Permitted development rules need to be reviewed, brokers say

Permitted development rules need to be reviewed, brokers say

 

Research by United Trust Bank found that 67 per cent of brokers believed a review was required, 33 per cent thought the rules were “fine as they are”, and none wanted them to be scrapped.

The bank’s survey asked 114 brokers whether they agreed with various statements about PDR regulations during June 2019. 

On micro-homes of less than 37sqm in size, 57 per cent of brokers agreed that they “can still be good if they are well designed”, and 23 per cent said they “can play an important role in tackling the UK’s housing shortage”.

However, 43 per cent of brokers agreed that the minimum space was “too small”, and 24 per cent assented that “minimum floor areas on permitted development and new builds should be mandatory rather than just standards that can be side-stepped.”

 

Challenge of micro-homes

Paul Turton (pictured), head of sales – property development, at United Trust Bank: “A very small minority of PDR developers may exploit and overdevelop sites and these have the potential to cast the whole sector in a bad light.”

“PDR is an important channel for providing new homes, with government data on net additional dwellings showing that it enabled 45,000 new homes to be created from 2015 to 2018.

“Micro-homes that use good design and technology to maximise living space can be affordable and enjoyable places to live.

“The challenge for the planning system is to support good developers to create high quality homes, while making it harder for less scrupulous developers.

“We believe that the majority of PDR developers want to create new homes that they can be proud of,” he added.

 

Advisers must ‘be mindful of where lenders see risks’ in short lease, high yield market

Advisers must ‘be mindful of where lenders see risks’ in short lease, high yield market

 

The call came as part of a debate on how the commercial property finance market was evolving with the changing economy and underlying lifestyle trends.

The advisers also noted that permitted development conversions of offices to residential were driving growth in shared workspace projects.

 

Clients know the risks

Speaking on Specialist Lending Solutions Television in association with Aldermore, Sirius Property Finance co-founder Robert Collins said brokers needed to be aware of lender’s risk appetites and market views which could have implications for their other decisions.

“We need to be mindful of where lenders see the risks, and when clients come to us with a proposal, we need to be early in the piece telling them what the finance issues may be,” he said.

Collins explained how one client had been forced to change plans because lenders were not going to be willing to re-finance the property despite holding a strong lease with Boots.

“So it’s really making sure that clients know where the risks are from the lending side,” he continued.

“I’m always conscious that we don’t give tax or investment advice, clients make their decision and then we’ve got to wrap the best financial options around it from there,” he added.

 

 

Higher yields, different underwriting

Coreco partner for specialist finance Matt Yassin agreed that lenders were adapting to developments in the economy, lifestyle trends and how leases were changing.

“I think you have to consider the advent of technology in today’s world, the flexibility it provides, and the knock-on effect in regards to commercial property,” he said.

This he noted was coming to the fore with shared working spaces where yields were higher for investors, but the underwriting has to be looked at differently.

“It’s more of a case of how can we match that flexibility which individuals have, from a lending perspective,” he continued.

“You’ve got all sorts of new proposals, places being made for people to share and we need to know how to look at the numbers from a lending perspective.

“That has an impact on the investors, but again it’s down to the brokers and the advice that we give to make sure that’s transparent all the way through to the lender.”

 

 

No pause to extension of permitted development rights planned

No pause to extension of permitted development rights planned

 

It has also ruled out introducing a body to liase between landlords and tenants where disputes occur and will not legislate to prohibit upward only rent increase clauses.

The details came as part of the government’s response to the Housing, Communities and Local Government Select Committee inquiry into high streets and town centres in 2030.

As part of its report, the committee made a range of proposals on how the government should plan for high streets to develop over the next decade.

 

Permitted development rights

One of the key issues raised was for government to suspend any further extension of PDRs, pending an evaluation of their impact on the high street.

“Where PDRs conflict with particular designations in the local plan or other established planning documents, councils should be given greater freedom to suspend PDRs in the affected area,” the committee said.

However, the government did not answer this request outright, but praised the positive aspects of permitted developments, suggesting that it was not likely to change the status quo.

“Permitted development rights make a valuable contribution to supporting development, by simplifying the planning process and reducing the matters that local planning authorities have to consider,” it said.

“They provide greater flexibility and freedoms to support our changing high streets and help businesses to adapt and diversify quickly to changes in consumer demands.

“Permitted development rights play a key role by allowing change of use between certain use classes, helping to ensure premises are not left empty on the high street.

“Additionally, as the committee’s report acknowledges, they make an important contribution to housing supply,” it added.

Permitted development rights have proved a hot topic, with the Labour Party suggesting it would strip back the current permitted development regime.

