Written evidence submitted by the Policy Exchange [PDR 068]

 

Executive summary

Introduction: Why PDRs?

Historical context: How PDRs have been extended

The charges laid against PDRs

Conclusion

 


Executive summary

 

        Permitted development rights are a fast-track to planning permission. They are designed to make the planning process faster, simpler and more predictable for relatively simple kinds of development, where a bespoke planning investigation is unnecessary.

        Some permitted development rights, such as garden extensions, have been popular and uncontroversial. Other rights, such as those to convert offices into new homes, have seen opposition. This opposition initially focussed on the argument that the homes these rights create are too small and have too little natural light.

        Nevertheless, these rights have created tens of thousands of new homes, especially in areas like London where the UK’s housing shortage is most acute. Between 2015-16 and 2019-20, 72,980 new homes were added to the housing stock via change of use PD, of which 64,798 were office to residential.

        All of these homes were on brownfield sites, reducing pressure for greenfield building in the countryside. Most were near to existing infrastructure, making them more sustainable and walkable, and helping to achieve Net Zero. In most cases they rapidly repurposed derelict sites that might otherwise have been unused in the planning system for years.

        Normal space and light standards have now been applied to PDRs for conversions, removing one of the main sources of controversy. However, this type of PD still faces objections that it doesn’t contribute properly to local infrastructure and publicly provided goods and services such as affordable or social housing.

        These objections would most naturally be tackled by adapting the PDRs to ameliorate the problems. For example, the Government could apply the new Infrastructure Levy to PDRs, as it proposes in Planning for the Future.

 


Introduction: Why PDRs?

 

By and large, proposed buildings in the UK are permitted or rejected on a case by case basis by the relevant local planning authority. However, since at least the Town and Country Planning (General Permitted Development) Order in 1995, the central government has also unilaterally been able to permit certain types of developments.[1]

 

This system of ‘permitted development’ is akin to the ‘by right’ development that prevailed historically, up to the creation of the modern planning system with the 1947 Town and Country Planning Act. It’s akin to a ‘fast track’ to planning permission. As under the old pre-1947 planning system, local authority approval must sometimes be sought on specific elements of a development that is otherwise permitted, such as certain features of its design. In addition, LPAs can suspend PDRs under certain circumstances, invoking powers granted by Article 4 of the Town and Country Planning Act.

 

Since 1995 permitted development rights (PDRs) have been expanded significantly. In 2013, they were expanded to cover certain changes of use. This meant that planning permission was no longer necessary to convert certain offices and commercial buildings into flats or houses. Due to the greater profitability of residential development in some urban areas, this led to a surge in housing completions. However, because PDRs were not subject to space and light standards, some of these new homes were controversially small and dark.  The Government extended minimum light standards to homes created through PDRs in 2019, followed by minimum space standards in 2020.

 

The planning system has sometimes been understood, both by supporters and detractors, as turning building into a state-controlled sector, as it was in the planned economies of the Warsaw Bloc. In fact, however, controls on development are found in virtually all human societies, serving the simple role of constraining spillover effects – what in microeconomics are called ‘externalities’. If there were no controls at all on development, then development that is narrowly profitable for the developer or landowner, but costly to society, would tend to go ahead. For example, chemical plants might be built in dense population centres, polluting the air that people breathe. Or we might see concrete monstrosities spoiling picturesque views of ancient towns and villages. In both cases these projects might create value for their landowner, considered alone, but destroy so much of the value of neighbours’ properties that they destroy value on a net basis.

 

There are two main ways of attempting to control these externalities, so that projects only tend to go ahead when they add value to society.

 

One is considering development proposals on a case by case basis. This is the system we have had in the UK since 1947. Under this system, planners judge whether a given proposed development has substantial negative externalities, require adjustments if such externalities exist, and potentially reject the development altogether if sufficient adjustment is impossible. They can, say, prevent a chemical plant from being built except where appropriate, or require that its exterior be designed in line with local architectural preferences.

 

Another is regulation. Regulations can set limits on development to prevent the most costly externalities: such regulations could, say, specify a range of steps that all chemicals plants must take to mitigate their effects on neighbours. Before the twentieth century, Britain controlled development almost solely through regulation: property owners could generally develop ‘by right’, but the form of such development was governed by strict rules. For example, a Georgian homeowner would have the right to demolish and rebuild their house without making any kind of planning application, but the materials, the number of floors, the height of the floors, and the form of the roof, party walls, parapets, chimneys and window frames would all have been closely restricted by regulation. Similar systems still exist in places such as Japan today.

