A Retail Revolution For Developers?
Converting non-residential property into residential homes will always have quite a few positives if you’re a developer. You’re not going into the ground for a start, a place where all manner of horrors might lurk. Plus you’ve already got a building, so you don’t need to demolish it and start again, and that means that timescales are usually quicker and the costs lower. It’s also somewhat kinder to the planet since we’re essentially recycling buildings.
Back in 2013, the government modified the planning regulations to allow commercial buildings to be converted to residential use without planning permission, using Permitted Development rights (PDR). PDR provides for the change of use class of a building without the need to go through the full planning approval process, which can often be notoriously slow, contentious, and cumbersome.
Since then, many developers have successfully capitalised on this, creating many new residential conversion projects nationwide.
Most conversions to residential use fall under a PD category called Prior Approval. Here developers must obtain Local Planning Authority (LPA) approval; however, this is usually straightforward and takes 56 days maximum. So in planning terms, Prior Approval is quick and carries less risk. PD also has the benefit that developers can bypass national ‘space standards’, enabling them to create smaller, more affordable units. Whereas space standards dictate that a new-build flat for one-person must be at least 37m2, under PD there is no such minimum. However, since high street mortgage providers won’t generally lend against sub-30m2 properties, plus people don’t want to live in ‘rabbit hutches’, it makes sense to use 30m2 as a minimum size.
This ability to dodge space standards has attracted political criticism, as some rogue operators went on to create cramped, low-quality housing. However, anyone who’s visited a well-designed 30m2 1-bed flat will tell you that they’re nothing like ‘rabbit hutches’. And of course, these lower-cost units also allow more people to get onto the housing ladder. Those that call for a permitted development ban need to recognise that it’s not PD itself that’s the problem; it’s actually a useful tool for creating desperately needed new homes using our existing building stock. It would be like banning motor cars to stop dangerous driving; the right intention but the wrong solution.
However, commercial conversions are not the only game in town when it comes to Permitted Development. Many different building types can be converted without going through the formal planning process, and one PDR opportunity that is frequently overlooked by developers is retail.
So, what’s so exciting about shops? Well, let’s start by looking at what they offer on the planning front. Shops currently have two types of PD rights under the Town and Country Planning General Permitted Development Order 2015 as amended (GPDO). Here is a high-level overview of each (please check the GPDO wording for all the gory details):
1. Class G of the GPDO allows for the change of use from retail (class A1) to up to 2 flats per shop, where that building has a display window at ground floor level. In other words, where a shop has one or more upper floors, these can be converted into two flats, providing the ground floor shop is retained.
2. Class M of the GPDO allows for the conversion of retail to residential, subject to Prior Notification to the LPA, providing that the building was in retail use on 20th March 2013 and that its cumulative floor space doesn’t exceed 150m2. There are some additional parameters, but in essence, it means that a ground floor shop of up to 150m2 can be converted to residential, with Prior Approval.
So how complicated are these conversions to do? The images show a retail conversion project in Amesbury, near Salisbury. Previously a pet supplies store, the building is situated in a mostly residential area just a minute’s walk from the town centre. The layout was straightforward; a ground floor retail space with a stairwell leading to an upstairs storeroom, two offices, and a WC. And while I’d love to tell you we unearthed this little gem via our comprehensive sourcing network, we actually found it on one of the online property portals. As ever, when you’re searching for something that most people aren’t looking for, the opportunities often hide in plain sight.
We quickly established that creating four 30m2 one-bedroom flats with a smart, modern, finish would be the most cost-effective solution. As with many retail sites, we could also provide one parking space per flat, which is a prime benefit in Amesbury, particularly for those looking to commute to nearby Salisbury.
We created a new internal stairwell at the front of the property, giving access to all four flats. This left us with enough space to bring all four units in at just over 30m2, with the layout of the first-floor units replicating the ground floor units exactly. Each flat comprised a lounge/kitchen, double bedroom, and a separate bathroom, and all had identical specifications, enabling us to negotiate slightly better prices with the contractor on build cost.
Structurally, we had to change numerous door and window openings around the building and remove the existing stairwell. We also added high-level window openings to the rear of the building, and by locating the kitchens and bathrooms against the rear wall, we were able to maximise the light coming into the lounge area and bedrooms from the front. This required planning permission; however, it was non-contentious as it did not involve a change of use. We put in a small amount of new stud work partitioning, and placed baths, WCs, basins, and sinks close to the rear wall, from where we ran waste to the front of the building.
