Navigating mixed-use developments

The high demand for residential development and the announcement, earlier this year, of the proposed change to permitted development rights to allow change of use from B1(a) office to C3 residential - together with the increased use of technology for flexible working, and changing patterns of work and retail activity - mean that mixed-use developments, incorporating small serviced office units with new residential developments, are gaining ground as a model fit for the future.

Another policy may also result in more mixed-use. The National Planning Policy Framework (NPPF) published in March 2012 introduced a strong presumption in favour of sustainable development, focusing on economic, social and environmental benefits. With the transitional period drawing to a close, Local Planning Authorities (LPA) that have not revised or drawn up Local Plans in response to the NPPF will find that weight may only be given to the Local Plan according to its consistency with the framework, which for some may mean the NPPF is effectively the only planning document it may consider in deciding applications.

The NPPF specifically commends mixed-use development multiple times, recommending “for larger scale residential developments in particular, policies should promote a mix of uses … including work on site”. LPAs should “facilitate flexible working practices such as the integration of residential and commercial uses within the same unit” and “ensure an integrated approach to … housing, economic uses and community facilities and services”.

A large proportion of projected UK economic growth is expected to come from SMEs, and corporates are finding their occupancy rates reduced.

Chris Allington of Oxford Innovation, which specialises in managing facilities that combine office space and in mentoring support for small businesses, said SMEs are less likely to want to take on a traditional full repair and insurance (FRI) lease, viewing offices as a commodity, a variable cost that can be adapted to meet changing needs, and which can remove the headache of facilities management from entrepreneurs who may lack experience in the area.

Additional services, such as high-speed connectivity, business mentoring, meeting hubs, and the ability to network with others attract businesses, while the mixed-use model could reduce the need for commuting and, with potentially high occupancy rates, further promote environmental sustainability.

To comply with the NPPF and to stimulate local economies, LPAs may use Section 106 agreements to require employment use to be integrated with proposed residential development, or developers may opt to submit applications for mixed-use schemes, which may be looked on more favourably by planners.

The introduction of the Community Infrastructure Levy (CIL) may contribute to the attractiveness and viability of mixed-use schemes, as some of the authorities that have implemented CIL levy different rates on residential and commercial, with office and industrial space being exempt in some cases. Stamp Duty Land Tax rates for mixed use are a maximum 4%, compared with the 7% or even 15% that can be levied on residential property.

The proposed extension to permitted development rights, allowing offices to be converted to residential use, has generated a lot of debate, with London councils in particular indicating that they will apply for exemptions. The potential use of these rights to sidestep the affordable housing obligations usually imposed on developers has been a source of comment, with fears raised that it will not ease the housing crisis for those on low incomes, first-time buyers or those trapped in homes their families have outgrown.

Practical considerations will have a significant impact, as while many properties built as houses and converted to offices could be changed back, purpose-built, large, open-plan office buildings would be difficult to convert into residential units due to the difficulty of designing units with adequate natural light. In such cases, mixed-use within buildings, as is more common in densely populated Asian cities, may offer a revenue-generating solution to empty offices.

The strategy for investment and exit on mixed-use development will be more complex than for single use, but by using specialist management companies and strategic partnerships significant returns could be realised. The challenge now is for an innovative and integrated approach from developers, planners and investors.

Bill Bidder is partner in and head of the Real Estate Group and Alexis Ash is a trainee solicitor, both at IBB Solicitors