The role of policy in intensifying competition for space

Two decades of brownfield-first policy have focused on infilling and densification. While this approach has been useful in enabling development, in many cities this policy, coupled with a reluctance to build outwards, has increased the competition for space between residential and commercial property. Rather than address this shortage of development land, the recent introduction of permitted development rights has worsened the issue by incentivising conversion of commercial space to housing.

This section looks at how planning policies are increasing the pressure on the provision of commercial space in city centres.

Permitted Development Rights (PDR)

This national policy allows the conversion of retail and office space to residential property to take place without obtaining the usual planning permissions. The vast majority of conversions are from office space to housing so this analysis focuses on this specific aspect of the policy, introduced temporarily in May 2013 and made permanent in May 2016. It was extended to apply to conversion of light industrial property in October 2017.

Conversions take place when residential space can earn higher returns than office space. The benefit of PDR is that by removing the need for planning approval it reduces the time and money costs of conversion. This has directly led to an increase in commercial to residential conversions.10 This is a good thing if it converts empty commercial space into new homes, but local planning authorities lose a degree of control over the economy and it increases the potential that occupied commercial property is also converted.

To prevent important office space being lost to housing, some locations have been exempted from the policy. Many applied for protection, considering their commercial properties to be critical for economic success, but few were successful. Much of central London is exempt via the Central Activities Zone (CAZ), as is part of Manchester city centre, and a few areas within towns such as Sevenoaks and Stevenage. New exemptions are available via what is known as an Article 4 direction, if an area can show its office space needs to be protected.

Importantly, this improved ease of conversion only works one way. Converting back to office space requires going through normal planning procedure, meaning the policy is biased in favour of delivering residential property.

The policy aims to:

  1. Achieve a more efficient provision of property by making change of use more responsive to the market
  2. Boost housing supply where this is most needed by freeing up more property to develop into residential units
  3. Revive high streets by allowing vacant offices to be repurposed into residential use11

The policy has not convincingly achieved these aims because its design has not accounted for where the demand for space is. PDR is most attractive where house prices are high due to strong residential demand. But cities with strong residential demand tend to also have strong business demand.

As a result, take-up of PDR is highest where offices most need to be protected. High-skilled, productive city centres with competition for space are at risk of losing key commercial property through the policy, as the following assessment of the three aims shows.

Aim1: Achieving a more efficient provision of property

A more flexible, responsive planning system is a good thing. Allowing the market to determine a property’s use can be beneficial. In many cities, older offices no longer attractive to businesses are more useful if converted to flats. Many cities have experienced this positive outcome of PDR, such as Southampton and Bristol, which consider it a helpful policy tool for repurposing poor quality offices.12

But this responsiveness has come at the cost of local control. Local planning authorities retain little influence over conversions taking place through PDR. Though prior approval ensures basic noise and infrastructure considerations are accounted for, little else is reviewed and it is difficult to prevent a conversion even when it is deemed unsuitable. Many areas have concerns about the delivery of very poor quality housing.13 Croydon, for example, has had to accept several proposed schemes that neither meet the London Plan’s minimum space requirements nor have any private or communal amenity space.14

The policy also leads to a building-by-building approach to development, rather than considering each scheme within its wider context. The implication is that decisions are driven purely by the market, which may not lead to the best outcome for the city’s role as a place of production, particularly if it leads to a conversion of space in the city centre.

Aim 2: Boost housing supply

One of the appeals of PDR is that it helps deliver housing in the cities that need it most. By allowing change of use to follow market signals, conversion is most attractive where house prices are high.

Take-up of PDR has been most significant in cities in the Greater South East. As Figure 9 shows, the number of office-to-residential conversions granted has been equivalent to a considerable proportion of the office stock in many cities, such as 9 per cent in Slough, and 8 per cent in Southend. As a result, the policy makes a large contribution to net additional housing in these cities, many of which have competition for space. In Crawley, nearly half the new houses built between 2015 and 2017 were due to PDR, while in Slough and Basildon these shares were 34 and 35 per cent respectively.

Figure 9: Permitted office to residential conversions as a share of office stock, 2014-2017W

Source: VOA, 2017. MHCLG, 2018

PDR works well when there is space to replace lost offices with new stock. Cities that are less constrained are able to build new, higher-quality offices elsewhere in the city and so the loss of older offices through PDR does not impact negatively on their economy. Birmingham, for example, approved the creation of around 560 residential units in its city centre (between 2013 and April 2017) but the city is not concerned about the lost commercial space because of new office developments taking place elsewhere in the city centre.15

But in city centres with limited space new homes come at the expense of commercial property. Since the policy is not restricted to vacant properties, occupied offices have also been lost and when there is competition for space in a city centre it is not always possible to replace these with new office stock.

