With permitted development rights providing a vital boost
to UK housebuilding, more development finance is needed
Permitted development rights are described officially as “rights to make certain changes to a building without the need to apply for planning permission. These derive from general planning permission granted by Parliament rather than from permission granted by the local planning authority”.
The aim of PDR is to support growth in the economy, enable businesses to make the best use of their premises and build more homes. Launched in 2013 and known as ‘Temporary PDR’, the legislation allows increased change of use and size limits for the depth of single-storey domestic extensions until May 2016, assuming local authorities do not adopt Article 4 powers to remove PDR and the site does not sit in a conservation area or area of outstanding natural beauty.
You have only to arrive in London by train to witness the impact of PDR: countless derelict or vacant office blocks are being redeveloped to provide modern, stylish apartments in the centre of the capital. Indeed, between April 2014 and June 2015 more than 4,000 conversions were approved.
We have assisted many developers in taking advantage of the relaxed planning laws, although, during the summer of 2015, we experienced a reluctance from development funders to support such schemes. This was due to concerns that conversions would not be completed by the required May 2016 deadline. However, confirmation in October that ‘Temporary PDR’ status would be extended indefinitely has reinvigorated this market, creating significant opportunity for specialist lenders.
Certain areas are exempt from the office-to-residential PDR, including the City of London, The London Central Activities Zone, areas in the boroughs of Stevenage and Ashford, areas in Sevenoaks (Kent) and east Hampshire, and Manchester city centre. These areas have until May 2019 to make an Article 4 direction if they wish to continue determining planning applications for change of use. A big opportunity exists if they choose not to adopt Article 4, potentially opening a huge number of vacant offices to residential redevelopment.
With such a large drive to increase building, more development finance is needed. Traditional sources of development finance will no doubt be buoyed by PDR but bridging finance lenders engaged in development will also benefit greatly.
Bridging lenders that provide loans for new-build or conversion tend to be priced more highly but offer valuable advantages: higher loan-to-cost, higher loan-to-gross development value, less experience needed, schemes outside the South-east and smaller schemes are the reasons most often leading to placement.
While high-street development lenders tend to offer 60 per cent LTC, specialist banks offer up to 60 per cent GDV and senior-stretch banks may reach 65 per cent GDV, our panel of bridging lenders involved in development or conversion will lend up to 90 per cent LTC, meaning the developer may be able to contribute 10 per cent. In some instances we can raise 100 per cent funding where equity in the scheme is given or additional security is available.
This type of low-contribution funding is particularly useful for developers involved in multiple schemes that are trying to manage cashflow or maximise return on equity.
The other great advantage is speed. Like bridging finance, this type of lender is built for providing funds quickly, which is sometimes required where an opportunity is available to the open market.
The Government has targeted nearly one million homes to be built during this parliamentary term. Relaxing planning laws will help but it is just as important that builders have access to capital. I foresee ever-increasing involvement from specialist funders in seeking to meet annual output targets of 240,000 units.