Commercial to residential conversion

Since the mid-2010s the process of converting properties built and used for commercial purposes to residential dwellings has become increasingly popular. More people than ever are looking to turn real estate built for profit-generating purposes such as gyms, warehouses, supermarkets, or office blocks, into residential dwellings. The number of conversions has been increasing since the introduction of the green belt, the collapse of the high street and the popularity of remote working, with developers often citing a number of benefits as an alternative to brownfield or greenfield development. Its solution to the housing crisis and its energy-saving advantages are strong cases for converting a pre-existing building. As of September 2022, the average UK house price sits at £294,559, a 9.5% increase on September 2021, more than many can afford, and something developers claim commercial to residential conversions will help to reduce. On the energy-saving side of the equation, limiting ground-up construction is of great benefit to the environment, with 7% of the world's Co2 emissions currently coming from cement production. Despite the benefits, however, the sheer number of conversions, paired with new legislation making them more accessible than ever has brought a number of challenges with many asking for stricter regulations.

Do you need planning permission for a commercial-to-residential conversion?

Commercial to residential conversions can be pursued through the process of applying for planning permission, waiting for a grant and carrying out works that fit within the bounds of the planning grant. However, in the past few years planning legislation has been relaxed to make changing a building's use easier. Now, whether or not conversion projects are possible without a planning application, depends on if your proposed project falls in line with your permitted development rights. These sets of rules allow certain projects to be executed through a prior approval process rather than the full planning process. In 2013 the first iteration of Class O was brought in (offices to homes) followed by another introduction of Class Q in 2014 facilitating the change of use of agricultural buildings to residential dwellings. Since then more additions to the Town and Country Planning (General Permitted Development) (England) Order 2015 have been made. In 2017 it was made possible to convert B1c (light industrial) to C3 (residential dwelling) without planning. A1 (Shops, hairdressers and dry cleaners) and A2 (financial services) conversations were also allowed under permitted development rights provided the size of the premises does not exceed 150 square metres. However, the introduction of class E in 2020 and MA in 2021 have been the most significant change.

Class E grouped together use classes:

• A1 - Shops,

  • Shops, retail warehouses, showrooms, hairdressers, pet shops, betting shops

• A2 - Financial Professional Services,

  • Banks, building societies, estate agents, recruitment and employment agencies,

• A3 - Restaurants and Cafes,
  • Restaurants, Snack Bars and Cafes, premises where food and drink are purchased to be consumed on-site, find pubs for sale on Addland.
• B1 - Business,

  • Offices, Research and Development, Industrial purpose buildings

• D1 - Non-residential institutions,

  • Health Centres, Creches, Clinics, public buildings. 

Any classes in Class E could now be converted between one another in 'non-residential conversions', without the need for planning permission. Class MA was then introduced in August 2021 stating Class E premises could now be converted to an eligible dwelling using permitted development rights.

The introduction of Class MA provides an opportunity for developers to a far quicker development process, allowing commercial property buyers to have confidence that the conversion will be possible should it fit within the conditions of Class MA, many of which include the property's proximity to:

• a Conservation Area,
• a National Park,
• an Area of Outstanding Natural Beauty, or 
• the Norfolk or Suffolk Broads.

Use Addland's research tool for cm-level accurate environmental considerations data to any of the above environmental considerations.

Prior Approval 

Commercial to residential change of use of any kind under permitted development rights usually requires 'prior approval' to legally convert. There are permitted development classes that don't require prior approval, but most 'change of use' cases will need it to gain building consent. Prior approval is a form of permission, but unlike the normal rules of planning permission, the process is essentially a checklist from your Local Planning Authority (LPA) to ensure the proposed development fulfils the criteria associated with:

• Design and external appearance;
• The transport impacts of the development;
• Flooding information.

The process is designed to be straightforward and decisions are made by the council within 56 days (8 weeks), or permission is automatically granted. To give yourself the greatest chance of a fast response, ensure you have provided the correct information. You can submit an application to your Local Planning Authority you can find if prior approval is necessary. 

Popular commercial to residential conversions

Agricultural buildings to dwellings

Agricultural buildings to residential dwellings have been a popular commercial-to-residential conversion since restrictions were introduced on rural development building land with the introduction of Green Belts in 1955. Since then, converting barns and other agricultural buildings into country houses has become a way to create residential premises in otherwise protected areas. More recently the introduction of Class Q permitted development rights in 2014 has provided new sets of rules for agricultural buildings, making their conversion even easier.

