The easing of restrictions on office-to-residential has driven a glut of activity. But as its expiration date looms and commercial pushes back, should contractors expect the planning amendment to be extended and growth to continue?
The coalition government’s National Planning Policy Framework included an amendment allowing offices to be changed to residential without the need for planning permission.
This amendment, which came into force in May 2013, was initially intended to be temporary and covers only conversions completed and occupied by May 2016.
Evidence would suggest that contractors have seen a boom in office-to-residential conversion work over the past three years.
Data from residential analysts Molior shows there are currently 89 office-to-residential schemes under construction in London alone. These projects amount to a total of 6,000 units.
Simon Hansard, director at architects Ashby Design, has seen a huge shift following the coalition’s move. “Since the government permitted development, the market has changed enormously,” he says.
“Off the back of the recession, there was a huge amount of office space that was left unoccupied, and the introduction of these rules meant a lot of developers jumped on board.”
Mr Hansard says his firm typically works on projects of this type that average 25-30 units in size, with a project value of between £1m and £2m.
If then it is assumed that the average individual project value of London’s 89 ongoing schemes is £1.5m, these projects are worth approximately £133m combined.
A broad estimation this may be, but such a glut of work means it’s no surprise that contractors have been keen to get involved.
“Since the government permitted development, office-to-resi has changed enormously”
Simon Hansard, Ashby Design
Even outside London, where office space is typically at a premium in larger cities, contractors have seen a significant increase in the number of these projects over the past three years.
Midas Group CEO Alan Hope says his firm has seen “a great deal” of work in the sector, adding that he expects this to continue but that it had “taken some office spaces off the market”.
According to the Deloitte Leeds Crane Survey, there are a number of office-to-residential projects emerging in Leeds, including the Broadley Group’s proposals at Brunswick Point and 25 Queen Street, which will provide 155 apartments by the end of 2015.
Mr Hansard says schemes of this type, once complete, have proved to be “immensely popular”.
“One project we worked on in Rickmansworth, on a pre-sale day, we had people queuing up 24 hours before to buy [the flats],” he says.
But with the amendment’s deadline approaching, there are concerns that government indecision could spell the end for lucrative office-to-residential conversions.
With the average conversion project taking around a year to complete, according to Mr Hansard, work in the sector has dropped off dramatically as next May’s deadline approaches.
“Around about April there was a glut of these projects suddenly coming on the market, as developers only had a year left to build them,” he says. “But now things have gone very, very quiet.
“It’s got to the point where some of the projects in the pipeline have had to revert to getting planning permission, as there’s no way they were going to happen before April of next year.”
There are still no indications that the government has come to a decision on the future of the amendment, and whether it will be made permanent to aid development of new homes.
But there are other issues as well.
The commercial market has begun to push back, particularly in London, where a shortage of office space has become an increasing concern.
In Westminster, the council has managed to add an exception to the rules.
Since the beginning of this month, no office ‘losses’ – particularly conversions to residential – will be allowed in Westminster, except where a developer can “demonstrate that the benefits of the scheme as a whole outweigh the loss of the office space”, according to Westminster’s City Plan.
In addition, even when these benefits are demonstrated, the developer will be “required to provide additional office floor space elsewhere to mitigate the loss”.
Space and rents pressure rises
Office vacancy rates in London now stand at 5.6 per cent as of July 2015, down from 8.5 per cent compared with the same month a year earlier.
In addition, rents for Grade A office space have been pushed up consistently over the same period, reaching £58.18 per sq ft in July 2015, compared with £48.42 per sq ft in July 2014.
Mr Hansard says the government’s decision may hinge on the performance of the office market and the availability of vacant space.
“I think the reason the decision’s been postponed is because they’re waiting to see what happens,” he argues.
“If there is a demand for offices and those vacant offices begin to be occupied, they might not carry on down the current route.”
“There’s continued confidence in the market and increasing demand for office space”
Alan Hope, Midas Group
Regionally, the picture is very similar. Mr Hope says his firm expects there to be significant demand for office space in the near future, particularly in places where offices have been converted into residential premises.
“There’s continued confidence in the market and increasing demand for office space – it’s not necessarily happening right now, but in the next two, three years it’s going to be a big growth area,” he says.
Battlelines being drawn
These two markets appear increasingly likely to come into conflict. There is clearly a need for new homes – but there is high demand for new commercial space too.
Does that mean the government will take away the amendment, or will they extend it beyond next May’s deadline?
“It strikes me as a bit strange that, with the housing crisis, they would take something away that provides so many units of housing,” Mr Hansard says.
He adds that in outer London in particular, especially in places such as Slough where demand for office space is lower, there is massive potential to convert offices to multi-dwelling residential developments.
It seems that, unless a compromise can be reached, conflict between commercial and residential developments may well continue right up to next May’s deadline.
And if contractors were considering jumping on the office-to-residential bandwagon, indications are that the market is slowing down sharply for the time being.
What the government does next will have a huge bearing on whether this market recedes or resurges.