assuming you have PDR. 

How to identify permitted development investment opportunities 

While the new maximum square metre limit will end the era of large offices to blocks of flat conversions (which can continue but only where planning permission is approved), the changes around permitted development actually mean more opportunity elsewhere for investors. 

Specifically, these changes give investors a new target market in the revitalization of Britain’s high streets. In prized central locations, the conversion of key units into residential development property will become a lucrative new avenue to explore - one that commands strong rental income and a high degree of desirability. 

One potential area to explore is mixed-use property areas - where developers will convert some high street retail spaces to living spaces and others to amenities or other community facilities. This is part of the government’s vision for Britain’s beleaguered high streets.

However, for investors, you need to maintain a keen eye. Transforming a disused commercial property such as a retail space into residential property is a good idea in principle - but having the right mix of commercial and residential buildings on the high street is critical to creating a place people actually want to live. While you may not need to seek planning permission if your project falls under PDR, you should still research the area and the opportunity carefully lest you end up with a conversion that fails to attract tenants or buyers. 

Funding for permitted development conversions

The nature of your project will dictate which funding options you require. For example, you may need to seek development finance - or complete a conversion through the use of a bridging loan that enables refurbishment. For those who want to convert and then let their property, a Bridge to Let loan may be a suitable option. 

Regardless of where your project is located, what your end goal is, or even what use class it currently falls under, you should speak to a responsible and experienced broker to get advice. 

At Rangewell, we’re experienced not only in the world of property finance but also specifically in supporting developers who wish to convert property under permitted development rights. Get in touch today and we’ll help advise you on the right routes to take advantage of these promising changes in permitted development and maximise your investment opportunities. 

Get in touch today before you get started on any permitted development conversions.