These types of conversions are generally considered the most simple form of commercial-to-residential change of use, mainly due to the shape of the building often fitting more appropriately with that of residential premises, meaning common issues with other conversions types like a lack of natural light are not normally issues. However, if you want to go down the permitted development route there are still limits to stay within to ensure legality:

• For the building to qualify as agricultural it must have been in agricultural use on 20 March 2013. If the building has been brought into agricultural use after this, a period of 10 years must have passed before development under class Q may begin.
• Previously there was a limit of 450 square meters per agricultural unit, but now in cases where agricultural buildings are converted into larger dwellings (for houses above 100 sqm), the only rule is the number of separate houses cannot exceed 3.
• Should the property be leased, consent is necessary from both tenants and landlords. Tenants are not allowed to pursue the conversion without the legal owner's consent.
• Class Q can not be used when the agricultural buildings in question have been constructed using permitted development rights.

One of the biggest debates around agricultural to residential property conversions under Class Q is the extent of the business operations. Building operations are allowed, so long as they are deemed necessary for the conversion to a dwelling. Therefore, so long as you can prove your building works are necessary, they will be permitted. Generally, however:

• windows, doors, roofs, or exterior walls, or, 
• water, drainage, electricity, gas or,
• other services to the extent reasonably necessary for the building to function as a dwelling house,

can usually always be deemed as necessary operations.

To gain the full details of what is allowed under Class Q permission read the planning insights guide.

High street to dwellings

Another type of commercial-to-residential conversion, high street to dwelling conversions have grown in popularity since the rise of online shopping in the 2010s. Many have suggested they are actually important for the high street, and will help the commercial operations that can still afford to stay open, by offering a new stream of local customers.

The introduction of Class E and Class MA has increased the rate of Highstreet conversions as expected. Of the high street commercial premises, the type of building with the most opportunity to convert is the conversion of unused shops into homes (Class M). The combination of the events of the past 5-10 years, including the pre-pandemic decline mainly due to the rise of online shopping, now has turned hives of social and commercial activity into ones of disuse and neglect. Now 16% of the UK's high streets are unused shops, with 1 in 20 of these having been vacant for more than 3 years. The introduction of Class E and Class MA has facilitated more conversions to non-business purpose dwellings with many commercial property owners now opting to convert. 

Converting unused shops to residential buildings using permitted development rights is by no means as simple as Class Q conversions, and the extent to which it will actually fix the high street crisis and affordable housing crisis in UK towns and cities is questionable. Many ground-floor shops in town centres and city centres don't have enough natural light to be deemed habitable for a residential premise, and fitting widows is either not an option, would require major work, and increased conversion costs. This combined with the opportunity to develop without applying for planning permission is also a dangerous combination, with fears dwellings will be created that don't meet the technical housing standards. What's more, the introduction of PDRs may well open the floodgates to cheap poor quality housing, and increase substandard living for the future. Twenty-seven professional bodies have objected to the government’s introduction of class MA, claiming it is a short-sighted policy that will only add to the housing crisis further in time. Some safeguards have been introduced in an attempt to limit inadequate housing, now:

• Buildings that don't have appropriate access,
• show potential for contamination,
• have too many or too few neighbouring commercial premises,

won't pass the prior approval stage and the development won't be possible under permitted development rights. However, this still does not limit the conversion of shops into poor-quality dwellings, even if they are deemed 'habitable'. 

The introduction of class MA of course does not rule out the option of pursuing a high street to residential conversion by applying for statutory planning consent. In many ways, it's a useful tool to highlight flaws in your plan that would otherwise have gone unnoticed. Applying for planning will likely make you think more about designs as your LPA may request architectural drawings for designs that will work for residential accommodation in a previously commercial space. Using PDRs and the planning process is also possible, by applying for planning and using PDRs as a kind of safety net should the planning be rejected.

Offices to dwellings

Converting offices into dwellings is often presented as another solution to the housing crisis. Whilst their popularity outdates the Covid-19 pandemic, and the rise of remote work, many developers have now decided the opportunity is simply too great to ignore. To some extent, the conversion of business premises makes a lot of sense. They make use of excess space, are centrally located meaning excellent transport links, offer a solution to the housing crisis and save fossil fuel combustion by limiting cement production. However, like Highstreet to residential conversions, they present a number of challenges, especially when paired with the opportunity to convert without planning.

