Legislation changes threaten the value of large older office buildings

The government has just published legislation changes which could well have a material impact on the value of large, older office buildings. Tony Guthrie, from our Value Recovery team, has shared his views as to the potential consequences for lenders with loans secured by such properties.

Currently office buildings enjoy “Permitted Development Rights” allowing them to be converted into residential use without, in most cases, planning permission being required. The key advantage is that this allows the investor / developer to avoid having to make any of the flats available for social housing. Where planning consent is required, the local planning authority will typically impose a requirement for 30% of the flats to be “affordable”. As the name suggests, this limits the price these units can be sold for and cuts the developer’s profit, often to nil on these units.

The new legislation comes into force 1 August this year and amongst other changes it takes these permitted development rights away for buildings in excess of 1,500 sq m (circa 15,000 sq ft). After this date, these larger buildings will therefore require planning consent if there is to be a change of use and that will inevitably result in a social housing quota being imposed if, as is likely, residential is to be the new use. For many such office buildings, the value attributed to them up to now will have been underpinned by their potential to be converted into residential use. With the value of a residential conversion to be significantly reduced, a reduction in the value of such an office building looks to be a real threat.

The proposed changes are quite extensive and will cover all commercial properties within the new “class E” (which is most commercial property) allowing all to be converted into residential use where no material external changes are required. Previously this only applied to offices so, subject to the size limitation, there may be instances where this wider coverage adds value.

There is a lot of detail in these proposed changes and to find out more please click here to read a detailed note from our Planning and Development team. To find out more about Value Recovery click here.