Turning Offices Into Homes – Financing a New Property Development Opportunity

Britain’s town and city centres have undergone huge changes over the last few decades. As manufacturing declined, many of the light and heavy industrial units that operated in close proximity to shopping and residential areas have been converted to offices or, more recently, apartments. Looking to the future, as retailers come under pressure, many analysts are predicting a sea change in the High Street. Fewer shops, a more diverse range of entertainment options and more apartment blocks.  

All of which may be good news for those who like to live and work close to the heart of things. Where previous generations flocked to the suburbs, today’s young professionals are attracted to apartment blocks that sit in close proximity to shops, bars, cinemas and nightclubs.   

There is, of course, the small problem of available properties in areas where space to develop is limited. One answer is to demolish existing offices, factories, warehouses and shops and build anew. The other way forward is to convert existing premises.  

Traditionally, converting commercial to residential property was a process fraught with difficulty, not least because planning laws tended to favour the status quo. That began to change in 2013, when new regulations were introduced with a view to making it easier for developers to refurbish existing property assets. In 2017 the laws were further relaxed.

 

New Planning Laws

Essentially, the change in the law conferred “implied planning permission” on certain types of conversion – for instance offices into residences, assuming of course that the offices in question weren’t subject to other restrictions, such as listed status.  

And for property entrepreneurs this was good news – not least in terms of the cost of building new homes. For instance, in some areas a developer might be able to buy an old factory or warehouse complex for £250,000 or £300,000 and convert it into residential units that might sell for £150,000 or £200,000 each. Even allowing for the cost of repurposing, the scope to ring up substantial profits is clear. Arguably there is also something to be said for developments that essentially retain something of the character of urban centres.

And the rules have undoubtedly had an impact on housebuilding.  For instance, the years after the 2013 deregulation witnessed something of a boom in conversion projects, which included a repurposing of the Centre Point tower – one of the first iconic skyscaperss in London – to flats from offices. In 2016, the Office for National Statistics said the rule change had resulted in a 10% rise in the number of new homes coming onto the market.  

The Funding Question  

Not all projects are as big – or indeed as controversial – as the Centre Point development. Under the new rules, a project may be as simple as converting a former florists to a single occupancy dwelling.  

But for a project of any size, development finance of some sort  will usually be required to fund either the purchase of the property or the refurbishment or both. The availability of finance will depend on a number of factors, not least the potential resale value (or the expected rental yield) set against the purchase and development costs. Or to put it another way, the business plan has to stack up.

In addition, finance providers will also look at the status of the property. A vacant building carries less risk than one with tenants in situ. If a property is occupied, building work will clearly have to be delayed until everyone is gone and that will add to the risk and the cost.  

It’s also worth keeping a weather eye on the attitude of the local authority, which may seek to remove permitted development rights on some properties.

Finding a Lender

Assuming that all the development ducks fall neatly into a row, finding the right finance package is crucial and in addition to specialist lenders, the alternative finance market is emerging as an option for entrepreneurial developers.  

The key is to find a lender – or a lending platform – that understands the risks and rewards associated with property development projects. In the alternative finance space, this is not necessarily an area that generalist peer-to-peer lending platforms – or to be more precise their community of lenders – will be comfortable with.   

However, the Route – Finance’s  Private Debt Platform was set up specifically to address special situation lending requirements. Today, property projects are an important constituent of the platform’s portfolio. That’s due in no small part to The Route’s community of backers. All are sophisticated investors who are well placed to assess the most complex projects on their merits.

 

To find out more call:   020 3141 9040

 

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