What Are The Opportunities For SME Developers In A Post-COVID Market?

By Jeremy Wormington, Managing Director at Ferrata Property Group

As much as one might wish for a crystal ball, what is certain is that there will be a huge opportunity for SME developers over the next couple of years as businesses restructure to the new ‘normal’ post COVID.  I will not discuss the residential market and how that might move over the next 12 months, which has held up well while the government supports Help to Buy and SDLT thresholds.  

There have also been some positive changes to the planning rules, with potentially an even bigger step change from August 2021 with air rights and the new Use Class  E which looks to widen development opportunities and provide greater flexibility to alter the property’s use quickly rather than through the cumbersome planning process and its inherent risk. The following points are my musings over the commercial market in the coming months.

There is much in the public domain about the death of the high street and how working from home will affect the requirement for large office space as companies rethink their working patterns. I would rather view it as an evolutionary process that is right for the future rather than the past. Technology is having a huge impact on how we live our lives, and working patterns will alter accordingly.  

For many, working from home has been a blessing with the reduced commute, which has meant many employees have actually worked longer hours and been more effective with fewer interruptions from colleagues (although equally the opposite does occur!). Even so, the need for human contact remains and companies still need to engender a corporate ethos across their workforce, which is difficult from afar. 

People will not want to commute as much, particularly if crowded onto trains, buses and the underground. Working locally will require more flexible office arrangements, whether companies down-size into a more hot-desking type of scenario or make use of serviced offices on a smaller scale than those operating in the centre of larger cities over the past few years, such as The Office Group. As this change occurs, there will be redundant office space ripe for redevelopment, especially when leases expire.

There has been a steady erosion of active retail space over the past decade, with vacant retail space now common in the more affluent towns and cities such as Guildford. COVID has accelerated that process with many turning to on-line sales as shops remain closed or are not the places to visit as the risk of spreading the virus remains.   

So what will be the future? While consumer pressure will move in a certain direction, there will be die-hard Councils that wish to maintain the status -quo and prevent the changes that are necessary to rejuvenate their town centres, rather than looking forward to the long- term needs and support development. In the past 12 months, we have seen much more localised shopping focused on food retailers, well-being and socialising, where possible. 

As retail space becomes more available, what are the opportunities? There is the obvious need to convert any upper floors, and potentially airspace, into much-needed residential use, which will hopefully get easier with the new use class. The downside is that large amounts of retail space are not suited to residential redevelopment due to access, lack of parking (in some instances) and how to make use of the ground floor which often has poor natural light and cannot easily be converted to residential within a workable budget.   

It’s one thing to create residential, but why would people want to move to more city central locations without the necessary social, health and grocery functions plus green space? In many instances, there are is already a wide range of supermarkets within easy access, so the key is to set up more cafes, restaurants, gyms, health centres plus the aforementioned offices. However, many of these have been hit hard by COVID and may not rush back to levels seen only a year ago. One of the conclusions from the pandemic is that people crave more outdoor space, and/or a more suitable home working environment. Where possible, developers will need to factor these into any scheme to increase their sales/rental volumes.   

Mixed use is the likely solution for many retail units with mainly residential uppers, or offices, and other uses for the ground floor depending on the local environment. There is talk of ‘dark spaces’ where the retail area can be used as a kitchen to fulfil home delivery meals, while the ‘final hour’ goal for on-line delivery will require smaller and more local storage solutions in the coming months. With larger retailers moving out, then covenants are likely to be much lower than previous with niche and independent retail prevailing.   

Currently, lenders appear to be reluctant to place much emphasis on the commercial aspects of the development, with the overriding requirement to maximise the residential income while minimising commercial income due to the risk that they will not survive for very long. Developers will need to tread carefully around this minefield in order to maximise their GDV or rental yield so that a development works financially.

While the government might provide more stimuli to assist SME developers, they have already injected staggering amounts into the economy, when compared to the crash of 2008/09, which will have to be repaid at some point. Vendors also need to get realistic with land values, particularly when properties have been vacant for some time, which reduces their commercial value.   This is exacerbated with rising development costs, which makes finding a profitable deal increasingly difficult. An opportunity for developers could be to create a JV agreement with the vendor who takes some of the risk coupled with a good upside due, in part, to reduced finance costs. 

This SME developer summarises that the opportunity over the next two years will be to:

• Repurpose mainly retail and some office space into residential while determining the local need for the ground floor and develop accordingly. 

• Maximise the residential aspects of the development to assist with funding.  

• Provide surety that a development can take place by utilising the many planning changes, particularly the stimulus that the new Use Class E should provide.

• Provide a space where people would be either happy to work from home, or locally.