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/ by Richard Sayer

Commercial to resi conversions – one year on

Just over a year ago, the Government implemented new legislation allowing developers to easily convert redundant and empty office space into new residential homes without the need to negotiate the lengthy planning process. The aim was to boost housing supply (in particular affordable housing) and footfall in town centres whilst encouraging the use of vacant brownfield sites. But just over a year on, have we seen the desired outcome? It certainly depends which side of the fence you sit on.

Across the country, the number of notifications for office to residential conversions has increased by more than 500% in the first 6 months following the introduction of the new rules, and so far, over 4 million square feet of office accommodation has been removed from the market with the potential for creating 6,000 new homes outside London.  With a huge divide between office values and town centre residential values, it’s not surprising that we’ve seen this level of conversion with many developers keen to capitalise on a rising housing market.

In London, this is even more apparent, and landmark buildings such as the Shell Centre and Centre Point have been earmarked for conversion to 790 and 82 flats respectively, while 90 Long Acre, one of Covent Garden’s most iconic office buildings, will provide approximately 200 flats. Clearly the legislation has had a very positive effect on the provision for new housing, although it should be noted that while the intention was to encourage much needed affordable housing, the majority of accommodation will be for the luxury or high value market.

The legislation was brought in towards the end of the economic recession, against a backdrop of booming residential demand alongside an economy that was still reeling from the recession. Many office blocks were either empty or under used as a result of low levels of demand. Since then however, the economy has seen a remarkable improvement and demand for office space has increased. As a result of the conversions, there is now a shortage of office stock, and subsequent to the rising levels of demand, rents and values are beginning to rise. The Borough of Richmond is a good example, as there have been 215 requests for change, with a potential loss of office space equalling 540,000 square feet. While it could result in 500 residential flats, the loss to the borough of office stock has been estimated to be as high as 20%.

Another aspect suffering from the implemented measures are section 106 contributions, which forced developers to contribute towards the local borough infrastructure and services. Under the new legislation, councils are unable to seek these necessary funds and so miss out on this valuable resource.

At the moment, a key question which needs answering is what will happen to the legislation when it is reassessed in May 2016? Without any guidance from Government, many developers are unsure what stage of the process they need to be in for the conversion to be recognised – does the development need to have been started, completed or fully occupied for example? And with a change of Government expected next year, there are clouds of uncertainty as to whether the new Government may introduce new rules and subsequently developers may have difficulty obtaining funding and buyers in obtaining mortgages.

My feeling is that greater power should be given to councils to allow them to manage the affordable housing aspect while also giving them an opportunity to seek section 106 contributions. Clarity should also urgently be provided on the future of the scheme with due diligence paid on a local level to ensure a more balanced split between office and residential development is achieved. Unless this matter is addressed the amount of available office stock could reach levels where the housing problem is replaced with an office problem.

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Expert Richard Sayer
Richard Sayer Senior Commercial Surveyor at KFH
Richard has worked at KFH since October 2012. He has over 22 years' commercial property experience primarily in the disposal and acquisition of commercial premises within the M25. When not working, Richard is keen on cookery, football and travelling.

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