 

In general, there is a tradeoff between these two methods of development control. Regulation is cheap, predictable, and easy to follow. However, as with all such written rules, it cannot perfectly address every case, and there may be buildings that slip through regulatory loopholes while being costly for existing residents or inhabitants of an area. Some such buildings may even be net harmful. By contrast, case by case control is costly and unpredictable for developers and households, and therefore leads to less development, but is arguably more secure against loopholes and unforeseen scenarios. This is because planners can take account of the highly bespoke and complex circumstances of every individual case.

 

The case for regulatory systems is most straightforward in the case of kinds of development where externalities are small or predictable between cases, so one-size-fits-all regulations can work. The permitted development rights the Government has introduced in the UK are intended to be an example of this: they are intended to grant property owners rights to develop in ways that mainly affect the owners and occupiers of buildings, rather than their neighbours, their local community, or society at large.

 

In some cases, it is clear that the new PDRs fit this description. For example, the most popular and famous PDR is the right to build extensions in one’s garden. This reduces the costs of the planning system to households and planners, since it removes one type of application that must be made and considered; at the same time, the accompanying regulations on height and massing are generally seen to have prevented these extensions from having a significant negative effect on neighbours.

 

In other cases, PDRs have attracted more controversy. The most conspicuous example of this is commercial to residential conversions. We discuss below how far these objections are justified, and, to the extent that they are, how PDRs could be refined to address them.

 

 


Historical context: How PDRs have been extended

 

Permitted development rights have been extended over the last ten years to the point where they now play a significant role not just in the planning system, but across the development and renovation industries overall. As mentioned above, some of this has come without controversy. However, rights to convert businesses to housing have typically aroused active opposition, particularly the freedom to switch space from the old B1 office designation to C3 housing.

 

These conversion PDRs have clearly enabled a substantial increase in housing supply: between 2015-16 and 2019-20 72,980 new homes were added to the housing stock via change of use PD, of which 64,798 were office to residential. In 2016-17, across England it provided over 17,500 new homes, compared to 183,500 new builds. It was only thanks to PD that the annual figure for new housing units finally rose above 200,000 in 2017, for the first time since the financial crisis.

 

In London, PD’s contribution has been even larger.  According to the 2017 annual monitoring report from the Greater London Authority, there were 33,000 new home completions across the capital in 2015-16, an increase of 8 per cent on the year before. Of these, 19 per cent  – 6,270 new homes – were provided under permitted development.

 

These rights have recently been both extended and constrained. On the one hand, regular high street properties in class E have also been given the right to convert to housing. But all properties over 1,500 sqm must now go through the regular planning process to convert, including B1 to C3. This will not affect a typical shop. But it will affect a wide range of buildings, from pretty much anything of 25 flats or larger to especially big John Lewis-type properties.

 

Similarly, prior approval over the ‘loss of retail’ test has been removed, so that those wishing to convert need no longer prove there is no need for the business via a market test. This is a deregulation. But on the other hand there is an increased prior approval requirement around dereliction: the premises must be empty continuously for three months before the right takes effect. There are some other small changes around whether the conversion will remove ‘social infrastructure’ – which would constrain some nurseries and clinics, for example, from converting.

 

In addition to office to residential PDRs, the government has recently created two new freedoms. The new class E of commercial activity allows owners to freely convert property between the various types of class E business, with no need for planning permission for change of use between the individual classes that class E replaced. This is strictly speaking not permitted development, but works in a similar way. Another is a PDR for certain upward extensions of houses if their design is approved by the council as meeting various conditions. This prior approval is a significantly tougher step than other PDRs, likely due to a concern that upward extension is likely to have more extensive spillover effects than typical outward extensions.

 

The Government’s plans would also allow buildings like schools, prisons, and hospitals to expand their premises more easily, without the need for permission. The plans would also allow PDRs to apply in conservation areas, though national parks and areas of outstanding natural beauty would continue to be excluded from using them.

 

Permitted development is constrained by Article 4, which allows local planning authorities to suspend or control how certain rights are used. There are, broadly, two types of Article 4 exemptions. One, which is likely applied by almost all LPAs in at least certain locations (though data doesn’t exist), constrains anything that would affect the appearance of a building. It is typical for this to be applied in conservation areas where the public is perceived to have a strong interest in preserving the beauty of an area. The second type, less clearly linked to the stated legal justifications, is generally in place to prevent conversions that do not affect external appearance.

