Affectionately known as the office to resi conversion, thanks to some new legislation aimed at breathing life back into ailing business districts it is now easier than ever to take advantage of this strategy. But as with all things of this ilk, thanks to a few people abusing the strategy, it’s likely to be more regulated in the coming months and years, so to take advantage of the easier legislation you’ll need to move fairly fast on this one.
What is the Office to Residential Strategy?
The strategy is exactly what it sounds like. Converting an office or retail building into residential accommodation. This niche strategy has come about as a result of more relaxed planning laws. Commercial offices and some retail spaces are now much easier to convert into residential buildings, usually flats. Previously, planning applications, section 106 tax contributions and affordable housing restrictions meant only seasoned developers could profit from this niche, but since the laws have changed it’s far easier for others to take advantage. Profits can be made in the change of use, either in holding the units for rental income or flipping them for more immediate profit.
Thanks to Permitted Development Rights (PDRs) you may not need to apply for planning permission for the change of use. This government scheme allows the change from B1 to C3 with just a prior approval needed. There are other things that need to be taken into consideration for this strategy, not every retail unit can be converted into residential accommodation easily. It isn’t just B1s that can be converted either, other classes can also be converted without planning permission, but there are extra rules around these. It is also good to note that it is only the change of use that is permitted, not the conversion, so if you need to knock down walls or add an extension, you’ll probably still need planning permission.
Pros of the Office to Residential Strategy
The real pro of this strategy is that it allows you to secure space in a town or city centre that is typically difficult or expensive to buy (certainly in residential form) but that is typically high yielding. To buy residential property with high yields in a town or city centre usually costs a lot of money and landlords renting out these kinds of properties are reluctant to sell due to the yields. The government have made this easy to do to boost housing stocks and to revitalise areas containing redundant office space.
The prior approval that’s needed is not that expensive.
Buying a commercial property can be simpler as there isn’t usually a chain.
You get more property for your money in most cases. An office property may be more expensive than a residential property but you’re getting a higher square footage for your money than you would in a residential property, it also enables you to buy a larger property in a more desirable place.
You won’t have to pay higher stamp duty for your ‘second home’ because non-residential and mixed-use properties are exempt from this rule. You also won’t have to pay VAT if you issue the seller with a 1614d form. If you need to spend money on construction works to convert the property to a residential one, you’ll also pay VAT at a lower rate. As always with tax treatments, things can fluctuate based on your personal circumstances, so get tax advice before opting for this strategy.
This strategy is great if you have a lot of capital that you want to invest. You can use the capital to convert properties in a desirable location into high specification flats or single dwelling units and profit from the high yields and capital appreciation by holding the property. Alternatively, you can flip the property for a healthy lump sum with no money left in (if you have significantly increased the property value enough to exceed the costs).
If you have the time and the inclination, you know what you’re doing, and you have developer connections, you could potentially buy an office, obtain the change of use permission and sell it on with that permission to a developer for a higher profit. This is a risky strategy as the developer you sell to will need to build to the specs you have stipulated in the change of use documents.
Cons of the Office to Residential Strategy
Overall it is not cheap, this kind of strategy can easily turn into a money pit if you don’t know what you’re doing or you mis-manage the conversion.
To get approval for the change of use from B1 to C3 your application needs to include a full set of drawings. You also need to submit supporting documents showing that you have considered the impacts on transport and highway and that you have considered contamination, flood and noise risks as well. Once you’ve submitted your application the council have 56 days to decide. If you haven’t followed the usual formula or if your documents are lacking it can take longer to gain approval. This isn’t a fast process. There is a risk that the council will reject your prior application, if this happens you will almost certainly have to get planning permission to continue with the conversion which will increase costs.
As previously mentioned, some developers have been unscrupulous with this strategy, converting office spaces into flats that aren’t fit for purpose. Because of these hasty developments you can bet your bottom dollar that before long the mechanism that allows this strategy to work will either be withdrawn or regulated. These rules have already been discussed in parliament, so there is a higher risk that something will change mid development if you engage this strategy in the coming months.
Your investment will still be subject to the same costs you would incur when buying a residential property, with the added expense of the refurbishment and planning permission for any structural changes. You may also have to pay for soundproofing and thermal insulation as the rules around these are different for residential and business properties. You’ll also have to get the drainage, water and electrical installations checked as these may need changes to bring them up to residential specifications. There are higher up-front costs associated with this kind of strategy.
You can’t get a standard mortgage for this kind of investment, there are funding options available, but they tend to be more expensive. It is common to take a bridging loan for office to resi conversions as they will also cover conversion costs, but they have a higher interest rate. Self-build mortgages will also cover office to resi conversions, with these you get your money in arrears and in stages, so you’ll usually be reimbursed by the lender for each stage of development and only once the lender is satisfied with the completion of the stage.
You’ll need to take out a specialist building survey on the structure of the commercial property prior to any conversion and you will also need a specialist commercial property solicitor for the purchase.
What’s Needed to Make the Office to Residential Strategy Successful?
In a nutshell you’ll need the right property that requires the least amount of work in the right location.
A good eye for market movements and sound research will help you identify properties that are right for this strategy.
An understanding of building regulations for residential and commercial properties or a willingness to learn about these would be beneficial. If you can look at a property and understand what’s needed to convert it, you’re more likely to make smart purchasing decisions.
Connections in the development and trade industries may lead to faster or cheaper refurbishment which would be an asset for this kind of strategy.
To make this strategy successful you will need capital that you’re willing to tie up for a while or you will need to find a good financing deal that will work for your aims.
When Office to Residential Conversions go Right
You choose a commercial property in a popular area that has high demand due to low housing stock. You convert the property as cheaply as you can but to a high specification. You then rent out the units to good tenants and make a high yield until you decide to exit the market. It all seems pretty straightforward and if you make the right decisions along the way it can be a lucrative strategy.
When Office to Residential Conversions go Wrong
You choose the wrong property, sink a lot of capital into refurbishment only to find there is no rental demand. You go over budget on the refurbishment and are unable to complete it without too much expense to yourself. Mistakes in this kind of strategy are generally costly.
Who Does the Office to Residential Strategy Suit?
If you have proven experience understanding market movements and demand in an area and you aren’t afraid to do in-depth research, you can likely make this strategy work.
Project management skills would lend themselves to this kind of strategy. If you don’t have project management skills, you will need to be willing to hire a project manager to manage the refurbishment.
You will need a good eye for design to spot a commercial property that will convert well to a residential property.
If you have experience with planning permission and building regulations, you’ll find that hugely beneficial for running this strategy.
Should you want to hold the property and let it out you’ll need the ability to manage tenants or a willingness to hire a letting agent to do this for you.
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