By There’s a revolution quietly ticking away in the commercial property market.
In recent years, residential landlords have been the target of considerable regulatory changes with losses of tax relief, stamp duty surcharges and capital gains tax increases steadily gnawing away at margins.
Propp.io, a comparison site for specialist finance are seeing a significant increase in savvy landlords avoiding these punitive taxes by purchasing vacant commercial and semi-commercial premises and using recently reformed permitted development rights to convert them to residential.
The changes to permitted development rights that came into force in August last year have paved the way to allow vacant commercial property to be transformed quickly with less red tape while avoiding the costly expenses and extensive timescales associated with planning applications.
This is affording landlords the opportunity to embark on more lucrative projects to grow and diversify their portfolio, with many choosing to convert the upper floors to residential for resale while retaining the commercial unit downstairs to let.
Jamie Pritchard, Director of Sales at Glenhawk, a specialist property finance lender explains:
“Commercial property is valued differently to residential, generally being valued at a third to a quarter of the value of residential.
Meaning, when purchasing a commercial unit to convert to residential a significant uplift in property value is baked into the project.”
Permitted Development Rights create an opportunity for smaller investors who perhaps wouldn’t have had the liquidity to purchase land and wait during the planning application process to proceed with a range of lucrative projects previously out of reach.
Using PDR, prior approval only takes 56 days in comparison to considerably larger timescales you could be subjected to via the planning process.
It also operates under the presumption of acceptance and prevents decisions from being made at the whim of council officers.
What are the changes to permitted development rights?
PDR allows you to perform certain types of work without the need for planning permission. This applies to premises under Class MA which now includes but isn’t limited to retail shops, banks, restaurants, offices and light industrial units.
The freedoms granted to these asset classes are extensive, allowing conversions of assets up to a maximum size 1500 sqm, even within a conservation area without the need for full planning – but as with any regulation there are exclusions. You wouldn’t be able to make external alterations for instance.
You’ll also need to demonstrate that the proposal doesn’t have a negative impact upon transport, local flood risk, noise pollution and natural light.
How are property investors using PDR to expand their portfolio?
As Jamie explained, these changes provide a level of certainty to a project which allows an investor to commit to it with the confidence that their plans cannot be curtailed by a planning officer further down the line.
Lenders are more comfortable lending a larger percentage of the property purchase price knowing that projects are unlikely to crumble due to planning, so investors are able to geta project underway with less of an upfront investment.
When coupled with the thousands saved in planning applications and the lack of punitive stamp duty surcharges that apply to the residential investment sector, these savings mean an investor can direct more of their cash towards the conversion project. Some just move immediately onto their next project.
How would I go down this route?
Auctions are a great way to pick up commercial units below market value, many even already have prior approval for conversion projects.
Once you’ve got your eye on a unit and done some due-diligence you’ll want to arrange the finance. Specialist finance options such as refurbishment bridging loans work nicely under these circumstances thanks to their speed and ability to lend for the cost of works too.
There are still people that avoid bridging finance due to the fact it’s usually more expensive than a traditional mortgage, but used correctly it’s one of the most powerful tools an investor can leverage.
With this being said, it’s important to be confident you source the best deal possible and have a realistic exit strategy to avoid defaulting on the loan.
Propp.io, the UK’s first comparison site for specialist finance exists to lift the lid on rates across the market and their experienced team of property finance consultants guide you through the entire process to ensure you achieve the best possible outcome.
What do I need to consider before using permitted development rights?
Whilst much of the above will be music to the ears of many investors, remember that converting a property can present multiple challenges so its key to do your research and due diligence before jumping in.
The key points to consider are:
- Does the property qualify for PDR?
- Are my refurbishment costs realistic?
- Is my projected gross development value realistic?
- What is my exit strategy – selling for profit of retaining for rental income – and is this realistic?
The team of property consultants at Propp are passionate about property investment and would be happy to talk through your project ideas and offer you advice at any stage.
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