Office-to-residential conversions: what to know and how it works 

Written by: Tsveta van Son
March 9, 2020

Office-to-residential conversions are a cheap and efficient solution to losses incurred on key real estate markets because one thing is for sure: people will always need somewhere to live. They became popular during the 2008 crisis when supply overtook demand: owners, left with vacant buildings and mounting bills, got creative and started converting units into homes and flats for tenants. This article by real estate experts at Tranio.com explains the pros and cons of commercial redevelopment projects, as well as how to do them legally.

From creative cunning to statutory regulation

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During the crisis years, office space conversions became so popular that countries across the EU, including the UK, had to introduce legislation regulating this activity. By doing so, this type of redevelopment became both structured and accepted as commonplace, thus making it easier on investors to transform a loss-making property into a profitable endeavour.

The United Kingdom became a frontrunner in this area in 2013 when the government enacted a three-year programme allowing property owners to convert non-residential properties into homes and flats without any preliminary clearance (i.e., Permitted Development Rights). The result achieved surpassed all expectations: rough estimates by the British Council for Offices showed that, in 2014 alone, about 570,000 sq m of office space were turned into housing stock (three times more than between 2000 and 2011). The sheer success of this programme allowed it to become a permanent addition to British planning rights on 6 April 2016.

According to Roman Grigoriev, prime property expert at Longrad, a Tranio.com partner, the programme is still extremely popular with investors. “Some time ago, there was a brief decline in activity because there were rumours that the Permitted Development programme would be terminated in May 2016,” he explains. “But those fears were allayed when it was extended indefinitely and redevelopment activities regained momentum. In some areas like Croydon, it became so prominent that office vacancy rates started to fall and rental rates rose. And yet, it had no incidence over demand for lofts because demand was still strong for residential property.”

In fact, Spain also adopted a similar law a couple of years ago too, mainly because the economic crisis had forced over twelve thousand businesses into liquidation and both the country and its residents were bleeding money. Under those circumstances, the only solution for commercial property owners was to be able to redevelop quickly and unhindered into residential real estate that could be sold or turned into rentals. That’s why in October 2013, the Supreme Court of Spain (Tribunal Supremo) granted office and industrial real estate owners the right to convert their properties independently and without clearance – on the condition that it would not have any adverse effects on the structure or be a source of inconvenience to the neighbours.

“The advantages of office space conversions in the UK for investors are clear,” continues Roman, “ like minimal bureaucracy, low construction costs and stable yields (15−25% per annum). That isn’t to say there aren’t any drawbacks either: transforming commercial property into residential incurs a loss of value, which can make it hard to get a higher resale price, thus making it slightly less competitive in comparison to conventional development projects.”

Be it in Spain or the UK, these examples are emblematic but far from unique. For instance, in the United States redevelopment is happening in as much as half the country’s office property market according to Costar, America’s leading commercial property information agency. And it’s not only in major metropolitan areas like Manhattan and Brooklyn in New York City, but even in central cities like Kansas City, St. Louis, Milwaukee and Cleveland. In fact, commercial property conversions are transforming the face of cities across the world. In Sidney, Australia, one in five class B or C office units were transformed into flats last year according to Colliers International, a global real estate services giant.

Three reasons why it’s so popular

It is profitable. As a general rule, light industrial and office units in hot markets are much cheaper per square foot than flats or homes. For instance, on Rightmove you can find a 5,328 sq ft, class B, former printing factory in Tottenham listed at £950K – with the potential for eight residential units – while a 4-bedroom house that’s half the size (also in Tottenham) lists for £700K–900K and above. So even with a big redevelopment budget (including building materials and transaction costs), the profit upon selling this property as eight separate units will by far exceed the money invested.

It is popular. Converting office space into residential units is particularly successful in popular districts of major cities. Here, an investor stands to attract businessmen, wealthy students and young couples with no children, all of which are looking for a place near where they work and study. Furthermore, converting a former industrial unit into lofts is even more lucrative as the unique design (i.e., high ceilings, columns and vast windows that let in a lot of light) is particularly in demand with affluent buyers. At the same time, redevelopment can actually accomplish a valuable urban and social duty. Take the Battersea power station: from a destitute and decommissioned coal-burning facility along the Thames, it is now becoming a landmark architectural project that will maintain the original industrial atmosphere and add nearly 1,500 flats to London’s housing stock as well as restaurants, shops, office space and cultural attractions.

