Why is everyone talking about commercial-to-residential conversions? Here, we discuss the opportunities and benefits available to property investors interested in this new investment venture.
The Untapped Opportunity in Commercial Property
The housing shortage in the UK is no secret. Demand continues to outstrip supply for buy to let properties, with many tenants staying in properties longer due to a lack of other options.
In stark contrast, thousands of commercial buildings across the country are sitting empty. However, this now presents a real opportunity for property investors.
Many are now looking at vacant commercial property as a potential solution, particularly with Labour’s plans for grey belt land and simplifying planning permission approvals. With the right approach, these spaces could help ease the housing crisis while offering strong returns.
Why Commercial to Residential Conversions are on the Rise
An estimated 165,000 privately owned commercial properties and 7,000 owned by local authorities have been vacant for over a year.
The shift to remote work has played a big part. Since the pandemic, demand for office space has dropped significantly. Businesses have downsized, moved online, or adopted hybrid models. As a result, many buildings are no longer fit for their original purpose.
In more positive news for the market, between 2021 and 2023, commercial-to-residential conversions increased by 63%, and planning approvals rose by 20%. Furthermore, there’s a high demand for city and town centre living despite the housing shortage.
It’s clear that more developers are seeing the potential in repurposing these spaces.
The Benefits of Converting Commercial Property to Residential Use
There are several benefits to this type of property conversion.
• The savings: It’s much more cost-effective to convert the property than build from scratch.
• Faster project timelines: The structure is already there, so the project will be completed much sooner than a new build. You’ll also make your money back faster!
• Quick approval process: With new Permitted Development Rights, in many cases you won’t need full planning permission to get started, making it an attractive project for many developers who have been stung by planning delays.
• An eco-friendly property market: Reusing buildings reduces waste and carbon emissions, making conversions a more sustainable option.
• Property types post-conversion: If appropriate, HMOs and Multi-Units are the best types of properties to convert the commercial space into. Not only do they benefit from higher tenant demand, but they also generate higher rental yields than standard buy to lets.
What to consider before you get started
As with any property project, planning is key. Here are a few things to consider before you start your commercial-to-residential conversion:
• Structural integrity: Not every commercial space is suitable for conversion, and hidden issues can be expensive. Have a surveyor come and look at the property first.
• Local authority permissions: Even with Permitted Development Rights, you may still need to apply for planning permission in some cases. Always check with the local council first to avoid any delays.
• Professional advice: Speak to the experts! Having experienced surveyors, architects, and planning consultants guide you through the process can give you the support you need and help you avoid mistakes. You’ll also likely need an experienced mortgage broker like MFB to help you secure development finance.
• Potential returns: It’s worth researching the Gross Development Value (GDV) to understand what you can earn from the project. This will be essential for your budget plans.
• Refinancing options: As mentioned, if you plan to keep the new residential units, consider the property types for profit. You’ll need to work with an expert mortgage broker (like us) to find the right buy to let mortgage rate once you’re ready to refinance.
Financing a Commercial to Residential Conversion: What to Expect
If you’re new to development finance projects, it’s essential to understand how this type of property finance works. Funding is available, but it’s essential to understand the lending criteria and the experience you’ll need.
Most lenders will offer up to 65% LTV on the purchase of a property, and development costs can often be funded in full, but this is typically done in arrears.
In terms of the loan interest rate, the average pricing is around 1% per month with a 2% lender arrangement fee. Legal and valuation fees will also apply, so factor these into your budget.
Working with an expert mortgage broker
With so many commercial properties vacant, property investors have a fantastic opportunity to explore. But success in this space requires the right strategy, the right team, and the right funding.
That’s where speaking to a broker comes in. A broker can help you understand your finance options and assess the viability of a project.
Found a property you’re interested in? Speak with our team to see what finance options you could access. Call us on 0345 345 6788 or submit an enquiry here.
