Comprehensive approach enables shop-to-flat conversion

Following the COVID-19 pandemic, commercial-to-residential conversions are becoming more common in the UK, with increasingly empty office and retail space being seen as a way to redress the housing shortage in bigger cities.

Recognising this trend, the previous UK government moved in February to encourage redevelopments. At the same time, however, new research has identified that poor-quality conversions are at risk of becoming 'uninhabitable'.

RICS supports commercial-to-residential conversions – with the caveat that they are of good quality. While such conversions are and will continue to be an area of contention, they still have potential to bring unused buildings back into use when done well.

I had to consider all these factors when I took the lead on the recent conversion of unused retail space into apartments as a partner at Balada Group.

Balada Group had recently completed a commercial-to-residential development on a neighbouring site, and I had mentioned to the owner that we were looking for new sites to acquire. He kept us in mind, and after the pandemic we negotiated a private, off-market sale, securing the property at a more favourable price and avoiding any competition.

I then assessed the commercial unit, and hired an architect and structural engineer to evaluate the feasibility of our plans to:

• split the retail unit to create an apartment at the back
• retain a smaller shop at the front
• convert the outdoor garage into another apartment
• convert the upper floors, which already had C3 residential use, into a C4 small house in multiple occupation (HMO). 

Calculating the potential profit from the gross development value (GDV) and subtracting all the associated costs, we negotiated a purchase price of £320,000 – very similar to what we had paid for the neighbouring property eight months earlier.

The valuation surveyor's report then confirmed that the property was in good condition and no adverse issues – such as reinforced autoclaved aerated concrete (RAAC) – were identified. 

I chose this option as, in legal terms, bridging is the only alternative to cash when funding a major development or change of use. But as it is a short-term loan, it is essential to understand how you will exit, whether by selling or refinancing. 

In my case, I knew I could refinance at a significantly higher GDV and could therefore repay the loan plus interest at the end of the term.

I secured a competitive rate of 0.85% per month for fees over a 12-month term; this meant I would need to refinance it after a year on practical completion of the project. 

With bridging loans offering flexible repayment options, I opted to roll up the interest, meaning it was deducted from the gross loan amount from day one to avoid monthly interest payments during the development period. In effect, this meant the net adjusted loan was minus the interest over the 12-month period. 

To secure the finance, I needed to obtain a valuation. The funder appointed a qualified valuer to conduct this to RICS Valuation – Global Standards (Red Book Global Standards).

Their report valued the property at the same price we had negotiated with the seller; moreover, it projected a GDV of £945,000 and proposed rental income of £71,800 a year, confirming the significant potential of our project.

The valuation was conducted after the purchase to understand the proposed GDV and not necessarily the current value.

One of the challenges identified, though, was the poor condition of the rear access, which could deter potential tenants. 

In response, we cleared away all the rubbish, levelled the flooring, paved the access road and installed sensor-operated floodlights and security cameras to improve safety and access. The funder then used the valuation report to finalise the loan. 

The new commercial, business and service class, E, combines several previous classes, allowing owners to change their premises' use within this class without planning permission, to convert units into residential.

Instead, they simply require prior approval from the local authority. Prior approval applications are assessed within 56 days, and checklists help ensure a smoother process.

To convert part of the existing shop and the former garage I used class MA, which is the term for the prior approval process to change a class E building into a C3, residential use. 

To be eligible, the built floor-space had to have been used under class E, and its precursors, for a continuous period of at least two years, which in this case it had.

To maximise our chances of obtaining prior approval, we collaborated with our architect to design a layout that met all necessary criteria.

Class MA doesn't allow for external changes, so the design had to be suitable without making modifications such as adding windows or doors.

A noise assessment confirmed minimal impact and suggested mitigation measures, while a daylight assessment showed that the unit received at least 50% more natural light than before, confirming our ability to proceed. 

Once I received approval to convert the rear of the shop into an apartment and the former garage into another, I had to apply for full permission to remove the garage door and replace it with windows, as well as extending into the loft and adding a dormer.

However, as the unit was already residential – class C3 – I could convert it into a small, class C4 HMO of up to six rooms. I then designed and implemented the HMO layout and created a separate entrance for the upstairs apartment. 

