Recent changes to Permitted Development rights have opened up opportunities for office-to-residential conversions for an increased number of South East buildings. However, there may be a short window in which to act ahead of any future restrictions.

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Huge potential

The recent relaxation of Permitted Development rights has created huge opportunities for office-to-residential conversions. Having conducted an audit of office buildings across the South East, LSH has identified 12.9m sq ft of space that we now believe to be prime targets for PD. This comprehensive audit included buildings built before 2012 with high levels of vacancy or significant lease breaks or expiries coming up within the next two years.

By square foot, the markets with the largest opportunities are Reading (2.0m sq ft), Blackwater Valley (1.0m sq ft), and the South Coast (1.0m sq ft). Meanwhile, Marlow, Uxbridge and Reading are the locations where PD opportunities form the largest proportions of the existing stock. Our PD targets represent close to 20% of the total stock of these markets, compared with a region-wide average of 7.5%.

Some of our key opportunity locations are in Local Authority areas where Article 4 Directions are a constraint on PD, including Reading, Blackwater Valley and Uxbridge. However, our research indicates that a large majority of the target buildings are not in designated Article 4 areas.

"12.9m sq ft of major office-to-residential PD opportunities across the South East"

Limits removed

New opportunities have been created by amendments to Permitted Development rights that came into effect on 5^th March 2024, increasing the number of buildings eligible for changes from commercial to residential use without needing full planning permission.

Two key restrictions on buildings’ eligibility were removed:

Vacancy requirement: Buildings no longer need to have been vacant for a minimum continuous period of three months before the prior approval application.
Size limit: Buildings of any size are now eligible for Permitted Development, following the removal of the cumulative floorspace limit of 1,500 sq m.

The removal of these restrictions has opened up the potential use of PD rights to a much wider range of office buildings. In particular, the loss of the size limit makes PD an option for larger buildings that were previously ineligible for full conversion.

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In Q1, a private investor purchased the former GSK building, Brentford for £69m, with plans to convert to residential.
The building was bought with vacant possession and a price reflecting £99.98 per sq ft.

Evolution of PD rights

The recent amendments are the latest in a series of changes that have been made to office-to-residential PD since the original Class O rights were introduced in 2013. These unleashed a wave of conversions that, at its peak, saw 17,751 new homes delivered in 2016-17 in England via changes of use from offices. Over 60% of all PD conversions have come in either Greater London, the South East or the East of England, but the total number delivered each year has dwindled by more than half since the peak.

Net additional dwellings via office to residential PDR

Class O rights initially lacked provisions to safeguard the quality of converted accommodation and many of the first wave of conversions were criticised for providing poor quality homes lacking space and natural light. PD rights were eventually amended in 2020 to include a requirement that conversions provide adequate natural light; while national space standards have applied since 2021.

A further major change came in 2021 when Class O was superseded by Class MA Permitted Development rights, covering changes to residential use for properties in the broad commercial Use Class E. The establishment of Class MA rights brought with it the size and vacancy requirements that have now been rolled back. However, space standards and rights to natural light still apply and both remain a significant constraint on office-to-residential conversions, with the size, shape and orientation of some buildings making them unconducive to acceptable redevelopment.

Article 4s still apply

Office-to-residential conversions can also still be blocked by Article 4 Directions, which allow Local Planning Authorities to remove PD rights in specific areas. Indeed, there has been speculation that Local Authorities wary of losing employment space will seek to increase the use of Article 4s in reaction to the recent loosening of PD rights. However, it can take a Local Authority a significant amount of time to bring in an Article 4 Direction, so a window of opportunity appears to be open in locations where Article 4s are not currently in place.

Any Local Authority attempting to extend Article 4 provisions could also find itself in conflict with the Secretary of State for Levelling Up, Housing and Communities, which has sought to limit their use in line with the National Planning Policy Framework’s stipulation that they are “based on robust evidence and apply to the smallest geographical area possible”. Within the last year, the Secretary of State has modified Article 4 Directions in locations including Watford, Reading, Rushmoor, Three Rivers, Hertsmere and Hillingdon. Developers should be attentive to any opportunities created by the redrawing of Article 4 maps.

Restrictions ahead?

Further legislative challenges may be ahead, although the calling of an early general election has prevented the passing of a Private Members’ Bill that had threatened to dramatically impact the viability of PD projects by enabling Local Authorities to apply affordable housing obligations to conversions of commercial property to residential.

Labour has said that it will overhaul the planning system if it comes into power, with its manifesto pledging immediate changes to the National Policy Planning Framework. The manifesto does not specifically mention PD, but Labour has been sceptical towards it in the past. The possibility of a major shift in planning rules provides a further reason to believe that there may only be a relatively short period of optimum opportunity for property owners whose buildings have recently become eligible for full conversion.

Value shifts add to PD case

Movements in capital values have also heightened the case for office-to-residential conversions. According to LSH calculations, residential values per sq ft are now on average 53% higher than office values across the wider South East & East of England area. This gap has widened significantly following the sharp repricing of office values seen since late 2022, and particularly large margins to secondary office values have emerged in many locations. While the first wave of office-to-residential conversions was triggered by legislative change, an imminent second wave could be equally driven by shifts in values.

Average South East Capital Values

However, there are additional considerations that will impact the feasibility of individual buildings for PD conversions. Converted units are often less attractive to residents than new builds, unless their location is particularly desirable, so may sell or rent at a discount. Depending on the complexity of the conversion, build costs can be higher for PD projects. In addition, converted residential units on business parks may not be mortgageable where offices are still the location’s main use.

Reshaping office markets

With occupier demand increasingly focused on prime office space suited to post-COVID requirements, many South East markets will need to see poorer quality space either repositioned as higher quality offices, or completely removed from the market via changes of use. PD rights are an important tool that, used correctly, will support the creation of leaner office markets more concentrated on grade A space.

The recent removal of size and vacancy restrictions has opened up the option of office-to-residential PD conversion to a much wider range of buildings. However, political uncertainty hangs over the future of PD, and any Local Authority moves to increase the use of Article 4s could restrict the potential for change of use. The current window of opportunity may not be open for very long and, for many landlords considering residential conversions for underperforming office assets, the time to act is now.

LSH has comprehensive intelligence on buildings across the South East suitable for office to residential PD, and we have the expertise to guide you through the conversion process. Please contact us if you would like to further explore the opportunity.

Download the Thames Valley and South East report in full here

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