As soon as Class O Permitted Development was introduced, developers took full advantage, leading to the construction of many small often dark homes, the worst of which were located in the centre of an old office with no windows at all as space standards that made natural light a requirement for new homes was not enforced until 2020. What's more, the quality of many projects has resulted in many developments being left unfinished or repurposed again. Since 2015 a total of 73,575 new homes have been converted from offices under permitted development rights and according to the Local Government Association, 18,000 have been lost altogether due to a lack of planning with conversations being rushed and encountering either construction or financial issues making their project unfinishable. This is not to say successful office-to-residential conversions are not possible. With a high-quality team, suitable size and location with plenty of light, it is more than possible to convert high-quality affordable homes from offices, like many of the 55,575 office-to-home conversions since 2015. Search on Addland to find the most recent offices for sale in the UK.

Finance in commercial to residential conversions

Funding commercial to residential conversions

Something to definitely consider when attempting a commercial-to-residential conversion is the unexpected additional project costs of construction or conversion services that come with making a non-residential building fit for living. To compensate for unexpected additional costs, if you are considering a conversion of premises of this kind for the first time, overestimating the project's additional payments is highly recommended. 

Prior to 2015, the most common type of development finance used in commercial to residential conversions was a short-term development finance on vacant non-residential buildings where work could start straight away. Since 2015 however, in the period of time since then, a finance route has developed as a hybrid between commercial finance and development finance. The emergence of this kind of arrangement has led to development brokers making special arrangements allowing more property developers to pursue commercial to residential development.

The type of finance needed to cover project costs for a commercial to residential conversion is split between a ‘heavy refurbishment bridging loan’ if you need to apply for planning permission, and a ‘light refurbishment’ where non-structural changes are not made and planning permission is not necessarily needed. To apply for the bridging loan you will need to find a suitable lender for your specific project, which will depend on the type of conversion of premises and if your conversion is in need of a ‘heavy’ or ‘light’ loan. Once you have found a suitable lender you can expect to receive credit back terms within 24 hours. If you are satisfied, with the terms you may then submit a formal application, and providing this is accepted the formal work usually takes around a month to be completed. However, this largely depends on the complexity of the conversion. If you're not new to property development, whether or not your application will be accepted will largely depend on the success of your previous development. However, whilst it is true that experienced developers are likely to be accepted over inexperienced building clients, first-time developers can be accepted if you have an experienced builder working on the project.

A feasible investment opportunity?

One of the defining factors of whether a commercial to residential conversion can be a profitable investment is the developer's ability to find a suitable site. With this in mind, conversions that provide multiple occupancies are renowned for providing higher yields. On top of this, despite the difference in the original purpose of the building, non-residential buildings tend to be in highly convenient, accessible areas with good transport links. The difference in interior and the necessity to strip the premises presents the opportunity to add brand new high-quality residences.

To cover the risks involved in the conversion of premises it is possible to gain a warranty to cover any mishaps that may come with the change of use. If you are planning to use a mortgage to cover the cost of your commercial-to-residential conversion you will also need a ‘building warranty’ as lenders will insist that the chances of conversion mishaps are offset. If your conversion requires building warranty One Guarantee provides warranties for all conversions and renovations including building warranty.

Tax

When converting non-residential buildings to residential buildings there can be substantially reduced VAT charges on certain processes should your building meet certain criteria. Usually, VAT is a taxable charge at a standard rate of VAT of 20% in the current VAT period, however, this is reduced to 5% can be applied if:

• The conversion is from a non-residential building into a dwelling
• The conversion increases the number of self-contained living accommodation within a building
• There are no planning restrictions on the building that would prevent construction

If your project is allowed the reduced VAT rate then you still won’t receive the discount on everything but you will on:

• Work on the buildings such as walls, roofs, floors, stairs, windows, doors, wiring and/or plumbing and,
• Facilities that need to be provided such as water, power, heat and drainage and the installation of fitted kitchen units, sanitary-ware, central heating and light fittings. 

Importantly, if the reduced rate is not applied for at the time of construction there are no legal bodies that will chase the tax relief for you after, and it will be up to you to contact the building group to retrieve it. So sorting it out during the work will likely save you a lot of hassle and possibly a lot of money.

Business rates are also a charge that commercial properties have to pay. These affect commercial to residential conversions of all kinds. Whether or not you need to remain paying them depends on your council. Generally, however, whilst business rates used to not be payable for a vacant or disused property, since 2014/15 most councils will charge the rates until the completion of works or even until the residential premises is occupied, and this can dramatically increase your project costs should they be applied. Find your area business rates policy.