 

No financial advice from task force

The committee also requested the government’s Future High Streets Task Force should provide support to local areas on the full range of issues surrounding high streets and town centre transformation, including financial advice.

The government rejected this proposal, saying: “The task force’s remit includes to provide best practice and data and to help local places understand how their decisions and plans impact upon this.

“We do not expect the task force to be involved in providing financial advice to local authorities on commercial decisions on property; however training provided may cover how local authorities could attract investment and structure commercial decisions,” it added.

 

No landlord-tenant conciliation service

The government also noted it does not have any plans to set up a conciliation service for landlords and tenants at present, as requested by the committee.

Instead it was encouraging the use of existing dispute resolution services. These include two government-approved redress schemes: the Property Ombudsman or the Property Redress Scheme.

It emphasised that since 1 October 2014, it was a legal requirement for lettings agents and property managers to join one of these two redress schemes.

“The letting agent or property manager should arbitrate any disputes between the landlord or tenant in the first instance, and should this be unsuccessful, a complaint can be made to the redress scheme,” it said.

“The government also encourages tenants to seek independent legal advice if needed, such as through Citizens Advice.”

 

Creative use of planning and refurbishment can boost yield and value – Syms

Creative use of planning and refurbishment can boost yield and value – Syms

 

Rather than chasing yields some professional landlords are adding capital value to their properties through refurbishments.

Sometimes this could be turning a three bedroomed house into a four bed and increasingly shrewd landlords are also using permitted development rights.

This allows owners of a building to make certain changes, including improvements, extensions and changes of use without having to make a planning application.

This could enable landlords to extend the ground floor of a house for example, or extend it to accommodate more people, thereby improving not only the capital value of the property but also the yield.

However even projects that do require planning can still be lucrative for property investors.

 

Rising rent and value

For example, one professional landlord client of Connect purchased a buy-to-let, rented it out but realised shortly afterwards that they could be making more of the property.

They applied for planning permission to develop it into two self-contained flats and this was granted.

When the existing tenant moved out, the landlord rescinded their original loan and took out a short-term loan to convert the property.

The work involved creating the two separate entrances and adding a new bathroom and kitchen. This took only around three months and created a substantial increase in the potential rental income and property value.

While the client had to pay early repayment charges when rescinding the original buy-to-let loan, by refinancing one of the newly-created flats just three months later with the same lender, the lender refunded the early repayment charges originally paid.

 

More lenders considering refurbishment

It is interesting to see more lenders adding refurbishment options to their offering to help this type of investor.

For example, Shawbrook have bridge loans that are suitable for heavy refurbishment and commercial property refurbishment; it also has a term loan for lighter refurbishments used as a retention which is released when work has been completed.

Precise has also launched a new offering that means two valuations are completed on day one, a current value and a post-works value.

A bridge offer is issued based on current value but at the same time a long-term offer is issued based on the post works value, giving the property investor the guarantee of the long-term mortgage while knowing the amount that can be released from day one.

Brokers experienced in this area can help guide the client in relation to the finance options and structure needed to make these types of investments a success.

And they can benefit from the increased income stream of adding bridge products to their recommendations.

 

How landlords are using permitted developments and refurbishment to drive portfolio growth – Syms

How landlords are using permitted developments and refurbishment to drive portfolio growth – Syms

 

Rather than chasing yields some professional landlords are adding capital value to their properties through refurbishments.

Sometimes this could be turning a three bedroomed house into a four bed and increasingly shrewd landlords are also using permitted development rights to do so.

This allows owners of a building to make certain changes, including improvements, extensions and changes of use without having to make a planning application.

This could enable landlords to extend the ground floor of a house for example, or extend it to accommodate more people, thereby improving not only the capital value of the property but also the yield.

However even projects that do require planning can still be lucrative for property investors.

 

One becomes two

For example, one professional landlord client of Connect purchased a buy-to-let, rented it out but realised shortly afterwards that they could be making more of the property.

They applied for planning permission to develop it into two self-contained flats and this was granted.

When the existing tenant moved out, the landlord rescinded their original loan and took out a short-term loan in order to carry out the development to convert the property.

The work involved creating two separate entrances and adding a new bathroom and kitchen.

This took only around three months and created a substantial increase in the potential rental income and property value.

While the client had to pay early repayment charges when they rescinded the original buy-to-let loan, by refinancing one of the newly-created flats just three months later with the same lender, the lender refunded the early repayment charges originally paid.

 

Lenders increasing refurbishment

It is interesting to see more lenders adding refurbishment options to their offering to help this type of investor.

