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The Commercial Revolution: Full Circle

There is a concept in property investing that you take whatever opportunity presents itself when it is available.  So in the world of property investing all possible resources are not necessarily available all of the time.  At different times any of the following resources may or may not be available:-

  • Cheap cost of finance/low interest rates
  • Relatively low property prices
  • Many property opportunities
  • Legal opportunities
  • Strategic opportunities
  • Opportunities of Capital/ private investment

What we must do as property investors is to strategically operate to exploit these opportunities as and when they become available.

In the previous article Ghost Towns: The Commercial Revolution, we looked at how planning use classes had changed recently with a new Class E being added to the General Permitted Development Order.  We looked at how changes of use were now possible within Use Class E which meant that getting Changes of Use under Prior Approval was granting a real opportunity to clever property investors to change all kinds of different types of commercial buildings typically found in the high street to other types of commercial buildings.

However, in March 2021 the Government dropped yet another bombshell.  This grants a further opportunity to knowledgeable property investors and developers to convert commercial properties that are under Class E into residential properties.  In granting this, the Government introduced another planning use class MA.  So, they are granting any property within the current Planning Use Class E the right to convert to residential property under Permitted Development Rights or at least under Prior Approval.

This is just HUGE!

Of course, many more building types have been brought into use by converting (since 2013) offices into residential properties.  This then applied to light industrial buildings.  However, with this one stroke many more types of commercial properties are now available for conversion into residential property than were previously available under use classes O, M, & G.  The ability to convert many more commercial types of property, especially those in the high street cannot be overlooked.  Under Use Class E the types of properties that have now come under the purview of this Class MA include:-

  • Shops
  • Restaurants
  • Cafes
  • Estate Agents
  • Letting Agents
  • GP Surgeries
  • Dentist Surgeries
  • Creches
  • Travel Agents
  • Sports Centres
  • Gyms
  • Offices
  • Clinics
  • Health Centres
  • Day Nurseries

With this new Class MA what this means is that any property that falls under one of these Use Classes may be converted into residential C3 use merely applying for a Prior Approval which gives the local authority merely 56 days to consider, the case.  If they have not considered the case and given you a formal response within the 56 days, then planning permission is automatically granted.

I told you this was huge, right?

As you might expect there are some important caveats to this:

  • The maximum size of the existing property must be under 1,500 square metres
  • The building must have been used for business & service continuously for at least 2 years
  • The building must have been empty for the 3 months prior to the application being submitted.
  • You can convert either the whole space or part of the space into residential units
  • The new space must meet minimum space requirements (generally 37 sq metres for a 1 bed flat)
  • There mustn’t be any external alternations (these may require a further planning application)
  • No listed buildings
  • However, they DO apply in conservation areas
  • If they are considered to be community assets then this will be subject to further review by the local authority who will consider the need for the asset in the area.

There will be no Affordable Housing requirements (S106) because these are considered merely a change of use so therefore not a new development as such.  There will be Community Infrastructure Levies applied if that Council levies such a charge and only if you are unable to apply an exemption.

 

What Does This Mean For Me As A Deal Packager?

This represents a huge opportunity even for deal packagers and property sourcers of course.  It means that a whole raft of new commercial properties (more properties than were previously available for conversion which had to have been built before 20th March 2013) are now available for conversion all over England (Scotland and Wales do not apply to this).

In a previous article The Deal Negotiator’s Protocol we’ve previously looked at how merely finding 25% Below Market Value deals is harder work than it was before.  We looked at how the skillset now and certainly why you get paid the big bucks – is how to inject that value into deals using additional strategies and other resources.  This new Class MA definitely falls under this principle as another strategy to force appreciate the value of these properties.

As a deal packager who is working Direct-to-Vendor and dealing with Motivated Sellers of course you’d prefer to be fishing in a pond full of fish.  You’d prefer to have lots of motivated sellers in any given area all desperate to sell you their properties.  This is definitely true for commercial property landlords right now.  After a series of lockdowns, many parts of the commercial sector are dying on their feet, as business realise that they don’t need to pay rents and leases on commercial property because Zoom allows them to severely cut down on their costs for delivering services to their customers.

Look at high street properties where there are now numerous For Sale or To Let boards all over the city centres (in fact if they have both For Sale & To Let Boards it is even better).  The challenge for deal packagers now is how to envisage the change of use of these properties, substantiate the opportunity, establish the highest and best use, and then to propose that new usage to your property investor property developer clients who will pay you kindly for amazing opportunities.

Commercial property is currently pound for pound cheaper than residential property right now and the more lockdowns are instituted in the UK, the cheaper that property appears to be.  The name of the game for deal packagers is literally to obtain control of those properties, then to obtain the required prior approval and then to sell those properties even without developing them.

It should go without saying that there is even more money to be made by developing these properties out rather than selling them.  And more to be made by developing these properties and then adding them to your property portfolio.

 

In this way there is an intrinsic progression that is naturally suggested for the deal sourcer to go from merely sourcing deals, to adding value and selling them to the market, to joint-venturing, to then getting planning permission and building your own property portfolio.  Certainly it would be remiss of the property investor not to use the fact that at this time there are lots of opportunities to be had by converting commercial properties into residential properties.  And of course the principle goes: ensure that you can strategically exploit these opportunities while they are there.

It remains to be seen what future changes to Planning Use classes or at least to the General Permitted Development Order over the next couple of years.  However, the Government has set out its stall to revolutionise this sector so there would be no surprise if there was even more to come.  Simply the disparity in prices between commercial property and residential property pound for pound would indicate that deal sourcers, deal packagers should be paying strict attention to this sector as it is arguably one of the simplest ways to adding significant value.

Now it goes without saying that this set of regulation changes represents the most fundamental changes that us creative property investors have seen in our lifetimes.

However, recently the threat to this arena comes with the new Secretary Of State for Housing, Communities, and Local Government The Rt. Hon Michael Gove MP who is putting at least a pause on  this new raft of new changes.  There may be a public showdown in the adoption of these changes or it may be that perhaps he just wants to weight the impact of all these changes together.  We don’t know yet.  But only knowledgeable property investors and developers who get in there quick, get the requisite Prior Approvals and literally get out with their shirts on – literally because the opportunity may seize up – will be able to benefit from this period of uncertainty.  Now the reason that Michael Gove is able to do this is this: These ‘planning laws’ were merely statutory instruments – they had yet to receive Royal Assent and so this means there is a possibility that they may yet be reversed.

Who knows where we may end up with this.  In a strange sense it may be that we revert back to where we started with a dysfunctional planning system. While a whole charter of new changes seemed to be proposed, the way forward at least for a while could exist by simply packaging and selling these deals without the longer term exposure by yourself.

Remember property is cyclical in nature.  It always has been and always will be.  We should be able to this period of uncertainty to profit, adding significant value to these properties using the statutory instruments while the going is good.

It remains to be seen which environment will prevail.  For now at least it may be safer to package and sell these deals without the longer term exposure, or perhaps 56 days may represent for you the opportunity to get through planning for longer term projects.  Whatever your attitude to risk your mindset should at least acknowledge the irony of the fact that – with regards to planning permission – in a relatively short period of time – we seem to have come full circle.