An opportunity to reimagine the UK’s high street

The main draw for British town centres was the high street. Sadly, this is no longer the case and town centres are in decline. The high streets are devoid of life, vast empty stretches of vacant buildings of what were shops, banks, department stores and malls.

Cue a potential saviour – Permitted Development RightsRights to develop property that are granted by Parliament and allow certain building works and change of use without having to make a further Planning Permission application to the local authority. The rights differ between Residential Property and Commercial Property. The conversion of Offices to Residential Property has been a popular route that many Developers have followed. See Transitional Assets.

There has a been a huge backlash against PDRs since they were introduced in 2013 with the aim of converting vacant office spaces into much needed housing stock. While 42,000 non-residential units have been converted into homes, there’s been intense criticism of the build quality of the converted properties. This also has meant lending is hard to come by to finance development based on PDRs.

Labour’s Shadow Housing secretary said PDRs have allowed developersAn individual or entity that buys and improves property, or builds entirely new properties, that are typically sold at completion of the project. to “bypass the normal planning process by converting commercial spaces into housing without the consent of the council and local community”.  John Healey also says, “PDRs give developersAn individual or entity that buys and improves property, or builds entirely new properties, that are typically sold at completion of the project. a get-out from requirements to provide affordable housing and meet basic quality rules such as space standards creating ‘rabbit hutch’ flats.”

However, Permitted Development RightsRights to develop property that are granted by Parliament and allow certain building works and change of use without having to make a further Planning Permission application to the local authority. The rights differ between Residential Property and Commercial Property. The conversion of Offices to Residential Property has been a popular route that many Developers have followed. See Transitional Assets. could still provide the answer to the housing problem and arrest the decline of the UK high streets – if we can learn from the failings of the office to residential conversions in the past 5 years and not allow for a free-for-all of poor-quality homes.

PDRs for retailAs a Commercial Property type this refers to properties used as shops of any kind; e.g. grocery, clothes, opticians, etc. to residential conversions can not only reduce vacancy but also inject life back into our perishing town centres, making them once again a thriving focal point for social and business life.

The government intends to bring forward a range of reforms, introducing additional flexibilities for businesses. This will allow for the ‘shops use class’ to be amended to ensure it captures current and future retailAs a Commercial Property type this refers to properties used as shops of any kind; e.g. grocery, clothes, opticians, etc. models, as well as permitted development rightsRights to develop property that are granted by Parliament and allow certain building works and change of use without having to make a further Planning Permission application to the local authority. The rights differ between Residential Property and Commercial Property. The conversion of Offices to Residential Property has been a popular route that many Developers have followed. See Transitional Assets. to allow for retailAs a Commercial Property type this refers to properties used as shops of any kind; e.g. grocery, clothes, opticians, etc. shops to change use to an office or residential use.

The Secretary of State for Housing, Communities and Local Government, James Brokenshire plans to publish “Better Planning for High Streets”. This will set out tools to support local planning authorities in reshaping their high streets to create prosperous communities, particularly through the use of compulsory purchaseThe act of buying something from another person, or in property terms, buying a property from another person., local development orders and other innovative tools. Stay tuned as we will provide an update when the report comes out.

We should imagine these new Retail-to-Residential conversions as mixed use properties that could signal the dawn of a new day for town centres. As councils, landlordsThe owner of a property that is rented to a Tenant. This could be the Freeholder that has created a Lease or Leases, but the term could also be used to cover the relationship between a more temporary relationship; such as a BTL Landlord and Rental Tenant. and occupiers embrace the popular ‘work, live and play’ ethos and reinvest in the high street, reinvigorating it as a complete community hub incorporating housing, leisureAs a Commercial Property type this could refer to Hotels, Pubs, Restaurants, or other Hospitality related industries., business, health and education.

The Property Finance Group specialises in development financeSpecialist funding, specifically used to fund a Development Project. Lenders predominately use a combination of LTC and LTGDV to assess how much they are willing to lend. Other factors also come into consideration; Property Type, Location, Development Experience, Profit Forecast, etc. A lender will determine the total Gross Loan they are willing to advance, and then deduct Lender Professional Fees, Lender Interest, Lender Arrangement Fees, and 100% of the Build Costs. The Residual Loan is then available to draw against the Land, so is often referred to as the Land Loan. and commercial mortgagesThis term is usually used to refer to mortgages secured against Commercial Investment Properties. Commercial Mortgages need to be supported by the income earned by the asset. The lender will deduct the operational expenses from the Gross Income to calculate the Net Income of the asset. It is the Net Income which the lender will then stress test against internal covenants (Stress Rate, Amortisation Profile) to determine what level of loan they can support. For example: Gross Income = £ 100k, Lender Gross to Net = 85% (£ 85k), Stress Rate = 6.5%, Rental Covenant = 125%, Amortisation Profile = 15 years, therefore Possible mortgage = £ 650,513. and have access to more than 75 development lendersA company or person that lends money to another. right across the capital stackA term used to describe the different elements of Debt and Equity, that can make up the totality of a property value. For example; if you take a property that is worth £ 1m. Let's assume there is a First Charge Loan of 50% LTV (£ 500k) and a Second Charge or Mezzanine Loan of 15% LTV (£ 150k). The total debt is therefore £ 650k or 65% of the property value. In this case, the remaining 35% is the owners original Deposit, and is the Equity value in the property. All 3 elements combined equal 100%, and that is the capital stack.; senior debt, stretched seniorTypically used in Development Finance but also available for Commercial Property, it refers to a class of loans that offer higher LTC and / or LTGDV than a normal standalone Senior Lender. It's like a combination of Senior + Mezzanine, except you would still normally achieve a higher loan with Senior + Mezzanine. A Senior Lender will normally go to 60% or 65% LTDGV, whereas a Stretched Senior Loan may go to 70% LTGDV. On a Senior + Mezzanine loan, you can achieve 75% LTGDV. As you would expect, rates are higher for Stretched Senior than for Senior Only Loans. The term is also used in the Commercial Mortgage market, as Alternative Lenders continue trying to make inroads to the main lenders market share., mezzanine funding and equityThe difference between the debt and the asset value; the part that the Borrower actually owns. The equity value can increase in value over time, if debt is reduced and / or the property increases in value. The reverse can also happen. See Negative Equity..

A landlordThe owner of a property that is rented to a Tenant. This could be the Freeholder that has created a Lease or Leases, but the term could also be used to cover the relationship between a more temporary relationship; such as a BTL Landlord and Rental Tenant. looking to develop a vacant retailAs a Commercial Property type this refers to properties used as shops of any kind; e.g. grocery, clothes, opticians, etc. site or change the use of class at the end of a tenancy using Permitted development rightsRights to develop property that are granted by Parliament and allow certain building works and change of use without having to make a further Planning Permission application to the local authority. The rights differ between Residential Property and Commercial Property. The conversion of Offices to Residential Property has been a popular route that many Developers have followed. See Transitional Assets. can expect a true end-to-end service from Property Finance Group. With over 20 years of funding experience we know the market better than most.

With well thought out and executed permitted developments, we may yet put life back into our beloved towns and high streets.

 

16 May 2019

 

 

Photo Credit: Viktor Forgacs