 

It was intended that the second kind of Article 4 exemption was intended to be used only rarely. The limited circumstances under which it should be used are laid out in the current National Planning Policy Framework (NPPF): 

 

53. The use of Article 4 directions to remove national permitted development rights should be limited to situations where this is necessary to protect local amenity or the well-being of the area (this could include the use of Article 4 directions to require planning permission for the demolition of local facilities). Similarly, planning conditions should not be used to restrict national permitted development rights unless there is clear justification to do so.5

 

This was further clarified in a letter from Lord Bourne to Lord True, in March 2017, which said that Article 4 restrictions were to be used only where LPAs were meeting 100% of their assessed housing need and could still meet this without the housing delivered by PDRs.

 

In practice, however, Article 4 exemptions have been invoked much more often. In 2018 around one in five local authorities had an Article 4 restriction applying on conversions from commercial to residential, including a number that had not met their assessed housing need. The effectiveness of these PDRs has thus been significantly compromised. This pattern is spreading, and has created a strange situation where what was intended to be a national right is available in some postcodes and not in others.

 

In the next version of the NPPF, the Government is aiming to end this postcode lottery. The current draft runs as follows:

 

53. The use of Article 4 directions to remove national permitted development rights should

• where they relate to change of use to residential, be limited to situations where this is essential to avoid wholly unacceptable adverse impacts

• [or as an alternative to the above – where they relate to change of use to residential, be limited to situations where this is necessary in order to protect an interest of national significance]

• where they do not relate to change of use to residential, be limited to situations where this is necessary to protect local amenity or the well-being of the area (this could include the use of Article 4 directions to require planning permission for the demolition of local facilities)

• in all cases apply to the smallest geographical area possible.

54. Similarly, planning conditions should not be used to restrict national permitted development rights unless there is clear justification to do so.

 

If implemented more closely in line with the NPPF guidance, Article 4 directions will become the exception rather than rule, as seems originally intended. This should lead to more consistent availability of residential conversion PDRs in the future.

The charges laid against PDRs

 

As mentioned, permitted development rights have been controversial, especially where they covered conversions from offices or other commercial buildings to housing. Broadly, objections fall under three categories. First, there is the objection that office space is needed more, or that it has larger positive externalities than housing. Second, it is held that conversions have created homes that are too small, or too poorly lit, and that would not pass usual regulatory standards. Third, unlike other developments, PDRs do not contribute to local authority budgets, as they are exempt from Section 106 payments. Community infrastructure levy, which falls on developments that increase total usable floorspace, usually does not apply.

 

There is some merit to each of these objections, but in each case they are usually stated too strongly, and the appropriate solution would not be removal or suspension of the relevant rights, but adaptation to better deal with the legitimate concerns planners have about their current implementation.

 

  1. A dearth of office space will be created

 

Why do landlords seek to convert buildings from offices to homes? They generally do so because people who need homes in that location are willing, in aggregate, to pay more rent for the building for use as homes than people who want to use it for office space. And not just more rent but considerably more rent: enough of an increase to pay for all of the conversion work, to pay for the time during which the building will become vacant, to compensate for the risks involved, and to leave a profit.

 

Market economies are systems of information revelation. The point of market pricing is to discover what people are most willing to pay for, and then, by rewarding its provision, to encourage people to produce more of the high-priced goods and services, and fewer of the low-priced goods and services. In economics, the idea that a perfectly competitive market will thus result in an efficient distribution of resources  is called the First Fundamental Theorem of Welfare Economics.

 

In the real world, perfectly competitive conditions frequently fail to obtain. One reason they often fail to do so is the existence of externalities. Externalities are where someone loses out or gains from some market interaction without being part of the decision whether it goes ahead or not. A classic example of an action with negative externalities is pollution. A classic example of an action with positive externalities is heating a flat in a larger block, where your spending on energy spills over to keep other people’s flats warm too.

 

If externalities are sufficiently large, then they frustrate the operation of the First Fundamental Theorem of Welfare Economics, since the information embodied in a price doesn’t include them. One may make a profit producing chemicals even though the emissions one creates kill hundreds of people. Such a business would be, in the technical sense of the term, profoundly ‘inefficient’: the transaction between chemical buyers and chemical sellers is good for both of them, but nonetheless bad overall.

