At Saxon Trust we’ve established a strong reputation for funding commercial to residential conversion projects. In this article Brian West explores the very significant potential of this specialist form of development.
Since its invention in 1974 the Rubiks Cube has seen sales top 500 million worldwide. It’s also spawned a myriad of quotes including the following one which will strike a chord with property developers and lenders alike:
“Building new properties is a bit like solving a “Rubik’s Cube: just when you think you’ve got it figured out, everything changes.”
Whoever it was that first coined this quote, it certainly sounds like they could have had first-hand experience working in the UK construction sector since the start of this decade!
Following Brexit, a pandemic, supply chain disruption, 14 consecutive base rate rises, a disastrous mini budget, a cost-of-living crisis and demanding new legislation, it’s hardly surprising that rampant inflation and falling property prices finally caught up with the sector in 2023. Add in perennial and increasingly exasperating planning delays, and it’s no surprise that the number of starts fell sharply as developers focused on building out existing sites rather than opening new ones.
The challenges of a “speculate to accumulate” cashflow model have rarely been felt so keenly but thankfully, as we move towards summer, the headwinds finally seem to be easing a little. Inflation is falling, the next move in rates may well be down and supply chain issues have eased.
Developers and funders certainly have reasons to be more positive and there is now a strong case for specific forms of development, most notably conversion projects, to thrive.
Permitted development rights far from played out...
The build-to-rent sector, underpinned by record demand for rental homes, is traditionally popular with young professionals and one favouring city centre locations. It’s estimated that to keep pace with demand we will need a million new rental properties by 2031.
Whilst some commentators argue that the best conversion opportunities have already been pursued in the years since permitted development rights were introduced, this ignores some interesting market fundamentals.
With the impact of remote and hybrid working patterns, the city office market has become quite challenging, especially with the cost of renovating many older offices to the required EPC standards being prohibitively expensive. An estimated 60% of offices currently don’t achieve the Band C rating required by 2027 and, consequently, it’s not hard to envisage another surge in commercial to residential conversions for both the rental and private market.
While ground up developments will continue to hold an allure, there are many compelling arguments for converting existing commercial buildings into residential, not least the fact that conversion typically involves less risk than ground up projects, given that the property already exists. Older commercial buildings have often been built with robust construction techniques and materials. Consequently, they can potentially provide a very solid foundation for residential conversion.
With a solid basic structure already in place, conversions are generally quicker to complete when compared to the lengthy process of acquiring land, obtaining planning permissions, and navigating the regulatory hurdles specific to ground up projects.
With developer margins being squeezed from all sides, cost efficiency is another factor. Conversions typically entail lower upfront costs compared to ground-up developments, because they eliminate the costs of land acquisition and preparation mentioned above.
If reduced risk, speed, and cost efficiency are not persuasive enough arguments for conversions, then the fact that adaptive reuse also ticks many sustainability boxes is another big argument in favour of this specific area of development. New life can be breathed into attractive, historic buildings in areas that already have established infrastructure, amenities, and transportation links.
By retaining their intrinsic character and charm it’s possible to produce homes within vibrant and resilient, mixed-use communities close to employment centres, schools, and entertainment venues - homes where people really want to live. In addition, these developments usually encounter only minimal if any opposition.
Finally, in the face of escalating housing costs and affordability challenges, commercial to residential conversions in our big cities and towns can also potentially include affordable and social housing elements and by doing so promote inclusive urban development.
Of course, conversions are not a complete nirvana. Whilst the advantages are clear these schemes can also present very real challenges, such as the remediation of hazardous materials or potential structural issues thanks to deterioration over time.
The requirements on listed buildings can also be onerous and quickly throw budgets and timescales off course, but overall, the case for funding good commercial to residential conversion schemes is compelling on multiple fronts. Now is a great time to be a convert to the opportunities offered by conversion schemes...
