The result is a growing number of buildings where the use is no longer viable, or where the demands of occupiers and users have shifted. For those willing to take on the challenges presented by these changes, there are significant opportunities for more agile and innovative investors and developers to repurpose and revitalise distressed real estate.
Generally, redevelopment will require planning and development consents to be obtained. However, in certain jurisdictions/countries, there are opportunities to take advantage of quicker and more simple methods that can allow investors or asset owners to adapt and reuse distressed assets. Such speedy adaptation can not only be cost-effective but can also trigger other benefits such as improved energy efficiency and environmental sustainability. Adaptation can also tap into and support wider regeneration initiatives.
Here, the planning approach to adaptive reuse in the UK, Hungary and Germany is explored, as well as the similarities and differences between the jurisdictions for investors and owners considering options for both existing assets and potential new investment.
Planning and use classes: maximising flexibility for permitted changes of use
United Kingdom
Here in the UK, legislation provides for a series of designated use classes. Changes of use within a designated class are not deemed development and may be done in full or in part without the need for planning permission. Permission is also not required for interior alterations which facilitate the change of use but additional consents are likely if external alterations are required for entrances, windows or other external features.
From 1 September 2020, the UK government amalgamated a number of previously distinct use classes into a new single use class (use class E). This has greatly expanded the number of uses that can be interchanged without the need for planning consents, as class E encompasses offices, retail shops, financial and professional services, gyms, clinics and day nurseries.
Changes of use between classes normally requires an express planning permission to be obtained. But to provide further flexibility, permitted development rights deem consent for otherwise material changes of use without the need for planning permission. These rights require certain conditions to be met and can involve a more limited form of prior approval. The range of permitted development rights has been revised and expanded in 2021 and now includes change of use from class E to residential.
There is considerable scope in the UK for repurposing without needing to trigger complex and time-consuming planning controls.
Hungary
Inner-city redevelopment can usually be carried out without the need for a new planning permission, provided that the development accords with the relevant planning zone and complies with the local planning/building regulations.
While there is scope for seeking a change to the zoning, the legislative process takes between six and 18 months.
Generally, the redevelopment and repurposing of non-residential buildings and residential buildings larger than 300 sq m require a building permit (which can be secured in a matter of months depending on the development’s complexity). For smaller-scale proposals, these may be permissible subject to a simple notification to the competent authority.
If a new owner wishes to repurpose a property, provided the new purpose complies with the local zoning/building regulations for the area, permission is required from the local authorities and generally takes two to three months. This period is extended to around five months where the change is from a non-retail building (with a floor area of over 400 sq m) into a retail unit.
Applications can be made for a development to be classified as a “brownfield action area” (either as a “priority brownfield action area” or a “medium and long-term brownfield action area”) subject to meeting specific conditions. Where an area qualifies as a “brownfield action area”, the site and the contemplated development will benefit from expedited timing for the approval of permits and also other planning benefits which allow investors to develop the relevant project under more flexible zoning/building regulations.
Germany
In Germany, there is no equivalent of the UK use class E. The default position, based on the safety-driven objectives in German building law, requires new permissions for most modifications and changes of use.
While this means there are no significant fast-track arrangements to allow the repurposing of an existing building, permission is not needed where the new use is covered by the “range of variations” allowed under the existing permission. These may be necessarily limited and, due to the specific requirements of each use, would not normally allow for material changes of use, such as retail to restaurant.
There is scope to invoke the “grandfathering” of a building. Grandfather clauses protect building owners against subsequent legal changes, including in relation to the permitted use. This extends to works associated with the maintenance or restoration/adaptation of a building such as upgrades to accommodate modern usage requirements where the existing use is retained, and subject to there not needing to be substantial new construction.
Some flexibility is available for the conversion of existing buildings into new residential use. In areas where there is a development plan, it is possible to obtain an exemption if the change of use is necessary to meet residential need. Experience shows that authorities are more generous in allowing an exemption if the alternative would be demolition of the building. In areas where there is no development plan and new residential use is inadmissible, residential use can still be permitted if it is created by changing the use of existing buildings.
Incentives and other benefits
Adaptive reuse of existing buildings can provide significant environmental benefits such as avoiding the carbon footprint arising from wholescale demolition and redevelopment. Other benefits can include energy efficiency improvements to help move towards zero-carbon operations. These works may qualify for green loans or other environmental finance incentives.
United Kingdom
The UK government is on board with the repurposing agenda and has provided funding and support programmes for the regeneration of town centres and high streets, including more than £820m through the Future High Streets Fund and a further £3.6bn to the Towns Fund to foster economic regeneration, stimulate investment and deliver vital infrastructure. While these measures are directed primarily at the community and public sector, the resulting improvements in infrastructure can increase and enhance the viability for repurposing town centre assets, with such changes garnering invaluable community support.
Hungary
There have been a number of recent indications from the government about the introduction of financial incentives such as VAT discounts and tax deductions for developments on brownfield action areas, which should encourage repurposing and redevelopment.
In addition, the Hungarian government and the Hungarian National Bank already provide support for the refurbishment of residential buildings and the construction of environmentally friendly buildings through a system of loans and grants.
Germany
Tax reliefs are available against the costs of conversion that arise from repurposing a building into rental housing. Furthermore, the German promotional bank (KfW) supports the refurbishment of buildings and the repurposing of non-residential buildings as residential buildings through loans and grants.
The German state also offers significant subsidies for energy-efficiency refurbishment works and the federal government has further increased this funding stream, with incentives where the better the carbon dioxide savings resulting from the building renovation, the higher the state subsidy.
Recognising and embracing the opportunities
While the level of flexibility within the existing planning and zoning regimes differs between the countries, each offers real opportunities for the repurposing of distressed real estate assets. The range and scope of incentives are also likely to expand as part of post-pandemic growth, particularly where adaptive reuse embraces sustainability. This offers scope for revitalising existing buildings and the surrounding communities.
Robert Gowing is a senior associate in London, Christopher Noblet is a partner in Budapest and Damian Sternberg is a senior associate in Düsseldorf at Hogan Lovells.
A previous version of this article appeared in EGI on 7 February 2022.
Authored by Christopher Noblet, Damian Sternberg and Robert Gowing.
