The Commercial Property Revolution: Ghost Towns
Whisper it quietly, but there’s been something of a revolution going on in the world of property since the first lockdown in March 2020 – actually even before that.
Of course, at that time, only key workers were allowed to work and so what has happened is that many retail outlets have finally realised that they HAVE to automate the purchase of all of their services and processes and retain the ability to sell their products and services online. Many service industries have realised that they don’t need an extensive workforce based in a large office block. Furthermore, staff have realised that there are great benefits to working from home such as flexible working hours and not spending hours in traffic each day. The knock-on effect is that staff are now demanding more from their homes and are looking for larger homes, which is also a contributory factor driving up UK residential property prices.
During this unique period of time there is one corner of the property market that has suffered disproportionately due to the uncertainty of the various lockdowns. The commercial property sector – especially high streets up and down the UK – has died a death. Many high streets are starting to look like ghost towns.
To be fair the Government have responded in September 2020 with Boris Johnson’s now infamous ”Build, Build, Build” rallying cry, opening up a raft of opportunities within the commercial sector and giving property investors and property developers greater opportunities to transform the use of commercial buildings. In doing so, what we are seeing is the beginnings of a commercial revolution, as this looks like quite possibly the biggest changes in planning legislation that we are likely to see in our lifetime.
You’ll tell me that property prices are rising at record rates right now, and I would agree with you. However, this is true mainly in the residential sector. But why am I harping on about the commercial sector, right? Because the same conditions are not true in the commercial sector. Well, there are 3 main reasons:-
1. There are fewer property investors chasing commercial opportunities.
2. Because (as you rightly point out) prices in the residential sector are rapidly rising, but this isn’t necessarily the case in the commercial sector where prices are significantly less, pound for pound, than the residential sector. Of course, following this series of lockdowns the chasm between the commercial and residential sectors is getting larger, not smaller, i.e. commercial properties are getting cheaper as demand for them wanes, and residential property is getting progressively more expensive.
3. Wholesale changes in the General Permitted Development Order are leading to major opportunities to add value to commercial properties.
There is starting to be an opportunity for property investors and property developers to help fulfil the housing need in the UK using commercial property as a base. Now the good thing is that we can still deal with motivated sellers, but rather than dealing predominantly with residential homeowners, or even buy-to-let landlords, we are looking at commercial landlords owning offices, shops, warehouses, restaurants, cafes etc. – they may be just as eager to sell their properties (perhaps even more so). We’re still dealing direct to vendor, but the opportunities are now vast.
The reason for these new opportunities is that in September 2020 the Government created a new Planning Use Class, Class E, which is for Commercial, Business, and Service. What they did was to group together the following planning use classes:-
A2 (financial and professional services)
A3 (restaurants & cafes)
D1 (non-residential institutions)
D2 (assembly & leisure),
which were all drafted into this new Planning Use Class E for Commercial, Business and Service.
Now let’s face it, the planning system in the UK isn’t generally fit for purpose (in our opinion). It often takes way too long to get planning permission and developers can be refused for reasons that are fundamentally unsound. Planning may be denied on identical applications to proposals that have been previously approved, or even built. In the UK we’re meant to be building 180,000 residential properties each year just to keep up with our housing demand. However, we’re barely building 80,000 properties each year. The main culprit of this is our archaic planning system.
So what this new planning use class does is fairly interesting. Rather than having to get planning permission to turn a bank into a shop or vice-versa, because all of these planning use classes are grouped under one class (Class E), you no longer need to submit a planning application. You can now do this under a Prior Approval process which is part of the General Permitted Development Orders so now you can change the use of these buildings using Prior Approval and the local authority must give you an answer on your application within 56 days.
Now there are a further 3 planning use classes that we should discuss here which came into operation in 2013 and 2015.
Planning Use Class O
Use Class O allows for the conversion of offices to any number of dwellings – houses or flats (as long as you’re not trying to convert a listed building). You can even convert buildings that are in conservation areas. There are other benefits to this use class, 3 of which we’ll discuss here:-
i. They are not subject to Section 106 payments, but you will still need to make Community Infrastructure Levy payments if they are applicable (and if you are not able to use one of the exemptions).
ii. Each dwelling that you create is allowed to keep its own permitted development rights. In this, Planning Use Class O is unique.
iii. The Prior Approval process costs £96 and takes up to 56 days. If the 56 days elapses and the local authority still hasn’t got back to you, then you are allowed to start development.
However useful Planning Use Class O is, it expired on 31st July 2021 to be replaced by Planning Use Class E.
Planning Use Class M
Planning Use Class M gives property developers the right to convert the ground floor space of a shop, financial or professional services building, or a takeaway (basically anything in Planning Use Class E) as long as it was used as a shop or retail unit on or before 20th March 2013.
You cannot convert listed buildings of course, nor does this use class apply to conservation areas or Areas of Natural Beauty.
Like Planning Use Class O, this is submitted using a Prior Approval process which gives the local authority 56 days to give you a decision.
Planning Use Class G
Planning Use Class G means that you may have up to 2 flats above a shop using Permitted Development rights. This means that you don’t even need to submit a Prior Approval application form. This is great for property developers. In reality you probably should also get a Certificate Of Lawful Development which protects you in this instance as mortgage lenders would usually insist on at least this.
As a Deal Packager or Deal Sourcer you get paid the big bucks by being able to spot or create opportunities. Many property investors, especially those keen on residential properties, would ordinarily pass up some of these kinds of deals. However, they’d be making a huge mistake. The right kind of deal can fetch £10,000 – £20,000 as a deal packaging fee for especially good deals. Once you understand how these deals work and how to get planning permission for them, it isn’t such a huge step learning how to develop them yourself, and then earning even bigger bucks by building and selling the developments, or even optioning, building and then purchasing the property with longer-term finance.
The negotiation itself sometimes isn’t as difficult with commercial landlords as it is with residential homeowners – unless the landlord is trained in the art of negotiation. There is a real opportunity, even with lots that don’t sell in the auction, to get direct to vendor. Usually, these landlords are trying to get rid of these ‘assets’.
Simply put, the fact that commercial property is valued so much less than residential property right now demonstrates the value that clued-up property investors, deal packagers, and property developers can add to these properties. They have a number of different exit strategies:
1. Sell the deal ‘as-is’ without adding value, by selling the opportunity;
2. Get prior approval and then sell the deal;
3. Get prior approval and then develop the property to sell;
4. Get prior approval, develop, split the title, and then sell part of the property;
5. Get prior approval, develop and then (re)finance the property to keep.
Creative property investors, deal packagers and property developers are realising that this era represents the Buy Opportunity Of A Lifetime as we are not depending only on a rising market. This lockdown period has afforded clever property investors an opportunity they may never again see in their lifetime.
In the next article we’re going to open this up yet again by looking at further opportunities to add value to properties in the commercial arena, to be part of the next wave of property developers transforming hopefully post-lockdown ghost-towns into communities once more.