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It used to be the case that commercial and residential developers were two quite different beasts. Broadly speaking, big commercial developers looked to build to high specifications, building the properties to own them and rent them to blue-chip clients. Meanwhile their residential counterparts focused on building properties quickly to sell on, retaining no long-term interest.

But the difficulty of funding large commercial projects, a changing workforce and an ever-increasing demand for housing, has meant that the distinction between the two is blurring, as office developers look to expand their repertoires and cash in on the mounting overseas interest in luxury residential properties as an investment. So how radical is this shift, and what issues does it create for the developers and their construction supply chain having to learn a whole set of new skills?

The move to residential schemes by commercial developers is being driven by the global financial downturn, and the resulting desire from many of the world鈥檚 richest to find a secure place to store wealth. This phenomenon is most evident in central London with new residential developments springing up in traditionally commercial locations such as London鈥檚 West End and even the City, as well as some suburbs where planners had previously looked to increase their commercial potential.

Even in the depths of the recession demand for luxurious homes never slackened, with developments like CPC鈥檚 One Hyde Park, and the residential element in the Shard prime examples of this high-end market.

The latest figures from Savills show that while the land values for London office development fell by 2.9% in the year to March 2012, residential land values increased by 3.9%. Overseas investors now make up about 65% of the market for those residential properties costing more than 拢5m, according to a survey by Savills, with residential properties in the City selling for between 拢650 and 拢1,350 per ft².

So it is hardly surprising some of the biggest names in commercial property are moving into building homes. They include Helical Bar which has 1,700 residential units at the planning stage in the City, Hammersmith and White City. British Land - whose portfolio is largely made up of offices and shops - is developing the 500,000ft2 North East Quadrant in London which includes the 126,000ft2 Triton Tower residential scheme, and has a 70,000ft2 residential-led pipeline worth 拢94m. It is also reportedly in talks to buy a 200,000ft2 block in Mayfair that has permission to be developed into luxury homes and offices, for more than 拢150m. In its most recent results British Land has stated that it is looking to 鈥渢ake advantage of opportunities to add incremental value in areas such as residential鈥�.

In the City of London Gerald Ronson鈥檚 Heron Group, which has just built the prime office Heron Tower, is now constructing The Heron, a 36-storey tower with 285 flats next door to the Barbican. So far, 80% of the apartments have been sold, priced from 拢495,000 for a one-bedroom flat to 拢3.25m.

Traditional housebuilders are still building, but with the exception of London, they tend to be concentrating on out-of-town and leaving urban areas alone

Chris Brown, Igloo

Other traditional commercial developers including Land Securities - with Kingsgate House, the Victoria Circle and Portland House - and Derwent London are acquiring bigger and bigger residential development pipelines. And Argent, whose focus is on city centre development, is reporting that increasingly it too is looking at residential.

Roger Madelin, chief executive of Argent Group, says: 鈥淚 said in 2000 that by the end of that decade we would be building as much residential as commercial and we were - although it wasn鈥檛 a huge amount of either for obvious reasons. The change has been that now commercial developers, when they do go into residential are looking at urban areas and are as good as, if not better than, [traditional residential developers], at building high-quality on confined sites.鈥�

Chris Brown, chief executive of Igloo Regeneration, says he expects the trend to continue for several years, as many traditional housebuilders are having difficulty funding capital-intensive high-rise schemes in the current market, leaving commercial players with an opportunity to move in. He says: 鈥淭he division between where people work and where people live is becoming much smaller, and the people who can have the competitive advantage are those who can raise the capital - which tends to be the bigger names.

鈥淗ousebuilders are concentrating on lower rise developments, and sometimes whole new places, whereas commercial developers are looking at a mixture of commercial and residential developments, sometimes mixed use and sometimes not.

鈥淭raditional housebuilders are still building, but with the exception of London, they tend to be concentrating on out-of-town and leaving urban areas alone.鈥�

Planning obstacles

Getting planning permission for new residential schemes can be a challenge for developers that aren鈥檛 experienced in this market, particularly when coming up against resistance from local boroughs keen to retain employment space.

