The ship has sailed on this strategy, but for a while it was a strategy that made many people rich. The basic outline of the strategy has merit in sharing again, as it demonstrates how value was created.
Historically changing the use of an office building to residential was nearly impossible, yet when the government introduced permitted development rights, it enabled offices to be converted to residential very easily. Doing so opened the flood gates, when eventually every developer was after an office to convert, ultimately pushing up the prices of offices in most cases to unviable levels and wiping out the returns.
However, had you been alert to this change and acted on this early, you would have been able to find numerous great deals, as there was a lag between this information being widely known and appreciated, giving a window of opportunity when offices could be purchased at very attractive prices that didn’t yet reflect this change.
An office could be purchased at £100/sq ft, converted to residential at £130/sq ft, and then sold for £500/sq ft. The high sales price was created by making these units much smaller than usual due to the space standards not applying, which was a key factor in this strategy that took some time to be fully appreciated. As opposed to building one beds at the standard size of 40m2 to 50m2, they were built to 30m2, just enough to ensure mortgages were not a problem.
What boosted profits was the fact that although these new flats were that much smaller than typical new build flats, the prices they sold for didn’t fully reflect that, as the property values were largely based on unit values and not £/sq ft. A typical example might be where a flat that would have been £300,000 normally, when built to 40m2 – 50m2, yet these much smaller office to resi conversions only sold for marginally lower prices, say £280,000. This reflected just a 6% discount to standard properties despite the units being some 40% smaller in most cases.
A further boost was the fact that office to residential conversions didn’t require any affordable housing provision, all of which created a very profitable strategy.
What we can learn from this example is that changes are always occurring in the marketplace, and there is a small window of opportunity to print money. You should always be alert to what’s going on and ready to seize such opportunities.
Today we can look at what other opportunities there are around permitted development rights.
Permitted development (PD) rights apply in some situations (within England), which is a government policy whereby you can undertake certain types of work without needing planning permission. They derive from general planning permission granted not by the local authority but by parliament.
It allows for the conversion of some buildings in specified commercial uses to residential use. Commercial buildings such as offices, retail, light industrial, agricultural buildings and so on.
The great benefit of PD is that the government has decided to allow it, as long as the application meets specified conditions laid out. This takes the decision making power away from the local authority in these situations, with the local authority having no power to refuse applications as long as the required conditions are met.
Although office to residential conversions have largely disappeared, great opportunities do still exist under other PD routes, and in our view we specifically like agricultural buildings where opportunities exist for greatly adding value. All of which we’ll cover in a later post.