If there is one thing that everyone in the housing market will agree on, it’s that we don’t have enough homes. The sharp imbalance between the demand from would-be buyers and supply continues to drive up property values, and as a country we are seemingly unable to build new properties at a sufficient rate to make a dent in that demand.
As a result, it’s welcome that the government has recognised the opportunity presented by commercial conversions. Michael Gove, the Secretary of State for Levelling Up, Housing and Communities, recently put forward new proposals which will extend permitted development rights, removing some of the red tape which makes it more difficult to convert buildings which aren’t being fully utilised in a commercial sense into residential properties instead.
The new rules remove restrictions on the size of the commercial building being converted, meaning all sorts of shops, offices and other buildings could be repurposed to meet residential needs. It’s a sensible move and one that will undoubtedly be welcomed by developers and landlords alike.
A different path
We know there are plenty of landlords in the commercial space who are in a negative position when it comes to their cashflow. From struggling to find commercial tenants to dealing with higher mortgage costs, as well as the likes of insurance and marketing outlays, it’s little wonder they are financially under pressure.
All sorts of different types of commercial businesses have been impacted by the changes of the last few years. Traditional offices, for example, are less in demand after the pandemic, given the fact greater numbers of businesses operate on a remote basis for at least part of the week.
Retail outlets are similarly less desirable given the growth of e-commerce and the changes to our general shopping habits, while we have all seen the challenges faced by hospitality venues since Covid.
What this has meant is a wide range of commercial premises that simply are no longer necessary, and are sat empty, actively losing the landlord money.
Yet there is an opportunity to work with developers and turn those buildings into residential properties, tapping into that excess housing demand and offering a new route onto or simply up the housing ladder.
Finding the right funding
The interest in these sorts of conversion projects is only likely to increase in the months ahead, so it’s important for advisers to get a good idea of which lenders are best placed to support their clients.
It’s an area we have worked in extensively at Tuscan, and that experience has helped us ensure our product design and pricing work for developers looking to take on such projects.
What is always clear is the importance of speed, so the developer and landlord can get moving as swiftly as possible. After all, given those cashflow challenges, delays come at a material cost.
As a result, working with lenders who have a reputation for delivering on that funding, and doing so rapidly, has a clear appeal. Understanding the challenges of this sort of project, as well as the flexibility and support required, are also enormously important.
Experience is invaluable, not only for the developers taking on these conversion projects, but also the lenders working with them.
The long-term view
It’s also important to take a long-term view when it comes to arranging funding, pinpointing lenders who are able to support the developer throughout the full life cycle of the project rather than simply at the outset.
Delays are always a danger when it comes to any sort of development project, but they have become a more pronounced concern in recent years. Shortages – and the rising cost – of both materials and labour have meant all sorts of projects are taking longer to reach the finish line than had been expected.
That makes it all the more crucial to work with a lender that can deliver ongoing support, even when the finish date is pushed back, or the developer simply needs more time in order to sell the new housing units.
It’s something we have seen frequently at Tuscan, with our development exit product seeing particularly notable demand levels in recent months. Having the consistency of using the same lender not only for the funding at the outset, but also for a development exit where necessary, is incredibly useful for adviser and borrower alike.
It’s clear that everyone, from the government to landlords, are waking up to the potential that unused commercial buildings present. If businesses do not need or want these premises, then we can put them to better use by converting them for residential buyers, with developers actively on the lookout for such conversion opportunities.
Partnering with experienced, flexible lenders can ensure advisers help their developer clients secure the best possible funding and support, not just at the outset but over the course of the entire project.
Carl Graham is regional director at Tuscan Capital