Peter Rees, head of planning at the City of London Corporation, says the corporation will mount a robust defence against excessive residential development. The corporation has already implemented planning policies which are biased against residential developments. 鈥淭he world has changed,鈥� he admits. 鈥淚 can understand why it鈥檚 happening because foreign investors don鈥檛 want their money in cash; they want to put it in something. And even though London has of course been affected by the financial downturn, residential is seen as the least worst option.

鈥淲e will resist changes in the City towards residential development and hotels otherwise we will become just like any other part of London. We do have 10,000 residents, but we have to prioritise our 350,000 workers. It鈥檚 extremely important that London keeps an area that is business focused, run politically with a business focus.鈥�

We will resist changes in the City towards residential development and hotels otherwise we will become just like any other part of London

Peter Rees, City of London

Thrown into the mix is the continuing lack of clarity over the government鈥檚 pledge to allow developers to turn office space into residential use without the need for planning permission. After promising the change, the government earlier this year seemed to back track, saying that changes of use would require planning permission after all.

But last month communities secretary Eric Pickles said the government would introduce permitted development rights to enable change of use from commercial to residential purpose after all, but with the proviso councils have the opportunity to seek an exemption where they believe there will be an adverse impact.

And at the same time other local planning authorities, far from preventing commercial developers moving over, are actually supporting the trend. Donal McCabe, director of corporate communications at Land Securities, says many boroughs are requiring homes to be built before planning permission is granted for office developments. 鈥淚f you want to develop in London, you have to include residential. To say we have been pushed might be extreme, but ultimately it鈥檚 become part of the process,鈥� he says.

A different skills set

So how are developers coping with the shift? Neill Morrison, consultant and quantity surveyor for Deloitte, says it is by sticking to projects that are as close to commercial schemes as possible. This means high-end residential properties are most likely to attract them, as the traditional residential developers have the edge on large developments for the general market.

Morrison says: 鈥淐ommercial developers will graduate to sites that will use their expertise rather than go for green belt sites where developers such as Berkeley will be doing what they normally do [mass building and quick selling].

鈥淐ommercial developers are less likely to compete with established players in their own fields - those who have developed supply chains and understand how to build cheaply. Instead they have more opportunities in high-end developments which don鈥檛 come around as often and need to go through more lengthy and complicated planning procedures, something which they are more used to.鈥�

It means learning some new skills. Gerard Cook, partner at recently formed consultant Core Five, says it is a 鈥渧ery steep learning curve鈥� for these companies - for example, in realising that procurement has to be approached in a totally different way. 鈥淚n commercial schemes you go to the market at a much earlier design stage, because you鈥檙e essentially just building a shell, and you don鈥檛 need all the detail. With residential schemes you need far more detail before you speak to the contractors, because you鈥檙e selling the quality and style of the fittings.鈥�

Cook says some developers have got into trouble by underestimating the complexity of residential schemes. 鈥淚t can be very complex because you have a lot of different trades going in at the same time, and you have to deal very carefully with that interface. In addition there鈥檚 still a cultural difference in the some of the trades in the supply chain for volume build residential.鈥� Some are dealing with this learning curve by bringing in extra consultant advice.

It might be that the trend towards residential will continue only as long as commercial developers find themselves struggling in economically challenging times. However, for others the shift is a permanent one and Cook says many of these are building sizable in-house teams to deal with the new work.
Argent鈥檚 Madelin argues that in a wider sense the shift has been positive for mainstream housebuilders too. He says: 鈥淔or all the horrors of the recession, there has been some good to come out of it for the industry.

鈥淲e鈥檝e all had to think about the right way to do things and far from crowding out traditional residential developers, there should be room for more players if you look at the government and the mayor鈥檚 [housebuilding] targets. What we need now is for planning restrictions to be eased and economic initiatives to be put into place.鈥