It pays off quickly. Not only is redevelopment less time-consuming than greenfield development, but it is also good earner. For example, office and industrial property in Europe’s biggest cities has yields of about 5–7% per annum on average and it takes buyers about 15 years of rental activity to pay off the investment. According to Anna Kurianovich, commercial real estate expert at Tranio.com, value added projects like office-to-residential conversions take about 18–36 months to pay for themselves (depending on the volume of work and availability of necessary permits) with 15−30% return on investment.

How it works

In order to convert commercial property into residential units, you need to fulfill the following requirements. First, you should apply for “prior approval”, under which local authorities have extremely limited grounds for refusal as “Permitted Development Rights” are granted by the Parliament. The regulations pertaining to this are best described by a London Council Briefing on The Impact of Permitted Development Rights from August 2015: ““The local planning authority is permitted only to consider transport and highways impacts, contamination risks and flooding risks. Under the prior approval process, the local authority has no discretion to consider or apply any other planning policies in determining the prior approval application. This means that, for example, authorities may not seek to enforce minimum space standards or seek affordable housing contributions.”

In general, there are few areas that are exempt from Permitted Development Rights including some London boroughs, Conversation Areas, National Parks or Areas of Outstanding Natural Beauty as well as buildings and zones on historical importance (e.g., UNESCO heritage sites). The final general restriction is redeveloping properties located in a hazardous zone (e.g., military weapons storage).

Authorised “changes of use” to “dwellinghouse” (Class C3) and restrictions
Building conversion class
Type of premises to C3
Restrictions
Class N

Amusement arcade or centre

Casino

– time restrictions on last use for primary purpose or mixed use

– cumulative floor space of building cannot exceed 150 sq m (1,614 sq ft)

– area of scientific interest

Class O

B1(a)–> C3
Office buildings “B1(a)”

– time restrictions on last use for primary purpose or mixed use

– not authorised if building use as C3 begins after 30 May 2016

Class P

B8 -> C3
Storage or distribution centre “B8”

– not authorised if time restrictions on last use for primary purpose or mixed use

– building use as C3 begins after 15th April 2018

– gross floor space of building cannot exceed 500 sq m (5,382 sq ft)

– consent required by tenant and owner for agricultural premises

Class Q

Agricultural buildings

– time restrictions on last use for primary purpose or mixed use

– cumulative floor space of building cannot exceed 450 sq m (4,843 sq ft)

– area of scientific interest
Source: The Town and Country Planning (General Permitted Development) (England) Order 2015

Exceptional limitations can include local councils that hold an “Article 4” which specifically asserts their right to refuse. Nevertheless, all owners who plan a conversion based on Permitted Development Rights can and are recommended to apply for “Lawful Development Certificates” (LDC), which are not compulsory, but can be required later on to prove the lawful use operation and activity according to PlanningPortal, an information provider on planning permission in the UK.

Zones exempt from Permitted Development Rights
London

– The City of London

– The London Central Activities Zone: parts of the boroughs of Camden, Islington, Hackney, Tower Hamlets, Southwark, Lambeth, Wandsworth, Westminster, Newham, and Kensington and Chelsea
Kent

Areas in the borough councils of Stevenage, and Ashford

Areas in the district councils of Sevenoaks
Hampshire
Areas in the district councils of East Hampshire
Lancashire
Manchester City Centre
Source: gov.uk

It’s also important to agree on the redevelopment with your neighbours. In the UK, long-term residents and properties could be affected by your plans depending on the extent of changes to the structure. For example, by hindering someone’s “Right to Light”, you could leave yourself open to legal action. At the same time, by consulting and discussing worries directly with neighbours before commencing work, it is easier to address any issues and reassure them before and during the process.

Environmental and health aspects are also worth considering. Any redevelopment project that would plan to introduce residential accommodation that is deemed unfit and create any prolonged and unnecessary form of pollution (air, water, sound or other) will be subject to scrutiny upon completion. Remember that design and modifications made to the exterior should fit in with the building and surrounding architecture. It will invite positive views of the transformation, but more importantly, attract a higher price when the property is put back on the market. Furthermore, local authorities should be addressed concerning any work that would inhibit road or highways near the premises during or after construction, as it is the main area over which they have responsibility.

As always, it is extremely important to consult local planning and legal specialists before engaging in such a project. Nevertheless, as housing stocks in major urban hubs continue to fall and amid a shaky international economic situation, it is worthwhile having a solid plan like this to fall back on – just in case.

Sergey Akinfiev & Leigh Stewart – Tranio.com