By New insight from Excellion Capital, the boutique debt advisory and investments firm, reveals that property investors could take advantage of Permitted Development Rights to reap great rewards from creating homes from non-residential stock without having to navigate laborious planning permission processes.
The Labour government has pledged to deliver 1.5m new homes by 2029 which, as it stands, demands an annual delivery total of well over 300,000. But no government in recent decades has ever come close to achieving this sort of new-build delivery rate.
In fact, Excellion Capital’s analysis of new-build delivery data* shows that at a time when new-build output needs to ramp up, it’s actually trending in the opposite direction.
The latest net housing supply data shows that, last year (2023-24), 198,612 new-build homes were delivered across England. Not only is this a long way off the level that Labour needs to achieve over the coming years, but it also marks an annual decline of -6.5% compared to 2022-23. It also means building figures remain far behind pre-Covid levels when, in 2019-20, 219,120 new homes were delivered.
Therefore, it looks increasingly unlikely that Labour is going to be able to honour its new homes pledge with new-builds alone, which means they might have to look at alternative avenues of increasing supply. One such avenue could be Material Change of Use.
New home delivery through Material Change of Use
Material Change of Use is the process of changing the ‘use class’ assigned to a property under the Use Classes Order 1987. For example, changing an office building (Class E) to a residential building (Class C3).
Excellion Capital has analysed change of use data from the UK government* and found that across England last year, 21,591 non-residential properties underwent a change of use to be converted into residential dwellings, marking an annual decline of -3.1%.
In Yorkshire & Humber, 3,347 non-residential properties underwent a change of use last year, which represents an annual increase of +70.4%. In the East Midlands, the number increased by +13.3%, and the East of England saw an uptick of +7.4%.
But for property investors who are looking to take advantage of the opportunities presented by Material Change of Use, the process of obtaining the required planning permission can be laborious, lengthy, and often expensive.
However, there are opportunities for investors to change the use of non-residential property without having to obtain planning permission, and this is through Permitted Development Rights (PDRs).
What are PDRs?
According to the UK government, PDRs, as granted by Parliament and set out in law, allow “individuals and developers to make certain changes to buildings or land without the need to apply for, and obtain, planning permission”.
This means that non-residential properties which hold PDRs under planning law can be converted into homes far more easily than those which have to undergo a Material Change of Use.
This presents a real opportunity for property owners and investors to create new homes with relative ease, reaping the financial benefits of doing so while also supporting the government’s efforts to deliver 1.5m new homes by 2029.
Excellion Capital’s analysis of change of use PDR data* reveals that before the pandemic (2019-20) 12,375 residential properties in England were created through change of use PDRs. Covid saw the total fall to 9,990 in 2020-21, before bouncing back to 10,340 the following year.
However, last year, just 8,825 residential properties came via PDRs, marking an annual decline of -8.3% and the lowest number since at least 2019.
In some regions, however, it appears that property owners and investors have started taking much greater advantage of PDRs.
In Yorkshire & Humber, the number of residential properties created through PDRs soared by +132.2% in the past year. In the East of England the numbers rose by +32.2%; the North East saw a rise of +13.4%; and the East Midlands saw an increase of +5.5%.
Robert Sadler, Vice President of Real Estate at Excellion Capital, comments:
“PDRs provide a great way for property owners and investors to convert struggling assets into new homes without the need to secure planning permission. This makes for an extremely fast project turnaround time, which can be highly attractive to lenders who often see PDRs as a low-risk venture with fast returns. As the government pushes to meet its heady new home delivery targets over the next five years, PDRs could play a central role, especially in those places where land and space is limited.
There is also currently tremendous availability of relatively low priced debt for residential projects, which means, in the right hands, there are some incredible opportunities just waiting to be unearthed with PDRs.
It is strange, therefore, that the number of instances where PDRs are being used to create new homes has fallen over the past year. A recent survey of ours reveals that high interest rates were the most pressing concern among property investors in the UK, so perhaps the falling number of PDR instances is because high interest rates required lower leverage and ultimately meaning more equity was required.
But now that interest rates are trending downwards, a previously high interest environment shouldn’t be enough to put investors off taking advantage of great opportunities when they arise. And that’s where we at Excellion Capital come in – by recourse to our strong lender relationships, we always know the best priced debt at the right leverage, for these projects.”
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