Why Coverting Commercial Property To Residential Homes Is All The Rage At The Moment

Converting commercial property into residential units is a great way to profit from property investment. Whilst many investors take out a commercial mortgage with a view to owning the premises or renting it out to a business, many others buy with the intention of converting the property into a number of self-contained residential units.

One prime example that can be used is the Victorian terraced housing in city centres across the UK, have been converted to offices for solicitors and for other office based companies. Where they can, commercial landlords are buying the property and converting it back to housing, with a housing shortage and city centre housing always being profitable, it can be a win-win situation in certain circumstances.

While it can be profitable, getting to that point is in itself a mission, red tape and planning laws can throw up too many obstacles by themselves. But a lack of commercial property finance just adds to the headache of many commercial landlords who can get lost in the maze created by both problems.

When lending ground to a halt during the financial crisis of 2008, it became vastly more difficult for developers to gain access to commercial mortgages from lenders. Banks suddenly became a lot more risk averse and have lacked the money to invest in property enterprises. This has made it far harder to obtain commercial mortgage finance for conversion projects.

In addition to this, the banks that did continue to lend have made borrowing a lot more expensive for the borrower. They restricted the maximum 'loan to value' (LTV) to around 60 per cent, leaving the other 40 per cent of the loan to be financed by the borrower. This has made the cost of borrowing too high for many. Investors and businesses have to find a significantly higher deposit when buying a commercial property to convert to residential use.

Over the last decade, a painfully complex and time consuming planning process has also prevented many new homes in the UK being constructed. Now the Government has decided to make life easier for developers who wish to convert commercial properties into new homes. This has become essential as part of the initiative to bridge the chasm between demand for residential property and a chronic shortage of new homes.

Last year, according to the BBC, a mere 129,000 new housing units were built in England, which is the lowest peacetime figure since 1923, and a figure no way near enough to keep up with demand. The BBC added that, at the same time, a staggering 7 to 9 per cent of commercial properties in the UK lie vacant.

No doubt focusing on the 7-9% vacant commercial properties, Chancellor Osborne announced in the 2011 Budget that planning permission would no longer be needed for landlords of commercial property who plan to convert their property to residential units. The budget Red Book highlights the fact that over the next 10 years these measures could provide an extra 250,000 new homes and save £140 million in bureaucracy.

It will come as no shock that the British Property Federation (BPF) was in favour of the plans, who isn't when it means less red tape? They do admit that some sort of balance has to be maintained as the UK does not want the scales to tip to there being too little commercial property available in the future. But they do highlight there are many areas of the UK where commercial property has stood empty for years, with no hope of businesses returning. This is doubly true now that many of these areas will be up against enterprise zones to attract competition, so these areas are ripe to be converted to help the strained housing sector.

So, if you have been put off before from investing in commercial property to convert to residential use, now could be the perfect time to revisit those ideas. Commercial mortgages are once again becoming more widely available and changes to the planning legislation should soon make the whole process that much easier.


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Timothy Frodsham writes for Just Commercial Mortgages the UK's No.1 site for the latest commercial mortgage rates and commercial property finance news.