For example, Shawbrook have bridge loans that are suitable for heavy refurbishment and commercial property refurbishment.

The lender also has a term loan for lighter refurbishments used as a retention which is released when work has been completed.

Precise has also launched an offering that means two valuations are completed on day one, a current value and a post works value.

A bridge offer is issued based on current value but at the same time a long-term offer is issued based on the post works value, giving the property investor the guarantee of the long-term mortgage while knowing the amount that can be released from day one.

Brokers experienced in this area can help guide the client in relation to the finance options and structure needed to make these types of investments a success and benefit from the increased income stream of adding bridge products to their recommendations.

 

Permitted developments fall as new housing starts slow sharply

Permitted developments fall as new housing starts slow sharply

 

According to the latest data from the Ministry of Housing Communities and Local Government (MHCLG), 222,190 additional dwellings were built in the last financial year, up just two per cent on 2016-17.

While the continued growth was welcomed, the figure was a substantial drop on the previous four years, which had seen increases of 10%, 25%, 11% and 15% respectively.

The total shows a plateauing of new buildings at just below the 2007-08 peak of 223,530 – which was the highest since data began being recorded in 1991-92.

Notably, the number of homes completed using permitted development rights fell 28% from 18,887 in 2016-17 to 13,526 last year.

This was on par with the 13,879 properties completed in 2015-16, which was the first time these types of developments were recorded.

 

Permitted developments fizzling out

Industry commentators cited a range of potential factors and warned that the rapid slowdown was a concern in reaching the government’s target of 300,000 new homes.

Thistle Finance managing director Mark Dyason said the 2% increase on last year highlighted the glacial pace at which homes were being built.

“The fact that the number of new homes being built as a result of permitted development rights also fell sharply will be a particular blow to the government,” he said.

“Permitted development rights were meant to ignite the UK housebuilding market but on this evidence are already starting to fizzle out.

“The irony is that there has never been a more competitive and dynamic borrowing environment for developers.”

Dyason noted there had been an influx of new lenders and challenger banks into the development sector bringing rates down and offered greater choice to developers.

“With Brexit looming, the UK construction sector has been like a rabbit in the lights,” he added.

 

Brexit slammed on brakes

Naismiths managing director Blane Perrotton agreed Brexit had been a serious cause for concern.

“You don’t need to follow every tortuous twist and resignation of the Brexit saga to identify the culprit for the slowdown.

“Fragile demand and a lack of developer confidence since the 2016 vote have both slammed on the brakes, even here in the engine room of the construction industry.

“More worrying still is the sharp fall in the number of changes of use made under the new permitted development rights.”

Perrotton argued that these new rules, “were supposed to be the white knights of home creation” but suggested they were failing to deliver on their promise with the overwhelming number of new homes being built from scratch.

 

Great news

However, in a statement communities secretary James Brokenshire was pleased with the figures and said the government was making further investment available.

“Today’s figures are great news and show another yearly increase in the number of new homes delivered, but we are determined to do more to keep us on track to deliver the homes communities need,” he said.

“That’s why we have set out an ambitious package of measures to deliver 300,000 homes a year by the mid-2020s.

 

Don’t burn your bridges with permitted development conversions – Oblix Capital

Don’t burn your bridges with permitted development conversions – Oblix Capital

 

Desirable stock in the UK’s major cities is becoming scarce, with the majority of prime, unused office sites already converted or currently undergoing a residential conversion.

Opportunities in these traditionally attractive areas are becoming difficult to source, but there is still a slice of the pie for the developer that’s willing to diversify.

The PDR market has been and will continue to evolve as a result of capital values and housing demand growing far quicker for residential property than for commercial.

While the market is still relatively strong, diversifying routes to sustainable housing stock is vital and developers are now testing the waters in the UK’s secondary towns and cities where unused office supply is still ample.

Changes in working practices and developments in digital technology have acted as a catalyst for the constant supply of unused office spaces ready for conversion.

 

Permitted development bridges

The attraction surrounding PDR conversions is partly down to developers not needing to go through the traditional costly and time-consuming planning routes, providing a much faster process to fulfilling their objectives and demands of the end buyer.

A general lack of desire to provide short term finance from mainstream banks has forged a path for more specialist players to tailor loans according to the objectives of each individual opportunity.

Permitted development (PD) bridges are an ideal candidate for funding on properties with ‘change-of-use’ opportunities.

Fast and flexible in nature, PD bridges allow developers to purchase locations that have existing PD permissions.

Time is of the essence with change-of-use conversions and the finance for PD purchases needs to be too.

