Conversion Aversion?

A few years ago, the Coalition government in an attempt to increase housing supply, deregulate planning etc. relaxed planning restrictions on change of use from office to residential. I personally know of a number of small property and planning consultancies that have recently had to leave their offices because the landlord was converting them to residential – and I don’t get out much. So I suspect that it is happening a lot. I’m just not sure whether it is happening because of the new policy or because of the market change or a bit of both. A planning consultant that I know well tells me that their (former) landlord is even asking then for planning advice on converting the consultant’s now former offices!

The BCO have just published a research report from CBRE on the impact of the change in the planning system allowing conversion from office to residential as permitted development. Essentially, they’re trying to identify a counterfactual – how much now former lost office space would have remained as office space or how many flats would not have been created had the policy NOT been introduced? It’s tough to do robustly. They have a fairly good go but the estimates are possibly too “assumption driven”.

The key financial drivers of conversion will be gap between the value in residential and office use, the cost of conversion and, possibly less importantly, the proportion of leases due to end. As the BCO/CBRE report acknowledges, it’s tricky to identify what the rate of conversion would have been in the absence of the policy.

How should it be done in one of Larry David’s perfect worlds? Ideally we’d have two identical areas with identical conversion costs, value gaps etc. with the only difference being the presence or absence of the policy. We’d then be able to observe the effect of the policy. With its ‘protected’ (from the new planning policy) CAZ, London is a fairly good ‘laboratory’ in this respect. CBRE find notable differences between the conversion rates in exempt (inside the CAZ and generally lower conversion rates) and outside the CAZ. It’s notable that in Westminster, they find that exempt areas had a higher conversion rate than non-exempt areas – it is supposed to be the other way around. The CBRE researchers really needed to include some controls for variation in conversion costs and residential-office value differences in order to try to strip out the differences between different types of area. Overall, their central estimate is that approximately 7500 dwellings were supplied in 2014 that wouldn’t have been otherwise.

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