 

This economic model is useful for thinking about office space. If the price of office space and residential space is the same, landowners will not spend the money necessary to convert from one to the other. Conversions, therefore, only go ahead where one type of space is valued more by the market. Thus, the obvious response to this objection is to point out that both office space and residential space are scarce, but that, judged by prices, office space is clearly less scarce than what is being built. What’s more, there is a wide assumption that people will tend to do more working from home in the future, and less working from the office – that is that office space will become less scarce and residential space will become more scarce. Whether or not this turns out to be true, of course, will be a matter of supply and demand.

 

However, there are two major complications to this view. The point of planning and development control, as we established above, was to account for externalities. If offices have large positive externalities, for example jobs for locals and custom for local businesses, and residential properties have only small positive externalities, or even negative externalities, then planners have a clear basis for preventing conversions.

 

That said, this basis becomes much less clear if no business is in place. Derelict offices and shops provide negative externalities, harbouring crime and antisocial behaviour, not to mention ugliness, and it may take years before planners are sufficiently convinced to allow conversion. This situation, where shocks mean businesses are no longer viable in a location, and emptiness would hurt the area, is precisely where the cheap and rapid flexibility of PD comes into its own.

 

The second complication is taxation. In our current taxation system, residential property tends to face far lower tax rates than business property. Businesses are taxed at a rate of approximately 50% on the rateable value of the property they occupy (this is roughly equivalent to the rent they do or would pay). By contrast, council tax can be as low as 1% on the notional rental value of a property. This means that landlords do not have only market reasons for shifting between uses. In many cases, they also face a generous tax reduction for converting. This tax benefit would be worth in the tens of thousands per year for single apartments, and in the tens of millions for very large buildings.

 

However, neither of these objections means that conversion PDRs ought to be junked completely. Planning consideration is not costless. Planning permissions total hundreds of pages, dozens of meetings, and often years of delays. There may also be costly appeals. This cost can run to hundreds of thousands or millions each time. Such costs are great enough that the  optimal outcome overall may involve suboptimal decisions on externalities, balanced by reduced cost of working out what is optimal.

 

Furthermore, these problems are at least partially problems of the tax system, rather than of the planning system. It may be appropriate for the government to equalise the tax treatment of commercial and residential land in case of conversions, so as to remove any arbitrary tax incentive to switch between those uses. But this would more normally be considered a Treasury responsibility. Planning and development control regulation ought not be used to solve a problem outside their purview.

 

  1. Space and light

 

One of the most powerful and emotive objections to office to residential conversion PDRs, is that because they do not apply all normal standards on light and space, they are creating excessively small homes without sufficient natural light. Until 2019, conversions were not subject to daylight standards, and until 2020 they were not subject to minimum space standards. Many argued that this was leading to apartments that were unacceptably small and naturally dark. The Government has taken this objection on board, and minimum light and space standards will be applied to PDRs in the future, as they are to homes built through the normal planning system.

 

Almost everyone can agree that it is very far from ideal when people feel obliged to live in 200 sq ft studio apartments with no windows to the outside, just as most people feel that a basement flat is unacceptably dank and dark. However, the key question here is why people do indeed feel that such a flat is their best option. The answer is of course that there is an acute shortage of housing, such that even small and insalubrious flats will find buyers or tenants. The fundamental solution here is expanding the supply of good homes, so that small or dark flats are no longer anyone’s best option.

 

It may well be appropriate to apply the minimum space standards in the meantime. Society may judge that people should not, say, be permitted to rent a very small flat in a central location, even if they believe it to be the best option available for them on their budget. This seems to be a broadly held view. However, as we have seen, it is no longer the case that property developed through PDRs will violate this social principle. There was an issue not with the institution of permitted development, but rather with certain technical aspects of the PD rules as they were originally set up. Since these aspects have now been revised, this should not continue to be an issue in the future.

 

  1. Insufficient contribution via s106

 

In the UK, most public services are funded by general taxation. In principle, this means that, from the perspective of public service provision, it matters relatively little where people live: government resources ‘follow’ them to their new homes, under a system whereby local public service resourcing is determined primarily by the size of local populations (‘capitation’). Densely populated areas like the South-East thus do not tend to suffer from worse public service provision than thinly populated areas like Snowdonia or the Scottish Highlands.

