Converting London's offices to residential: housing solution or commercial disaster?
The UK Government wants to make it easier to convert offices to residential use without full planning permission to help solve London's housing shortage. But it runs the risk of simply turning valuable commercial space into more empty houses owned by foreign millionaires, as Zoe Green discusses.
London is one of the most dynamic cities in the world, and the UK government has recently announced nationwide changes to its planning policies which could have a significant impact on its property market. The coalition wants to increase flexibility within the planning process and speed up the delivery of housing, which it perceives as held back by an overly bureaucratic system. It has already published the National Planning Policy Framework (NPPF) to replace over 1,000 pages of national guidance with roughly 50, largely removed the regional tier of policymaking and sought to devolve a greater sense of power to local governments; but is this a step too far?
Speedier switching of offices to residential
Planning permission is currently required to change the use of a building from commercial to residential. The government is bringing forward changes to the "permitted development rights" policy (PDR) that will allow such changes without the need for consent. This marks a significant shift away from the original intention of the policy, which was to enable minor development alterations (such as roof alterations and loft conversions) to homes without the need for planning permission. Now, instead, large-scale development could be possible outside of planning control, despite its potential impact.
Market demand combined with property owners' new rights could therefore undermine the essential form and function of these areas by replacing important employment space with economically inert residential accommodation.
The details are expected to be announced in June, and will be limited to an initial three-year period as part of a package of measures to support growth. Those wanting to switch their properties would then need only to submit an application for "prior approval" that would demonstrate that the changes would not have any significant impact on transport and highway networks, and that development would not occur in safety hazard zones such as areas of high flood risk or contamination. However the "prior approval" process does not require consideration of other matters, such as impacts on affordable housing or water and energy utilities. This is despite the potential for further strain on existing infrastructure and other elements such as public spaces which are essential for sustainable communities.
The only area to be exempt from this policy change is the City of London — the local government area at the centre of Greater London — whose reputation as the powerhouse of the financial sector safeguards it from inclusion. Indeed it is the area where the impact of a large shift from office to residential uses is most clear, potentially changing the character and function overnight with significant economic consequences. Without the widespread availability of office space in the City, how could London maintain its position as the European hub of international banking?
In order to ensure that other such areas were taken into consideration, the UK government invited local authorities to "opt out" where they could demonstrate how the new PDR could result in the "loss of a nationally significant area of economic activity" in their commercial areas or "substantial adverse economic consequences at the local authority level" — code for a loss of council taxes. The period for responses ended in February and, understandably, over 700 authorities across England sought an exemption.
Resisting the change
In London, 18 local authorities are reported as seeking exemptions before the deadline including Southwark, Richmond upon Thames, Westminster, Islington Kensington and Chelsea, the City of London, and Merton. It is also anticipated that more London boroughs and other major cities such as Birmingham, Leeds, Sheffield, Manchester, Bristol and Newcastle will have also put forward their evidence to the government for opting out of this policy. Nottingham, however, missed the deadline and now potentially faces the consequences.
The large number of councils that have chosen to opt-out comes as no surprise for two major reasons. First, the changes mean that councils will have less control over development within their local area. Planning permission is an important process which, for example, safeguards minimum space and amenity standards, which councils cannot ensure otherwise. The process also allows councils to ensure that new developments support the sustainability of the wider area by securing contributions (through the community infrastructure levy and "section 106" agreements) to address specific impacts of developments on the surrounding area.
Second, councils may also notice a financial impact from the proposed changes, as they collect business rates from commercial buildings that go towards supporting local services. Business rates are considerably higher than the council tax collected from residential buildings. For example, in Westminster the highest council tax band is for residential buildings worth more than £320,000 ("band H"), which can include units worth several million pounds, which would require payment of around £756 per month to Westminster City Council and £606 to the Greater London authority. In contrast, a Westminster office with a rateable value of £3.63 million would provide a business rate of £140,378 per month to Westminster Council alone, equivalent to £2,035 for a comparable floor area.
There is a strong case for protecting London's CAZ and its surrounding area, but authorities seeking exemptions for other areas might be a knee-jerk reaction. It is evident that some empty offices around London could be usefully converted, particularly buildings that have been vacant for some time and for which there is little current demand.
The Mayor of London has supported an exemption for the "central activities zone" (CAZ), an area of intensive inner city development covering some 3,300 hectares (much of Transport for London's "zone 1") across 10 boroughs. This is the vibrant heart of the capital which contains a mix of financial and business services, cultural and creative industries. There is little debate that this could be detrimentally and irrevocably changed.
Residential values in the CAZ typically command higher values than commercial floorspace in many areas, and this is compounded by the fact that London is seen as a safe and stable location by real estate investors locally and globally. In January, London witnessed the "pre-sale" of 800 flats and townhouses at the Battersea power station worth a total of approximately £600m in just four days. This international demand for higher-value residential properties is already sparking investor interest in changing the use of buildings that could result in productive commercial activities being driven out of the CAZ, as well as areas such as Canary Wharf, "Tech City" in Shoreditch, and the Stockley Park business estate in Hillingdon. All are widely considered at risk if they are not exempt from this policy. Market demand combined with property owners' new rights could therefore undermine the essential form and function of these areas by replacing important employment space with economically inert residential accommodation.
Providing housing where needed
There is a strong case for protecting London's CAZ and its surrounding area, but authorities seeking exemptions for other areas might be a knee-jerk reaction. A number of these authorities are applying to opt out for their whole area, whilst others are choosing a more selective approach, such as protecting town centres or existing employment areas. For the market to function efficiently it will always be necessary to have a supply of vacant office premises, allowing businesses to move and expand freely as their requirements change. However it is also evident that some empty offices around London could be usefully converted, particularly buildings that have been vacant for some time and for which there is little current demand. In outer London where values are lower and there is a demand for private affordable housing, the changes to PDR could provide new stock by turning poor quality and disused office buildings to a viable use, surely a real benefit in allowing families and communities to remain together.
There are valid concerns around the potential for these changes to lead to negative consequences for central London and similar areas, and unfortunate consequences when the economy picks up and new employment space is required. There is however also a balance to be struck in providing an increased and mixed supply of new homes, whilst ensuring that there is a flexible and suitable stock of buildings to meet the needs of businesses. It remains to be seen however where the government will draw the line; overall the long-term impact on the ability of areas to meet present and future needs is likely to be more detrimental than the immediate benefits brought by the changes themselves.