This required a minor external change to the shop frontage, i.e. to create a new door for the HMO, which was approved. To expedite the process, we processed most of these applications simultaneously.

I opted to use a private building inspector rather than the council's team due to their speed and availability of the service, sending them the drawings, calculations and other supporting materials.

The inspector then made regular site visits to assess progress and compliance with HMO regulations, focusing on structural integrity, fire safety and energy efficiency, as well as attending to specific aspects of the conversion such as soundproofing and ventilation.

On completion of the project, I submitted handover documentation including certification of commissioning, gas and electrical safety, emergency lighting specific for the HMO, fire safety, sound test results, and ventilation airflow tests. 

Once these documents were reviewed and accepted by the inspector, we received the final certificate, confirming that the work met the required standards.

For conversions such as this project, building compliance involved several key aspects. These included obtaining an energy performance certificate, conducting acoustic and air quality testing to ensure compliance with regulations, and performing water efficiency and consumption calculations. 

In this specific case, we also needed a commissioning and compliance certificate for the misting fire system that was installed.

To obtain building control sign-off, it is essential to address these compliance requirements proactively, developing an as-designed report and an as-built report once the project has been completed. 

The former includes energy performance and water calculations based on the design drawings, which are then updated in the latter to reflect anything that differs from the original design in terms of materials, appliances, showers, taps, heating systems and controls, windows and so on.

The project timeline was ambitious, with an eight-month construction period followed by a one-month refinancing process, which involved moving from the bridging loan to a traditional buy-to-let product. 

However, compared to new-build developments, conversions are often faster because the existing building structure provides a foundation. 

The process began with a thorough strip-out of the brickwork. To assess the building's condition, we inspected the existing fabric before proceeding. Construction then commenced with the dormer, followed by work on the apartment conversion.

The different phases of construction included insulation, plumbing, screeding, partitioning, plasterboarding, first-fix electrics, skimming, tiling, carpentry, kitchen installation, bathroom and second-fix electrics, finishing and decorating, and finally landscaping.

This phased approach ensured efficient progress and timely completion. 

First, there were issues with the building's existing fabric. While external building changes cannot be made when converting from commercial-to-residential uses, I had to build a cavity wall inside the building, which meant that some internal space was lost. 

I also had to fit a cavity barrier by an approved installer, which was added retrospectively following the building inspector's recommendations to ensure that it met building control requirements.

For the upper flat conversion, I also needed to ensure there was adequate head height in the front room because, under the specific local authority HMO licensing requirements, the minimum space for a single occupier room is 6.51m², with any space under 1.5m in height disregarded.

As we fell slightly short of this target, we had to readjust the first-floor joists we had installed and drop them lower to ensure that there was adequate head height coverage on the second floor to meet the council requirements.

To support this, I prepared a comprehensive package detailing progress and my own GDV analysis, including information on the original comparable valuation evidence and how the market had evolved since the project's inception.

A valuer from the lender's panel who had also conducted the initial valuation was assigned to assess the property. Based on their assessment, the project was valued at just over £1m.

Given the HMO element and its potential income, we anticipated no issues with rental calculations or stress testing. This allowed us to refinance at a 75% LTV ratio against the new GDV, enabling us to withdraw the initial investment in the project.

In addition, it is fundamental to understand from the outset – and to communicate to the build team – the HMO-specific licensing requirements for amenities as well as minimum space criteria. 

Early engagement with the wider professional team can ensure a robust and fully developed design, as the focus in commercial-to-residential conversions can sometimes be solely on completion.

However, we failed to develop the electrical layout design early enough, and had to wait during the first-fix stage as we finalised where each of the sockets and points would go.

I found the project rewarding and profitable – but careful planning, patience, and adaptability were crucial. Our primary goal was to revitalise our community by transforming underused commercial spaces into much-needed housing, which we look to have achieved. 

For those considering similar projects, I recommend a comprehensive approach: understand the financial aspects thoroughly, including potential returns and associated costs. You should calculate the potential value of the site and work your numbers back from there. 

You should also conduct extensive research on your chosen area, and understand national and local planning requirements, including permitted development rights and prior approval processes.

Moreover, strong communication and project management skills are essential to coordinate various stakeholders effectively.