Compared to both London and some other regional cities, Manchester and Salford have seen relatively little office to residential conversion during the latest cycle. We expect to see more conversions over the next five years, now that Permitted Development Rights (PDR) have been extended and made permanent. This trend will be driven by both the limited supply of developable land and rising differentials between the capital values per square foot that are achievable on the different uses.

The map looks at the capital values per square foot that are currently achievable on comparable office and residential developments in different parts of Manchester and Salford. We have assumed that the decision facing a landlord or developer is whether to redevelop the property for office use, or go for a residential conversion. We have also assumed that the office building is in an area which is suitable for residential use. Also, we have ignored the very highest residential values in each location, as most markets can only support a handful of such schemes, and the extra fit-out costs to get to this peak level can be double the norm.

Our experience tells us that even without the need to go through a traditional planning process, you need to factor in at least £100/sq ft for a basic office to residential conversion.

This simple analysis highlights three areas where there is a clear value advantage in converting commercial space into residential, and two submarkets where the case for developing office space is more solid.

Planning changes

In October, the Government announced that PDRs allowing office to residential conversions will be made a permanent part of the planning system and expanded to allow the demolition of office space and the conversion of light industrial space to residential.

In theory, this change of policy should facilitate a surge in the conversion of unused or under-used commercial space to much needed housing. Historically a large number of office buildings have been unsuitable for conversion, due to their construction or configuration. However, the cost of conversion will still remain high and therefore likely to take place only in locations where there is a substantial differential between the office and residential capital values.

Furthermore, plans to allow local authorities to set their own business rates and to keep the proceeds present councils with a tough choice between delivering more homes via PDR, potentially reducing their income from business rates or increasing their income from rates at the expense of housing.

Manchester city centre is one of the 17 areas in the country that successfully managed to achieve exemption from the first round of the PDR initiative, and we expect that this will be maintained. However, the potential for a loss of employment generating uses elsewhere in the city is significant and will hit public finances even harder than it might have done in the past.

^{Source: Savills Research, Glenigan, Rightmove}