On a national level the recent decline in office stock has been attributed to PDR.16 London boroughs outside the CAZ exemption are particularly concerned about the loss of occupied office space. They report that 100,000 m2 of fully-occupied space was lost between May 2013 and April 2015 and as a result remaining office stock has become less affordable, pricing out some businesses.17 Brighton was so concerned about the loss of commercial space it obtained an Article 4 direction to prevent additional offices being converted within part of its city centre.

That the policy has been able to increase the supply of housing is a good thing. But that it has come at the cost of occupied commercial space is not. Instead of looking to address the housing crisis through the shortcut of the conversion of commercial space, more new homes should be built instead. The risk is that by allowing offices in city centres in particular to be converted, the policy holds back the main engine of growth in a city.

Case study 1: PDR is putting Crawley’s economy at risk

Crawley faces very strong residential demand for two principal reasons. The first is its proximity to London – almost 10 per cent of Crawley’s population commute every day to work in the capital. The second is the strength of the city as a place of production, with a successful industrial and business district (Manor Royal), a growing city centre, and London’s second largest airport (Gatwick). Due to this high demand from both businesses and residents and the city’s significant land constraints – proximity to London’s green belt, the borough’s tight administrative boundary and airport restrictions which limit the height of buildings – Crawley is experiencing competition for space.

The introduction of permitted development rights has had mixed results on Crawley’s economy:

  • It has helped deliver homes: 48 per cent of Crawley’s net additional dwellings between 2015 and 2017 have been delivered through PDR, the highest proportion among English cities. In total, 18,000 m2 of residential space has been delivered. By encouraging the conversion of outdated office spaces into residential units PDR has supported the city centre’s regeneration strategy which aims to increase population there.
  • But it has generated concerns about poor accommodation standards. Planning authorities can only refuse PDR based on very limited grounds. While noise pollution generated by businesses is a valid reason to refuse prior approval, transport noise pollution is not. Given Crawley’s proximity to Gatwick Airport, this raises the risk of housing being delivered in areas with unhealthily high noise levels.
  • And it has squeezed the supply of commercial space, impeding the city’s capacity for sustainable economic growth. Conversions of occupied office space have taken place in the city centre, and perhaps somewhat surprisingly, in Manor Royal. Given the demand for commercial space, Crawley has now put in place Article 4 directions for Manor Royal preventing the use of PDR, but no restriction applies to the city centre.

Aim 3: Revive empty high-streets

PDR was one of several policies that the 2010-15 government used to revive the fortunes of retail, stating that “…in many town centres there is unused space above shops and other town centre uses which could lend itself to conversion to residential.”18 The rationale was that by bringing residents into town and city centres, footfall would increase. This in turn would increase the size of the market which retailers and restaurateurs could sell to.

But this has not happened to any great extent. While data on conversions in city centres is not readily available, the number of PDR office conversions in cities with struggling high streets outside of the Greater South East has been low, as shown in Figure 9. For example, across the whole of Middlesbrough there have been only 12 conversions granted since 2014. In Barnsley there have been six, and in Blackburn just one.

This has occurred because the policy fails to acknowledge patterns of demand. The policy assumes that developers can earn a sufficient return by converting office space into residential in these struggling city centres. The reality is that demand for residential space is weak precisely because they are struggling. These locations do not offer access to job opportunities or amenities in the same way that successful city centres do, reducing the benefits of living in them relative to the costs of more noise and less space. As a result, PDR has done little for these high streets.

Overall, PDR makes it more difficult to manage competition for space

PDR creates an incentive to deliver residential property rather than commercial space in the most expensive, in-demand city centres. But it is these city centres where the economy most needs high-skilled businesses to succeed. Putting the space they require at risk threatens the economic success not only of these cities but also of the national economy.

Case study 2: PDR in Manchester is focused on its city centre

How land is allocated within Manchester is an increasingly political topic. Concerns are being raised about the pace of change, for example in the Northern Quarter, and policymakers are having to make difficult trade-offs between conservation of character and delivery of new commercial and residential space.

This is because the city is starting to experience competition for space in its city centre. The data shows that the city as a whole does not have particularly high property prices – for both housing and commercial space – compared with other UK cities. But when the city centre is considered in isolation, property is more expensive because demand – from businesses and residents – is high. This has implications for PDR.

