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Developer guide: Converting from commercial to residential

The extension of permitted development rights has led to an “explosion” of office-to-residential conversions.

However, what do developers need to consider when converting a commercial property into a residential one? 

Development Finance Today has spoken to property professionals who specialise in either funding or arranging funding for commercial-to-residential conversions. 

They have explained what property developers should consider before embarking on such a process.

What are the costs and how can it be funded? 

“Costs are one of the hardest estimates when it comes to turning commercial buildings into residential, and can often be underestimated as unforeseen problems can always rear their ugly heads,” said Ashley Ilsen, head of lending at Regentsmead.

Meanwhile, Jordan McBriar of Adapt Finance, said that since the introduction of permitted development rights, there has been a change in the way these projects are funded.

“In short, pre-extension, the vast majority of cases were vacant buildings so the commencement of construction was immediate. 

“However, post-extension, more vendors are choosing to obtain permitted development and then market their properties without vacant possession. 

“Therefore, funding wise we need to look at an amalgamation of short-term commercial finance and development finance as one proposal.”

Jordan added that while this has taken time to perfect, the development finance broker now has a product specifically for this eventuality. 

What is the resale value? 

As well as finding the right kind of funding and the costs, the viability of the deal needs to stack up, according to Scott Marshall, director of Roma Finance. 

Scott felt that both the developer and the lender needed to be aware of the resale values and rental yields once the scheme has been completed.

“Knowledge of the local buy-to-let market is important. 

“This may influence the type of residential accommodation – as generally HMOs can deliver higher yields from a rental point of view. 

“Many specialist lenders will lend on property conversions, but probably won't if the exit route for the bridging loan hasn’t been planned in advance.”

Does it need planning permission? 

One of the benefits of the extension of permitted development rights is that for many projects planning permission isn’t needed. 

However, some local authorities and the mayor of London have looked to clamp down on the use of permitted development rights to protect office space. 

In August, 120 pubs were stripped of permitted development rights by Wandsworth Council to prevent them being converted into homes without the need for planning permission.

“Over the last few years, there has been an explosion of office-to-residential conversions due to permitted development rights,” said James Bloom, managing director of development finance at Masthaven. 

“One key factor to consider is whether planning is needed. 

“Offices and agricultural buildings usually have automatic rights to convert to residential without planning under permitted development.

“You will need to establish any contamination issues if the building has been used for certain commercial uses such as a petrol station.”

Jordan added that although permitted development is a much quicker process due to the nature of the construction, there could be a lot of factors which may not have been taken into account.

“Since the extension, there has been more pre-commencement conditions attached to permitted development, such as three-year commencement dates and acoustic levels in particular. 

“Therefore, there may need to be [a] change of window units – which requires full planning to change the exterior to the building’s façade, which takes time and isn't guaranteed.”

The future changes to commercial-to-residential conversions 

Looking at the impact permitted development rights have had on the housing market, Ashley urged for similar schemes to improve the housing stock.

“There are some arguments to suggest that in certain areas this has led to a shortfall in office stock, but as a whole I think it’s served as a relatively creative solution to the housing crisis. 

“If the government can come up with more innovative schemes such as permitted development, we may start to see a dent being made in the existing demand for housing.”

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    Cliff Malcolm

    I am interested in any commercial to residential courses / webinars that are going .. Cheers..

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