Alex Searle

To PD or not to PD, that is the question



Suck eggs warning: permitted development rights (PDR) provide automatic planning rights for certain types of developments.

PDR has been around for some time, but in 2013, the government relaxed how these rights can be used and since then it has been possible to convert commercial buildings (typically office blocks) into residential ones.

This relaxation of regulation had good intentions. We badly need new homes and we have perennially missed our housebuilding target for the past decade. PDR means that unused or outdated buildings in urban areas can quickly be developed without needing to install new infrastructure thus providing more homes more quickly. 

But the road to hell is often paved with good intentions. PD schemes do not need to comply with local planning policy and authorities have limited powers to determine whether the scheme is of an acceptable quality, which has resulted in some shockingly meagre homes being delivered. 

There has been a lot in the media around the use of PDR — from supporters and detractors. And, as is often the case, this has become a polarising issue: you either think all PD schemes are brilliant or they should all be condemned. The truth is, like all issues, the situation is a messy one. There are some great PD schemes, there are some rubbish PD schemes. Some good developers have developed some poor schemes. Some poor developers have developed some good schemes. 

At HTB, we have seen a significant increase in the demand for buy-to-let funding on finished PD schemes and when assessing these deals, our underwriters come to the fore. There are a number of aspects that need to be considered when underwriting each PD scheme.

How will the value of these buildings hold up during the life of the loan?

For normal BTL assets, five-year fixes with 75% interest only are relatively common terms. Lenders have a good understanding of how the value of most assets move in relation to the economy during that five-year term — even during downturns. However, PD schemes are a new asset sub-class, so lenders must ask themselves how might the value of these assets evolve? How much maintenance budget is required? How well managed are they going to be? Is the tenant profile likely to impact the value? These questions are being asked so that the lender understands what options will be open to the borrower in five years’ time. 

Micro location and infrastructure?

While many PD schemes are in central urban areas, we are seeing more examples of PDR being used in out-of-town business parks or industrial locations. Do these locations have good enough transport links? Do these locations have infrastructure nearby? Is there suitable parking nearby? Where are the tenants going to buy their milk on a Saturday morning? The micro location impacts the resilience of the rental demand.  

Quality of the conversion/compromised nature of the units?

Consideration needs to be given to the quality of finished units and how they will age. Many units can be superficially attractive, but age badly. Are the internal finishes (for example, fixtures and fittings) of a good specification? PD schemes often have compromised units, for example, no natural light, windows that can’t be opened or floor areas of less than 10m2.

There are deals to be done for PD schemes — and we are doing many of them — but the only way we as an industry can make a success of this asset class is to move forward in a practical, pragmatic and transparent way.


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