The execution with PD bridges occur in a matter of weeks, meaning the developer has enough time to arrange any form of enhanced planning while also securing development finance to finalise the project.

 

Top tips to arranging PD bridges

Do your research:

This might be an old cliché but couldn’t be more accurate when it comes to PD bridges. A lender will want evidence that the borrower has not only identified a suitable site but researched the local area for transport links, employment and most importantly demand. Lenders will always be more committed to financing projects when the borrower can demonstrate sustainable demand from the end user as well as the mortgage-ability of the finished units.

Experience is a must:

This is a specialist form of short-term finance and with that in-mind, it’s vital borrowers can demonstrate the necessary skills and experience to deliver high-quality PD conversions on time and within budget. Planning experience also adds another string to a borrower’s bow, playing an instrumental role in maximising property’s value. Evidence of previous successes will boost the chances of obtaining a PD bridge as well any subsequent finance when finalising the project.

Have a clearly defined exit:

Aside from ensuring the borrower repayment terms are viable, lenders like to ascertain that a clear exit strategy is in place. As with most PDR conversions, properties will undergo a period of transformation seeing the commercial attributes become residential. Development finance is a practicable form of finance that allows exit on the PD bridge whilst providing the funds to complete the transformation. More and more borrowers are using ‘development wraps’ that encapsulate the bridge and development finance under one deal and one lender.

Since its introduction in 2013, PDR has gone someway to tackle the UK’s current housing crisis and ensuring this continues to spread to the UK’s secondary cities will be key to its momentum.

Lending capabilities such as flexibility, speed of execution and expert underwriting practices have typified the successes of PD bridges making them a suitable vehicle to capitalise on the existing PDR opportunities.

 

 

Budget 2018: Faster permitted development approvals on way for commercial to resi conversions

Budget 2018: Faster permitted development approvals on way for commercial to resi conversions

 

The measure was part of a series of moves targeting home building and development announced in the Budget, including cash for local councils and housing associations and support for SME builders.

The permitted development rights consultation proposes allowing upwards extensions above commercial premises and residential properties, including blocks of flats.

It will also allow commercial buildings to be demolished and replaced with homes.

This will be part of a £675m fund for local councils to help redevelop empty shops as homes and offices, improve transport links and re-use old and historic properties.

 

Developer contributions

The government also published its response to the Supporting housing delivery through developer contributions consultation which was open earlier this year.

It said a simplified system of developer contributions for land value uplift will also be introduced, which would provide more certainty for developers and local authorities.

HM Treasury added this would enable local areas to capture a greater share of uplift in land values for infrastructure and affordable housing.

“The reforms include simplifying the process for setting a higher zonal Community Infrastructure Levy in areas of high land value uplift, and removing all restrictions on Section 106 pooling towards a single piece of infrastructure,” it added.

Government will be consulting on the draft regulations to implement the changes later this year.

Other measures announced in the Budget to help tackle the house deficit, included:

 

Positive impact of conversions

Thistle Finance managing director Mark Dyason welcomed the investment in the planning process.

“There’s no doubt that office-to-residential conversions have had a positive impact on the number of new homes being built so any simplification of this process is to be welcomed,” he said.

“Empty commercial deadwood is helping to regenerate local neighbourhoods around the UK and it’s a trend that needs to continue.

“Coupled with the additional £500m set aside for the Housing Infrastructure Fund, the right noises are emerging from this government.”

However, he questioned the commitment of government to stick to its plans and noted that the revolving door of housing ministers did not help the process.

“There’s zero consistency, often zero ministerial understanding of the property market itself and, to top it all off, never enough time to stick to a coherent game plan,” he continued.

“What many in the property industry would like to see for the benefit of new build is a cross-party working group with a remit that extends beyond the parliamentary cycle and individual budgets.”

 

 

New Homes Ombudsman and residential permitted development rights unveiled

New Homes Ombudsman and residential permitted development rights unveiled

 

Speaking at the Conservative party conference, Brokenshire (pictured) pledged to speed up the planning system and make better use of land and vacant buildings to try to reach the target of building 300,000 new homes a year.

This includes introducing permitted development rights to allow property owners to extend certain buildings upwards.

The ban on the use of combustible materials on the outside of high-rise buildings, proposed in the wake of the Grenfell Tower disaster, was also confirmed.

 

New Homes Ombudsman

The Ministry of Housing, Communities and Local Government (MHCLG) said it will legislate to require all new developers to belong to a new homes ombudsman.

It said the watchdog will champion homebuyers, protect their interests and hold developers to account.

“House buyers should be confident that when they purchase a new home, they get the quality of build and finish they expected,” the MHCLG said.

