The Government are continuing with their ‘Build Build Build’ agenda and have announced another permitted development right (PD) as part of their bid to speed up housing delivery in England, with the added benefit of getting High Streets functioning again.
This time it is the long-awaited Class MA which will be coming on stream from 1^st August 2021.  It is a commercial to residential permitted development right that provides the ability to convert commercial premises within Class E of the Use Classes Order into residential, subject to a number of prior approval matters.  

Class E was introduced on 1st September 2020 and covers the former use classes of A1 (retail), A2 (financial and professional), A3 (restaurants), B1 (offices / R&D / some light industrial), parts of D1 (non-residential institutions) and D2 (leisure) and puts them all into one brand new use class so that change of use between these will not require planning permission.

The new Class MA will allow the conversion of many Class E properties without any (or limited in conservation areas) considerations of the effect on the High Street and will be a game changer for many town centres, and likely to be a fruitful strategy for many SME investors and developers.

Of course, these measures come as a package and are hot on the heels of the Government’s other recent permitted development changes – including the amendments to the rights to develop out airspace above both residential and commercial premises, and the changes to Class E itself.

Amongst other things, this new PD right, Class MA, will increase the amount of retail able to be converted to residential.  Currently the maximum permitted floor space able to be converted under permitted development is 150 sq. m.  This increases to 1,500 sq m under Class MA.   There are several prior approval matters that have to be taken care of first of course including, amongst others, minimum room sizes, natural light to habitable rooms, noise, and a vacant property having to be marketed for 3 months or more – which frankly isn’t much time at all in the context of the current market.  The building must also have been in Use Class E (or one of its preceding use classes) for at least 2 years, which is assessed on a rolling basis.  

Class M (conversion of up to 150 sq m of ground floor retail, takeaway, financial or professional services etc to residential) and Class O (offices to residential) will fall away on 31^st July 2020 and be replaced by Class MA, and it comes with one important difference to previous permitted development rights of this nature – the conversion is to be for C3 residential only – HMO’s are not permitted.

Its introduction should mean that it will become much easier to introduce housing into some town centres and should bring back some redundant buildings into useful use.  As investors, there could be some interesting opportunities to explore to purchase unloved buildings, especially before the market starts to price this in.

Although there are a number of conditions for investors to satisfy with regard to the prior approval process for the PD of these sites, local authorities appear to be questioning whether this will actually significantly reduce the potential ‘harm’ caused by the new right by changing the nature of high streets.  As a contrary view, however, some industry bodies, consultants and lawyers suggest the changes could actually curtail developer interest as being too restrictive.

I’m not a planner, but it’s pretty clear to me that this change presents a huge opportunity that has been brought about as a direct result of the unique set of market factors we currently find ourselves in.  For those of you that work with me, heard me speak or have read my previous articles, they will know that I’m an advocate for niching your strategies and this is a great example of that.  Becoming an expert in this particular PD right (or any others for that matter) in your investing location is a great way to drill down into a very specialist strategy to obtain a commercial advantage.

In order to protect the prime retail pitches of high streets, it is inevitable that Local Authorities will introduce Article 4 directions in due course.  These can take an average of between 12 and 18 months to be put in place, so there will be a window of opportunity for investors before this occurs.  Fortune will favour those that are the early adopters of this strategy.

However, there are a number of caveats to the recent announcement.  Firstly, this strategy won’t work everywhere – it’s only applicable in England (planning applications are required elsewhere).  In addition, there are many locations where it will just not work commercially, as the end values are too low to justify conversion to residential.  The Government has put paid to high density developments as a result of insisting on minimum space standards (these previously weren’t applicable to PD conversions) so viability has been hit as a result.

What, therefore, will happen on those declining high streets where conversion to residential does not stack up, and there are limited alternative uses? The announcements on Freeports and other Government funding initiatives will help to some degree, but it’s clear that local authority intervention will be required in many locations, in the form of grants and loans, the ability to use CPO powers and the ability to take a holistic and strategic view of the regeneration of their towns and cities.

It also will be interesting to see how long it takes for the market to price in these new PD rights.  When Class O was announced several years ago it took a year or so for this to be fully priced in, and it’s clear that this will happen here in due course.  This could rapidly become a very crowded market space.  

However, whilst the new PD rights can be a great tool, and it’s always key to have multiple exits, there are many other ways to add value to commercial property, other than converting to residential.  It’s important to make sure you have a wider view of the commercial property market in order to make sure that you are pursuing the right strategy for your investing location.  Sometimes retaining commercial property as commercial can actually end up being the best route to pursue.

For example, Class MA still leaves the door open for B1 (office) conversions, albeit on a more restricted basis than under Class O, but in some locations retaining a building as offices may be the best strategy.  It will be interesting to see the impact of COVID-19 on that particular market.  I expect there will be a ‘new normal’ whereby working from home will be much more acceptable, but also suspect we will see an increasing gravitation back towards the office over time.  Employers will most definitely be making an assessment as to whether productivity has increased once their employees return.  I also expect to see the rise of the serviced office in suburban locations, where even those employees allowed to work from home will want to escape their homes after being stuck there for over a year! Pre COVID, we witnessed a trend where office rents were actually rising in some more affluent suburban locations as PD office conversions limited the supply of offices in high demand areas.

Similarly, with regard to the PD conversion of light industrial (class B1(c)) premises to residential.  The opportunities for the conversion of these types of property is possible, despite the prior approval tests being occasionally challenging, but in the current market some of these industrial uses can be as valuable (if not more so) than residential.  The same applies to health care and nursery occupiers who can make great commercial tenants and can often take longer leases.  

The beauty of commercial property investing tends to be that you often don’t HAVE to do any development to add value to investment assets.  Value can be added by implementing lease management (extending leases and / or changing the terms) and tenant management (moving tenants in and out to improve the rent and /or tenant covenant in your property), both of which have the ability to be combined with residential conversions on upper parts etc, if appropriate.  In some circumstances commercial values may stack up better than residential and it’s definitely worth looking to blend your strategies in order to achieve an even better outcome.

A very useful sourcing strategy is to identify properties with short leases where you can achieve income in the short term whilst you are working up your value-add strategies.  There are various mapping packages on the market such as Nimbus, Land Insight and others, that can help with this.  Direct to vendor marketing can then be done once you have identified properties with leases which have circa two years or less remaining.  Leases may either be regeared and extended, in order to increase value, or surrendered so that conversions can take place.

And don’t forget that there are many other types of commercial property where you can pursue very profitable strategies without doing residential conversions.  The industrial market is very buoyant at present and contains within it uses that tick the boxes of many of the post COVID emerging trends, including dark kitchens, cold storage, data storage, self-storage etc.

Whilst the new raft of PD rights recently announced by the Government can be a great niched strategy for an investor, they are most definitely not the ‘only show in town’.   There are many more ways you can make money from commercial property without converting it to residential.  Due to the very unique market conditions we currently find ourselves in, investing strategies work differently depending on location and type of property.  In your particular market, your most profitable asset management route may not necessarily be a residential conversion.  Investors will be best equipped to gain a competitive advantage by having a bundle of strategies in their toolbox in order to add the most value to their properties.