Across the whole city, the scale of office to residential conversions through PDR has been small. The number of conversions granted since 2014 is equivalent to just 1 per cent of the city’s office stock. As a comparison, in Southend and Reading conversions were equivalent to 7 and 5 per cent. But in the city centre conversions have been more significant. Since April 2015, city centre office conversions through PDR have provided 282 residential units, and 430 are under construction or approved.

Many of these conversions are close to the Office-to-Residential Exemption Area (see Figure 10). Without this protection, it is reasonable to assume that some high value, occupied office within the Exemption Area would be at risk of conversion. The city’s view is that PDR conversion risks a significant under-valuation of these resources.

In other parts of the city centre, there are examples of previously vacant office blocks which have been converted into residential through PDR. There can be no doubt that some of these buildings were in need of investment. But the city is concerned about the quality of several of these developments, which do not adhere to Manchester’s Residential Design Guidance (2016).

Manchester city centre’s recent boom has in part been enabled by the large amount of land that has been available in recent decades. But as its success continues, competition for how land is used will become more acute. For this success to continue it is vital that it retains its ability to provide offices for high-skilled jobs. So it is clear there is a need for strategic exemptions to PDR within the city centre.

Figure 10: Office to residential conversions through PDR in Manchester city centre, 2015–2017

Source: Manchester City Council

Restrictive planning policies

The persistence of brownfield-first policy

Since the mid-1990s, government policy has prioritised the development of brownfield land, preferring to densify and infill rather than expand cities outwards. This was a sensible approach initially as there was a large amount of brownfield land within cities. But in our most successful cities brownfield land is ever less common.19

Resistance to building upwards

There is strong opposition to city expansion. In a recent speech on house building, the Prime Minister reemphasised the brownfield-first approach, stating that “Where cities surrounded by Green Belts still need more homes, we can increase housing density, make better use of brownfield sites, build upwards rather than outwards.” But this is easier said than done, for example, densification is limited by conservation areas, protected views and campaigns to protect heritage building. By continuing to restrict city expansion, difficult choices have to be made between provision of residential or commercial space.

Every UK city has its own collection of conservation areas designed to preserve character and protect its assets. For example, Brighton uses these restrictions to maintain its distinctive architecture, while in York buildings of historical significance are protected. In addition, London has protected views preventing developments obscuring sightlines considered important by the city, such as the ability to see St Paul’s Cathedral from King Henry’s mound in Richmond Park. The aim of these designations is to manage change in order to protect heritage, not to prevent development, but in reality they do have a restrictive impact on city growth.

Each planning restriction presents a trade-off between preservation and development. In cities where economic growth demands more business premises and houses, the consequences of resisting development are decreasing affordability and fewer suitable business properties. This forces cities to make difficult, political decisions – should the character of an area be maintained at the expense of housing costs, or should densification be permitted to keep housing and commercial space affordable?

Crucially, these trade-offs evolve over time. The benefits of being able to see St Paul’s from Richmond Park may have far outweighed the cost when originally protected, but those costs change over time and at some point the impact on property prices (due to limits on development) might become too high to justify preservation of the view.

Resistance to building outwards

Green belts encircle several UK cities. These rings of land aim to prevent urban areas sprawling outwards by confining development to within the city on previously developed or derelict sites.20

The green belt squeezes the supply of new residential space, which in turn squeezes commercial space. By restricting delivery of new homes on the outskirts of the city, space must be found for them in more central locations. In theory this is done using brownfield land, but in reality many cities do not have enough brownfield land to accommodate the homes required. Previous research by Centre for Cities found there is insufficient brownfield land available within cities such as London, Oxford, Cambridge or Bristol to deliver the cities’ assessed housing needs.21 So by requiring development to take place within the belt’s boundaries, residential and commercial properties are placed in further direct competition, worsening pressure for space.

In London, demand for housing is so strong that it leap-frogs the green belt. Cities outside the belt are importing London’s excess residential demand and expanding to accommodate commuters who cannot secure homes within the capital. This is illustrated in Figure 11, which shows that towns and cities outside the belt are building more homes than areas within it.

Figure 11: Net additional houses built, by local authority

Source: MHCLG, 2017

Figure 12: Office to residential PDR conversions as a share of net additional houses built, by local authority

Source: MHCLG, 2017

Demand for residential space is also strong within the green belt. While the number of net additional houses is low, a high share of those delivered come from office to residential conversions under PDR, as shown in Figure 12. This confirms the restrictive role played by the green belt, as the only way to build homes is via conversion, but also highlights the pressure the policy places on commercial space especially when combined with use of permitted development rights.