Externally, we repainted rendering and soffit boards, renewed guttering, and cleaned brickwork to freshen up the exterior.
We also gravelled the front area and installed lockable storage sheds, which provided essential storage space – always a premium in smaller flats. As you can imagine, completing a conversion project like this is nearly always going to take a shorter time to complete than a new-build project.
So, how did we convert the entire building to residential when no single PD right allowed us to do it? Well, under Class G, we had the right to convert the upper floor to two flats, so we first gained this approval. Once this right was established, we then used Class M to convert the ground floor to residential, as it measured less than 150m2 and was in retail use on 20th March 2013. We were then able to complete the project in a single build phase. Hopefully, this demonstrates how, by using multiple development rights, a little planning knowledge can go a long way. We also appointed a Project Manager to oversee the build, so our involvement as a developer primarily involved a weekly update call rather than having to manage things personally on site.
Ok, here’s a test question for you. Imagine you owned a retail unit and wanted to convert just the upper floor to residential. You want to build four 40m2 flats, but there’s a problem. Class G only allows you to add a maximum of two flats per retail unit. This would potentially mean building two large 80m2 flats instead of four smaller ones, which doesn’t make financial sense. And Class M doesn’t apply because the shop is bigger than 150m2. So what would you do?
Do you give up? Well, the answer is to divide the ground floor retail unit into two retail units first, something you can do without planning permission or prior approval. Then, once you have your two retail units in place, you can use Class G to build two flats above each, giving you your four 40m2 flats.
Many of my development students are often surprised to learn that the scale and complexity of development projects are far less than they thought, yet the scope to take advantage of permitted development rights is significant, particularly with a decent planning consultant in tow. For many landlords, the clincher is that a simple conversion project can net a sizeable profit in relatively short timescales. As a result, it’s an ideal solution for fast-tracking portfolio growth by creating regular lumps of cash through small-scale, lower-risk development projects. Is it easy or risk-free? Definitely not, but it’s certainly very achievable, particularly as so much of the expertise comes from a readily available team of professionals all overseen by an experienced project manager.
So what of the future for PD rights in general, and retail conversions in particular? The poor old high street has undoubtedly taken a battering over the past few decades. First, the out-of-town supermarkets had it on the ropes, and then online retail arrived and pretty much sent it sprawling to the canvas. And if that wasn’t enough, we’ve got the impact of COVID-19 and Brexit waiting in the wings.
However, back in early March, the government set out its plans for the future of housing and planning in the UK, and promised ‘a housing-led regeneration of high streets’ and that ‘the Government would back brownfield’. By the end of June 2020, the government said, we’d have a new Planning White Paper that would explain everything, including how they were going to speed up the frustratingly slow and under-resourced planning system.
Now, no one, including me, was holding their breath given what’s happened in the interim. Yet, on 30th June, the Prime Minister donned a suspiciously new-looking hi-vis jacket and hard hat, and took enthusiastically if unconvincingly to the controls of a digger, to the strains of ‘Build, Build, Build’.
We learned that the promised Planning White Paper would be arriving in July, and again the PM reinforced the focus on making it easier to build new homes in town centres and on brownfield sites. The government’s messaging has been consistently clear – they intend to extend permitted development rights to help developers repurpose existing non-residential buildings and brownfield sites into new homes. Plus, we can expect to see a radical overhaul of the planning system and a speeding up of the entire process.
So what further opportunities lie in store for retail as we move into this new planning age? I’ve long predicted an increase in what I call ‘co-retail’, where larger retail units are repurposed to house multiple shops and boutiques under one roof. Then we have the creation of live/work units, where boutique retailers can effectively live over the shop. And with the prevalence of ‘just in time’ retail logistics, the need for storage space above shops is significantly reduced, so what could be done with all that free space? Or what if ground floor retail units with deeper floorplates were converted to residential at the rear?
And of course, retail space doesn’t need to be converted into residential. Co-working represents another key opportunity, particularly as many new home-workers are lacking quality home-office space. Similarly, some firms will create smaller local hubs, either as self-contained units or hot-desk areas, where staff can work without commuting to an expensive central office. One suspects we’ll also see a fair amount of lease reform as larger retail units become unviable and need splitting. There are many options, but one thing’s for sure; we’re entering an exciting period in the worlds of retail property and permitted development.
With the Planning White Paper arriving this month and new planning laws expected to come into effect this September, we won’t have long to wait. And of course, many of these projects will be too small for the larger home building firms, but they could be perfect for first-time developers looking to do smaller projects. And for those that do their homework, now really could be a great time to take advantage.