A funding gap has emerged for landlords and developers looking to convert commercial properties into residential space. This results from an imbalance between the expanded permitted development rights and the currently available financing products. Although Class MA Permitted Development Rights allow for conversions without full planning permission procedures, lenders' assessment criteria have not yet fully adapted to this specific borrower category.
The Class MA regulation, which came into force in August 2021, permits the conversion of business, service, and retail spaces (Use Class E) into residential buildings (Use Class C3) without having to apply for comprehensive planning permission. This measure was originally intended to accelerate the creation of more housing and promote the revitalisation of city centres by repurposing vacant commercial spaces. However, practitioners point out that the intended efficiency is being hampered by financial hurdles.
Challenges in Credit Assessment
Banks and other financial institutions continue to operate with traditional risk assessment methods, which are often tailored to projects with full planning permission. For permitted development conversions, lenders frequently lack familiar reference points, leading to increased caution. This caution manifests in stricter loan conditions, higher interest rates, or a general reluctance to finance such projects. For developers, this means that despite the legal simplification, they face significant capital raising problems.
Another aspect is the lack of familiarity with the specific characteristics and potential risks associated with renovation projects of this type. These include, for example, the need for noise protection assessments or compliance with minimum living space standards, even if the conversion itself does not require full planning permission. These additional requirements can increase project costs and intensify planning uncertainty, which reduces their attractiveness for lenders.
Outlook and Potential Solutions
Experts are calling for an adaptation of financing models to the changed regulatory framework. This could include the development of specialised lending products for permitted development conversions that take into account the specific characteristics of these projects. Likewise, better communication between developers and lenders regarding the details and risk mitigation strategies for these projects would be beneficial. Greater transparency and standardisation of assessment procedures could help to strengthen financial institutions' confidence in this important segment of the property market and close the funding gap.
- —Introduce specialised lending products for conversion projects.
- —Improve communication between developers and lenders.
- —Promote standardisation of assessment procedures.
- —Increase transparency regarding project risks and opportunities.
