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Permitted development rights explained
March 7, 2018Article by Paul Avery
When I first heard the mysterious acronym “PD” bandied around the office and asked a colleague what it stood for, their answer left me even less enlightened than before: “Permitted Development”. If that is the opposite of a Forbidden Development it includes everything legally built – making the term a Royale nothingburger with cheese.
In fact, it means a lot more than that, and is actually one of the most important and contentious new ideas in British construction.
Permitted development rights allow certain changes to be made to buildings without planning permission being sought. (Planning permission has in effect already been granted, hence “permitted”.) Most commonly, this includes extensions and other structural renovations, but more interesting to developers and investors is a 2013 amendment permitting offices to be converted to residential use. External structural work will still require planning, but the change of use itself will not.
This unlocks a huge quantity of desperately needed housing stock and deals with the issue of disused office buildings deteriorating in otherwise desirable locations. However, it is also controversial because high residential capital gains incentivise the conversion of non-vacant offices that provide valuable commercial space and jobs, and because the rules prevent local authorities from insisting on affordable housing quotas.
As a relatively new system, PD rights are not perfect and do currently leave open the possibility of inappropriate use. However, by removing a regulatory barrier, they allow the housing market to operate more efficiently: vacant space can be quickly converted to more appropriate use, and building owners can more flexibly respond to the demands of the market. Most people agree that British housing is in a state of crisis, and PD rights are a key plank of the government’s strategy for future provision.
The benefits to investors
So why should investors care whether a new residential opportunity arrives through the PD channel? It isn’t the most important factor when selecting an investment, but there are several benefits arising from office to residential conversions – and whether or not a project offers those benefits is a good measure of the quality of the investment:
- Because the building already exists, the title received by investors is clearer and more tangible than with a plot of land on which a new building is to be constructed.
- PD schemes are less likely to incur planning delays (since they require fewer permissions), and construction delays (because they are refurbishments rather than new builds). Both of these factors mean that investors buying off-plan will have their money tied up for a significantly shorter length of time than usual, and at a reduced level of risk.
- PD schemes tend to be located in prime locations with good transport links. As offices, they needed to be easily accessible to employees using public transport and close to lunch spots, coffee shops, banks and other amenities usually found in town centres. If they were located in out of town business parks, they should offer plenty of parking and good road access.
- The refurbishment of vacant or derelict office blocks has positive knock-on effects for house prices in the local area, potentially bestowing immediate uplift upon completion or kickstarting further regeneration spending.
- Lower development costs are sometimes passed on to owners in the form of below market value pricing, allowing investors to share in the value-add of appropriate conversion.
- Commercial buildings tend to have stricter structural requirements, meaning that PD buildings are often extremely solid and strong.
- Open layouts allow developers ultimate flexibility to design user-friendly floorplans unconstrained by existing walls or ancient features.
Above all, the peculiarities of PD schemes are an important reminder that it is always worth looking into the story behind the building and the location you are investing in, considering what is happening around it, who will use it, and what it will take to arrive at the finished product. Expect to see more and more permitted developments projects coming online in the coming years, and learn to recognise the signs of a standout investment.
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