Commercial to Residential Property Conversion
With housing demand on the rise and high streets evolving due to changes in retail behaviour, converting commercial properties to residential use has become an appealing investment strategy.
While it can yield significant rewards, such as increased property value and rental income, the process involves careful planning and compliance with various regulations.
Why Convert Commercial Property to Residential?
There are many reasons why property developers and investors are increasingly exploring the conversion of commercial spaces into homes.
Greater Profit Potential
Commercial properties, especially those in declining retail areas, are often priced lower than residential properties. Once converted, these properties can command higher sale or rental values, especially in prime urban locations.
Meeting Housing Demand
The housing crisis is driving the need for more residential properties. By converting commercial spaces, you’re contributing to the supply of much-needed homes while also positioning yourself advantageously in a high-demand market.
Portfolio Diversification
If you’re an investor, adding converted residential properties to your portfolio helps diversify your assets and reduces risk. This diversification can provide more robust financial stability, especially during economic downturns.
Government Support and Sustainability
Governments often encourage the conversion of commercial properties into residential spaces to address housing shortages and make better use of urban areas. Additionally, repurposing existing buildings is more environmentally friendly than new construction, aligning with sustainability goals.
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Key Steps in Converting a Commercial Property to Residential
Understand Local Regulations
Before starting, research the local planning and zoning regulations. Every council has specific rules, and understanding them upfront can save you time and money. For instance, some areas have restrictions on converting commercial spaces to residential, while others might actively encourage it.
- Permitted Development Rights: Some commercial-to-residential conversions may qualify under permitted development rights, eliminating the need for full planning permission. However, these still require a prior approval application, covering aspects like transport impact, flood risk, and building safety.
Engage Professionals
Property conversions can be complex, so it’s crucial to involve experienced professionals. Architects, surveyors, and contractors who have worked on similar projects can anticipate challenges and help the project stay on budget and schedule.
- Architects and Surveyors: These experts can assist with design, structural assessments, and planning applications.
- Specialist Contractors: Choose builders familiar with conversion work to avoid unexpected delays or costs.
Planning Permission and Building Regulations
Planning Permission
In most cases, converting a commercial property to residential use will require planning permission. This is particularly true if significant structural changes are involved or if the property is in a protected area, like a conservation zone.
- Use Class Changes: Be aware of your property’s existing use class. For example, most commercial properties fall under Class E, which includes shops, restaurants, and offices. Changing to a residential class (C3) may require a formal application.
- Listed Buildings and Conservation Areas: If your property is listed or in a conservation area, you’ll face stricter regulations and may need to use specific materials to maintain the building’s character.
Building Regulations Compliance
Meeting building regulations is crucial to ensure your converted property is safe and habitable. These regulations cover:
- Fire Safety: Adequate fire exits, smoke alarms, and fire-resistant materials.
- Insulation and Energy Efficiency: Proper insulation and energy-efficient systems to reduce carbon footprint.
- Structural Stability: Ensuring the building is structurally sound, especially if it’s an older property.
- Accessibility: Providing suitable access for people with disabilities.
Using Short-Term Finance for Commercial to Residential Conversions
One of the most crucial aspects of converting a commercial property into residential is securing the right funding at the right time.
Often, a project of this nature begins with the need for short-term finance to acquire the property and complete the necessary conversion works.
Once the project is completed and the property has been revalued, the short-term loan can then be replaced with a long-term residential or buy-to-let mortgage, depending on your intended use of the property.
Why Short-Term Finance is Used for Conversions
Short-term finance, such as bridging loans or development finance, is often the first step for developers or homeowners looking to convert commercial properties into residential spaces.
Here’s why short-term finance is so important:
Fast Access to Funds: Commercial properties, particularly those in prime locations or at competitive prices, tend to sell quickly. Bridging loans provide fast access to funding, enabling you to secure the property without delays.
Flexible Terms: Short-term finance is typically more flexible than traditional mortgages, offering interest-only or rolled-up payment options that allow you to focus your cash flow on completing the conversion.
Funding Renovation Costs: Most bridging loans or development finance packages are designed to cover not just the purchase price of the property but also the costs of renovations or structural changes required for conversion.
Bridging the Gap to a Long-Term Mortgage: Since most lenders won’t offer a standard residential or buy-to-let mortgage until the property has been converted and revalued, short-term finance fills this gap effectively. At this moment, the property is not a residential property, even if it has planning permission to become one, so the correct mortgage will be needed.
Planning for Your Exit Strategy
A well-thought-out exit strategy is vital when using short-term finance. The exit strategy details how you plan to repay the short-term loan once the project is complete. Common exit strategies for commercial-to-residential conversions include:
Securing a Residential Mortgage – If you intend to live in the property once the conversion is complete, you’ll need to switch to a residential mortgage at that time. After the property has been revalued as a residential asset, most lenders will consider your income, financial stability, and the property’s valuation to approve a residential mortgage.
Switching to a Buy-to-Let Mortgage – If your goal is to generate rental income from the property, a buy-to-let mortgage will likely be your best option. These mortgages are assessed based on the projected rental income along with understanding your situation too.
Selling the Property – For developers who aim to sell the property for profit, the proceeds from the sale can be used to repay the short-term loan in full. This approach is common for investors focused on capital growth rather than long-term rental income.
How Bridging Loans and Development Finance Work
Bridging loans are short-term funding solutions designed to help you purchase a property quickly or complete a project in a specific time frame. They are used for conversions that require substantial renovations or a change of use.
Loan-to-Value (LTV): Typically up to 70–75% of the property’s current value, but this can vary.
Term Lengths: Ranging from 3 to 24 months, depending on the project.
Loan-to-Gross Development Value (GDV): Often up to 70% of the projected post-conversion value, but lenders have their own criteria.
Staged Payments: For development, funds are usually released in stages as the project progresses, helping you manage costs efficiently.
Repayment Terms: Usually interest-only during the term, with interest added to the balance, with repayment required upon completion of the project.
Conclusion
Converting a commercial property to residential use can be a lucrative investment, but it requires careful planning, the right expertise, and tailored financing solutions. You will want to make sure you have the right professionals on your team to cover all areas, from the drawings, to planning, to the construction, and of course the finance.
By understanding the steps involved and being prepared for potential challenges, you can maximise your investment’s success.
At Kerr & Watson, we enjoy helping investors secure finance for property conversions.
Contact us now for advice and financing options.