“We will work with consumers and industry to develop our proposals and publish more details in due course.

“In the meantime government expects industry to continue to improve the current redress arrangements and improve the consistency of quality for new build homes,” it added.

 

Planning reforms

Proposed changes to the planning system include more flexibility to extend upwards on existing blocks of flats, shops and offices making better use of space by increasing housing density.

The permitted development rights would require property owners to maintain the character of residential and conservation areas and safeguard people’s privacy.

Planning changes will also promote councils keen to make new garden communities a central part of their plans for housing and economic growth – there will be clearer rules to give more certainty for communities when land is needed to make this a reality.

Local authorities will receive additional freedom to make the most of existing brownfield land and dispose of surplus land that could instead accommodate new homes.

 

High-rise protections

Following the Grenfell Tower tragedy the government has also confirmed that it will ban the use of combustible materials on external walls of high-rise residential buildings.

The ban will apply to hospitals, care homes and student accommodation over 18 metres.

The government also announced £165m of funding for up to 5,100 homes and the infrastructure to support these new homes in Birmingham to follow the Commonwealth Games in 2022.

 

Fairer housing market

Property Ombudsman Katrine Sporle welcomed the news of the New Homes Ombudsman.

“We have always agreed that new homes should be covered by an ombudsman, as consumers have no idea that when they buy a new home directly from a developer they will have no access to a redress scheme,” she said.

“This announcement will mean the housing market becomes a fairer place for all involved.”

 

 

Change-of-use developments could be key to solving the housing crisis – Oblix Capital

Change-of-use developments could be key to solving the housing crisis – Oblix Capital

However, what’s arguably had more impact is the permitted development (PD) rights policy, a government initiative introduced in 2013 that allows developers to turn redundant office space into residential flats without the need for conventional planning permission.

This has caused commercial-to-residential unit conversions to soar and there remains a sizeable opportunity for both intermediaries and developers alike.

With a surplus of empty commercial units in the UK, coupled with a housing shortage, change-of-use conversions have been rising over the past five years, consistently contributing to the UK’s housing stock.

 

Making the most of what’s available

The rise in office-to-residential conversions is also a by-product of changing working practices across the UK’s major cities, which have resulted in a decline in office usage.

Developments in digital technology have allowed entire offices to become completely mobile.

With reduced dependence on long-term space and flexible working trending upwards, shared office spaces are fast becoming a mainstream alternative to signing long-term leases.

This has been well received by UK businesses which have long suffered the contractual imbalances of landlord/tenant agreements.

However it has also left many properties previously used as offices unoccupied and a target for conversions.

 

Numbers speak for themselves

London and the South East have been at the forefront of residential conversions, accounting for more than a fifth of new housing added to the capital in 2016/17 – it accounts for around 16% in the rest of country.

These statistics are likely to be the result of larger housing demand, appetite in financing and the availability of commercial space suitable for conversion.

PD rights policy was proposed to accelerate new developments that look to meet the UK’s ambitious house building targets, and since the policy’s inception, change-of-use conversions have gone some way to meeting these goals.

There has been a duty-bound effort from councils to support these conversion projects, and the numbers speak for themselves: change-of-use conversions increased by 48% between 2015 and 2016, with 41% of these being office conversions.

More importantly, new residential units have been formed from unwanted or unfit office spaces, which might otherwise blemish the surrounding area.

 

Resistance from lenders

Despite the continued year-on-year growth, change-of-use conversions have been met with some resistance.

Some mortgage lenders have been unwilling to lend against certain PD units due to worries around future demand.

This is because many of the converted buildings were purely designed to be offices and are situated in the middle of commercial sites, such as suburban office parks.

In 2014, a well-publicised example occurred in Islington where the council decided to issue article four directions across the whole borough.

This decision was blocked by the planning minister on the grounds that it had been applied disproportionately, resulting in a direction that covered specific clusters of office space rather than the entire borough.

 

Faster planning process

The government’s stance on PD rights has been welcomed by developers, especially with capital values and housing demand growing much more quickly for residential property than for commercial.

Further to this, developers do not need to go through the traditional costly and time-consuming planning process, providing a much faster process of fulfilling the demand in housing.

Oblix Capital has financed multiple change-of-use projects over the past three years, with conversions ranging from office to residential, student accommodation and semi-commercial. Recent cases include an 80-unit office-to-residential conversion in Manchester, a 77-unit office-to-residential conversion in St Albans and a 75-unit office-to-student conversion in Leicester.

With a large number of commercial sites still free for conversion, the industry must continue to support change-of-use – enabling the PD policy to achieve what it set out to.