 

However, in practice, public services tend to be supplied inelastically. This means that inflows of people to a locality can lead to strain on local services in the short term, because it takes time for local services to expand in response to the increased population. Since new roads take years to be built, an increase in population tends to lead to more traffic. Similarly, the NHS, also free at the point of use, builds hospitals only slowly: an increase in population can thus strain hospital services in the area. Schools are similar. Local people can quite reasonably be concerned when their children have to bus far across town to go to school if population increases mean their local schools become oversubscribed.

 

In the UK development control system, these concerns are partly addressed by section 106 agreements and the community infrastructure levy. These two regimes are designed to generate funds to jump start expansion of local infrastructure that might otherwise take a long time to be supplied. In so doing, they reduce the impact of new housing developments on those who live in the area already. These revenues are also used to help fund social and affordable housing.

 

Permitted developments are exempt from these charges. To some extent, this reflects that permitted development tends to mean increased floor area without increased physical infrastructure. Compared to greenfield sites, development enabled by PDRs is inherently closer to existing transit infrastructure, and does not need new relief roads. It does not need new litter collection, drainage, or similar, and does not have the same environmental costs, requiring mitigation. In fact, the most standard types of PDR – a loft conversion, garden extension, or adding solar panels to a roof – require almost no infrastructure at all, and it seems correct that they face no charge.

 

This is not necessarily true with office to residential conversions, which likely goes some way to explaining the controversy around them. These conversions may not add substantially to demands on certain types of infrastructure, such as roads, but they will very likely increase demands on healthcare and education, since there will be more people living in the area. Similarly, brownfield developments do not generally require new roads, and sometimes do not even require new sewers, but are nonetheless generally expected to make a contribution to infrastructure. It may therefore be appropriate, and help underwrite a successful and popular PDR regime, if a limited form of these infrastructure charges do end up applying to conversions, at least in some reduced sense. This is a consideration raised in the Government’s Planning White Paper. Alternatively, the Infrastructure Levy proposed in the Government’s Planning White Paper, if it comes to replace S106 and CIL (which PDs do pay), could be applied to PD at some reduced rate, say half.

 

In all three cases, there is some merit in the objections, but it is wrong to construe them as reasons for PDRs’ abolition. In each case, it is clear that adjustments to PDRs that would defuse the objection – either adjustments that the Government has already made, or adjustments that could readily be made in the future.With these small adjustments, PDRs could continue to deliver necessary housing, to help cities adapt to changing circumstances, to reduce the work burden on planners and the cost of the planning system to business and households – without the drawbacks that we have seen so far. In fact, with safeguards and improvements along the lines proposed, there may be ways we can usefully extend PDRs.


Conclusion

 

Permitted development rights use rules-based regulation to control externalities, like the system of ‘by right’ development that existed in British history between feudalism and the Town and Country Planning Act 1948. This has the virtue of cheapness and predictability, since it avoids deep consideration of every case. However, it can mean a less perfect control of spillover costs than in other areas of the planning system, precisely for this reason. It has been uncontroversial in cases where externalities are unambiguously low, such as garden extensions; it has been controversial in cases where there are debates over the extent to which externalities exist.

 

The most controversial type of PDR right – office to residential conversions – has been very successful in terms of delivering housing numbers. However, it has come under fire for providing homes perceived to be too small and dark. It has also been criticised for lack of contribution to local authority budgets and additional needs for infrastructure.

 

These objections, even if they were legitimate, should not be taken as reasons to abolish office to residential PDRs. As we show, small tweaks to the current regime have already addressed many of the concerns about these PDRs, and further tweaks can address the remainder. Principally, taxes should be aligned to reduce distortionary tax incentives to switch uses, and the Government’s proposals around making PDRs pay towards infrastructure should be taken up in some form.

 

With these tweaks in hand, there are ways that PDRs could be extended, to bring more of their benefits of low cost flexibility, and rapid adjustment to new conditions, to areas currently excluded. This might include allowing individual streets in conservation areas covered by Article 4 restrictions to choose, by qualified majority, to allow properties to change their internal uses, so long as their external appearance remains completely unchanged.

 

As we shift to a more rules-based development control and planning system, it is likely that permitted development will have more and more role to play in enabling improvements to our urban spaces. The important thing is to get the details right to make sure it does this in an aesthetically attractive, economically efficient, and community endorsed way.

 

 

April 2021


[1] https://www.legislation.gov.uk/uksi/1995/418/contents/made