Converting an empty shop or a tired office into flats has become markedly more viable since the permitted development rules were widened. Funding one has not become easier — it has simply become more common, and lenders have got better at pricing it.
The planning position lenders will check first
Class MA allows a change of use from Use Class E to residential subject to prior approval from the local planning authority, normally determined within 56 days. Since 5 March 2024 in England there is no floorspace cap and no requirement for the building to have been vacant, though it must have been in Class E use — lawfully, and continuously — for at least two years before the application.
For a lender, that translates into three questions:
- Is prior approval actually in hand? Most development lenders will not release funds against an unconsented scheme. A small number will lend on a pre-planning basis at much lower leverage.
- Is there an Article 4 direction? Many authorities have withdrawn Class MA rights across town centres and office cores. An Article 4 area means a full planning application, a different risk profile and often a different lender.
- Does the scheme meet the standards? Nationally described space standards apply, and every habitable room needs adequate natural light. The daylight test kills more conversions than anything else — deep retail units and landlocked upper floors routinely fail it.
Get a daylight assessment at appraisal stage. It is the cheapest piece of due diligence on the whole project.
How the facility is structured
Development finance is not a single loan drawn at the start. It has two components:
- A day-one advance against the value of the building as it stands, typically 60–70% of site value.
- A build facility drawn in stages as works progress, commonly covering 80–90% of construction costs.
The overall constraint is expressed as loan to gross development value, usually capped around 65–70% of the completed value of the flats. So the scheme has to have enough margin in it to absorb that.
Drawdowns are released against reports from a monitoring surveyor appointed by the lender, who inspects and certifies progress before each release. Build that into your cash flow — you fund the work and are reimbursed, rather than being paid in advance.
Interest is rolled up and repaid at exit rather than serviced monthly, which preserves cash flow during construction but means a delayed programme costs you twice: more interest, and later sales.
What lenders assess
- Experience. A first-time developer converting a whole office block will struggle. A track record of comparable completed schemes is the single biggest factor in both approval and pricing. If you do not have one, a partner or main contractor who does can carry the case.
- The contractor and the contract. A costed schedule of works, a named contractor with accounts, and a fixed-price contract where possible.
- Contingency. Around 10% of build cost, and lenders will insist on it. Conversions produce more surprises than new builds — existing structures, services, asbestos, fire compartmentation.
- The exit. Sale of the units, or a refinance onto a term investment facility. Both need evidencing: comparable sales for the former, an interest cover calculation on projected rents for the latter.
- Personal guarantees and a debenture over the borrowing SPV, essentially always.
Costs that catch people out
Class MA gives you the use, not the building works. Building Regulations apply in full — fire safety and compartmentation, means of escape, sound insulation between dwellings, ventilation, thermal performance. On a multi-storey conversion the fire strategy alone can decide viability.
Class MA also does not authorise external alterations. New windows, balconies, roof changes or a new entrance generally need separate permission, and a scheme that depends on them is not a permitted development scheme at all.
Add the Community Infrastructure Levy where the authority charges it, professional fees, lender arrangement and exit fees, monitoring surveyor costs, and legal work on both sides.
Appraise it backwards
Start from gross development value — what the finished flats are genuinely worth, evidenced by comparables, not by optimism. Deduct build cost including contingency, professional fees, CIL, finance costs including rolled-up interest, sales and marketing costs, and your required profit. What remains is what the building is worth to you. If that is below the asking price, the deal is not a deal.
Where these schemes work
They work where the residential value per square foot genuinely exceeds the cost of getting there — which is a street-by-street question, not a national one. Secondary retail values remain well below their peak while residential demand in the same locations holds up, and that gap is the opportunity.
Considering a conversion? Send us the address, the prior approval position and your build estimate, and we will tell you what it will fund at.
Related services
Most buy-to-let mortgages, and some forms of commercial, bridging and development finance, are not regulated by the Financial Conduct Authority. Your property may be repossessed if you do not keep up repayments on a loan secured against it. Giles Finance is authorised by the Financial Conduct Authority (No. 726857) to transact regulated mortgages. Giles Finance is a trading style of Giles Finance & Consultancy Services. This article is general information, not advice.