The green belt has created the ideal conditions for PDR in cities surrounding London. High residential demand from London commuters and city economies which cannot match that of the capital together have generated a strong price differential in favour of conversion from offices to residential. This is why many of the smaller cities around London – for example Southend, Aldershot and Luton – have seen a significant take-up of PDR, as shown in Figure 9. These cities are concerned about the impact this loss of business space will have on their economies.

Case study 3: Slough is under pressure to accommodate growth

Slough is experiencing strong competition for space. It has the fifth highest residential property prices of all cities in England and Wales (£4,103 per m2 at sale price) and the sixth highest commercial property prices (£124 per m2 at annual rental price). This is a consequence of two factors:

  1. Slough’s economy is successful and fast growing. Between 2009 and 2015, the city’s productivity grew at the fourth fastest rate of all UK cities and by 2016 it had the highest productivity level.
  2. Land is significantly restricted because the city is surrounded by London’s green belt, most of which lies in neighbouring planning authorities.

The city needs to provide more housing but there is only a limited amount of land available. The council has been progressively releasing chunks of green belt land under its own control but the urban area cannot grow across the administrative border because most of the surrounding land is also protected, see Figure 13.

PDR take-up has been significant due to this strong residential demand. Since the policy was implemented, 25 office to residential conversions have completed and another 11 are under way. These schemes are attractive to developers, given the high demand for housing within the city. Conversions have so far delivered more than a third of the city’s net additional housing between 2015 and 2017, but each one comes at the expense of office space.

This is a threat to Slough’s economy. As Figure 9 shows, the floor space lost through PDR is equivalent to 9 per cent of the city’s existing office floor space. The city is concerned that continued losses will prevent businesses finding the space they need, but they are reluctant to apply for an Article 4 exemption as their housing target has not been met.

The challenge for Slough is to find alternative ways to build housing, in order to provide sufficient office space to sustain economic growth. As well as densifying the city centre, they are pushing for a northern extension into green belt land without which they will be unable to meet their housing target. But neighbouring authorities are against the development as they want to protect the green belt. This is just one example of the trade-offs cities face: losing green belt land or threatening the economic success of the city.

Figure 13: Office to residential conversions through PDR in Slough, 2013–2017

Source: Slough City Council
Contains Ordnance Survey data © Crown copyright and database right 2018

Case study 4: London’s approach to protecting commercial space

London is experiencing particularly intense competition for space. The city is growing fast: the number of jobs increased by 22 per cent (the third highest city growth rate) between 2010 and 2016 and population grew by 8 per cent (the fifth highest). The population is expected to continue to grow by 70,000 people each year. At the same time, land is restricted by policies such as the green belt and a collection of protected views, which limit the height of new buildings in certain locations.

This combination of high demand and limited space contributes to the capital’s high property prices. Average commercial prices are 2.3 times higher than the national average and the average house is worth 17 times the average Londoner’s annual wage.

The new draft London Plan expresses concerns about the impact of these pressures on its economy.22 A number of conversions of workspace into housing have taken place, several on the fringes of the Central Activity Zone (the central area of the capital that has an exemption from PDR). Smaller, cheaper offices are particularly likely to be converted due to the higher returns they generate as flats and the city is concerned about the impact this will have on small firms in innovative sectors, such as the technology and creative industries.

To preserve a wide range of office types, the plan proposes workspace lost is offset by delivery of an equivalent amount nearby. In addition, it directs planning authorities to ensure that large-scale developments always include some small business units.

The limitations on land available for housing make it more difficult for the capital to protect workspace and the city is struggling to meet its housing target. Last year London boroughs delivered 39,500 net new dwellings, less than the existing target of 49,000 and significantly less than the new 2017 Strategic Housing Market Assessment target of 66,000 per year.

As growth trends continue the Mayor’s commitment to delivering more housing and affordable workspace while continuing to protect the green belt will become ever more difficult. The approach taken so far to preference commercial space in central locations, such as the Central Activities Zone, must be sustained. Increasing the housing stock is also crucial, but this should be mainly focused on suburban areas. To offset rising residential demand the city will need to consider its position on the green belt, conservation areas and protected views.

Footnotes

  • 10 BCO (2015), Office-to-residential conversion. Establishing the impacts of the prior approval regime
  • 11 Community and local government parliament committee (2014), Fourth Report. https://publications.parliament.uk/pa/cm201415/cmselect/cmcomloc/190/19008.htm#a29