"Many hotels are entirely suitable for residential use with very few changes required"
- Paul Johnson - LRG
Commercial property has historically been viewed as the more profitable asset class but more recently, residential property values have taken over. This is evident in the number of companies, across the board, converting commercial to residential property – from John Lewis investing in Build to Rent homes, to the many former office blocks that have been converted to residential units.
We deal with several such properties: an example of this is Peartree House, a former office block in Harlow, Essex. LRG recently purchased the 26 apartments and we are confident that with an annual yield of 6.58%, it will resell very successfully.
Conversion into residential
Many hotels are also choosing this option. Some do so because of straitened economic circumstances including increased capital and operating costs, changing consumer demand but many do so as a prudent financial investment in a changing market.
After all, the UK built fewer houses in 2022 than since the Second World War, according to an analysis by the Home Builders Federation. And with some significant blockages in the planning system (from issues of nutrient neutrality creating moratoriums across entire local planning authorities; to local plans being shelved due to political uncertainty) land for housebuilding is limited.
Many hotels are entirely suitable for residential use with very few changes required.
Our planning consultancy, Boyer, advises clients in the hospitality sector both in seeking planning consent for change of use to residential or doing so under Permitted Development Rights (a planning route which is generally quicker and less expensive than a full planning application).
Full planning permission is required if a hotel owner wishes to make structural changes to their property in converting it for residential use. However, the relatively recent option of permitted development rights (PDR) can also provide permission for change of use without the need of a full planning application.
Often hotels are attractive, perhaps historic, buildings, ideally located in popular areas close to amenities or with facilities within the complex itself which makes them potentially very desirable to potential homeowners.
Going down the planning route – whether a full planning application or a change of use application - requires council support. In areas with a shortage of homes this may be easier to achieve than in those in which the demand is for employment, A good planning consultant will be able to advise on, and make a case for, either. The earlier you understand what you can achieve, what is viable and what the limits are, the better informed your outlook will be.
There are certain pitfalls to look out for. One is that residential units require a good EPC rating, and especially with older buildings, the costs of conversion and upgrading to meet modern energy efficiency standards can be considerable.
The option to convert a hotel to homes is increasingly popular with investors, as institutional investors increasingly see the benefits of residential over commercial investment. So whether you’re looking to retain the support of existing investors or attract investment for a new venture, this is one aspect in which the economic factors are favourable.
Conversion to student accommodation
Another option is to convert a hotel into student accommodation – another sector crying out for additional bricks and mortar: research cited by the Higher Education Policy Institute suggests that there is a current shortfall of 207,000 student beds in the UK, likely to rise to 450,000 by 2025.
Hotels, with their shared spaces and additional facilities, are particularly well suited to the co-living lifestyle sought by students. Also, room sizes and the inclusion of en suites tend to be well suited to student accommodation than self-contained flats. This means that a conversion may be achieved through permitted development rights.
When considering the conversion of hotels into student accommodation, city centre sites tend to be more desirable to operators than rural sites.
The challenges include convincing the council that the scheme can be managed in a way that won’t impact on the existing community. It is generally easier to secure planning permission for student housing if an occupier has agreed (ie, that the development isn’t speculative), so if there’s a nominal agreement with a university or college, you can demonstrate demand and have a greater chance of winning planning consent.
Conversion to later living accommodation
A further opportunity is to convert a hotel into retirement accommodation. The recently published Mayhew Review found that the property sector is failing to adapt to the impact of an ageing population, with only around 7,000 retirement homes being built each year in contrast to the 50,000 new units needed annually. Given that the 65 + population is anticipated to increase to 17.2 million by 2040, there is clearly a significant demand and supply imbalance to be resolved.
Again, investors favour this use, because density is a key factor in the viability and profitability of any property development and with later living schemes averaging approximately 250 apartments, they are an attractive investment proposition.
With the exception of a few ramps, schemes such as these demonstrate that providing such a community does not require a structural re-think in the layout, but an attitudinal shift. Facilities such as lounges and clubrooms, staffing assistance, care packages, wellbeing suites, and 24-hour concierge are either already present in most suburban BTR schemes or can be provided with little change to the built environment.
The UK has much to learn from the numerous successful later living schemes in Europe and the US, many of which form part of larger suburban BTR schemes - mixed-use developments not only for the over 55s but in some cases, innovative intergenerational living projects which both support the crisis in social care while also boosting the supply of affordable housing.
So while increased interest rates and build costs, along with other factors, mean that getting financing for property-heavy investments has become more challenging, conversions offer a great way of resolving that impasse.